It’s official: When it comes to jumbo loans, credit availability is loosening up. According to the July Mortgage Credit Availability Index (MCAI), there was an increase of 0.5 percent from June to July, in large part thanks to a rise in available jumbo mortgage programs.
According to property data firm CoreLogic, lenders issued more than 15,000 home loans in the $1 – $10 million range in the top 100 metropolitan areas during the second quarter of 2014 alone. This level marks an all-time high.
With jumbo mortgage rates lower than ever and credit flowing a bit more freely than in years past, high net worth home buyers are finding it is a good time to explore jumbo loan options. Here’s an overview of what a jumbo mortgage program is all about…
What makes a Loan “Jumbo”?
The first thing you need to know is what defines a jumbo loan. Essentially, it’s a home loan that exceeds the Fannie Mae and Freddie Mac conforming loan limits. In other words, the government does not back loans that go over the set amount – $417,000 for a single-family home, and up to $625,500 in more pricey areas like San Francisco. So those seeking higher amounts would have to go the jumbo loan route, or use a combination of lending products.
As you can imagine, immediately after the housing market struggles of 2008 and beyond, qualifying for a jumbo loan was difficult to say the least since lenders tightened up their purse strings. As the market levels out, jumbo mortgages are popular once again, since they are more accessible and more affordable than ever before.
Jumbo Mortgage Rates
Thanks to favorable jumbo mortgage rates, which are currently at record lows (but not expected to remain that way for much longer), more people are making moves now to lock in a good rate to finance their luxury dream homes. In the past, jumbo loans usually carried higher rates than conforming loans, but that’s changed over the past year or so, when rates have been very similar, and at times, even lower.
Usually, a 20 percent or higher down payment is required for a jumbo loan, so another perk is that there is no private mortgage insurance to pay each month. Also, the fees that are tacked onto Fannie and Freddie backed mortgage programs, called Loan Level Price Adjustments or LLPAs, don’t exist for jumbo loans. The jumbo mortgage borrower gets a pass on those. Finally, interest on jumbo loans up to $1 million is tax-deductible.
Jumbo Loan Guidelines Vary Widely
It’s important to note, however, that each lender has their own requirements and terms, which are constantly changing, so be sure to note such differences when shopping around. Especially in the case of jumbo mortgages in which there is no government or national standard that must be followed, the lender has more flexibility when it comes to deciding who qualifies for their programs.
Choosing to go with a jumbo mortgage could simplify your home purchase as compared to combining a first and second mortgage. The second mortgage interest rate could adjust higher in the future. And you have to deal with two loan applications, two lenders, and two loan document signing sessions.
With jumbo loans, there is only one lender, and you can choose a fixed or adjustable rate, depending on your preference. As for loan limits, again, that depends on the lender. Some banks will go up to $5 million or more, while others will cap their loans at $1 million.
Banks Entice Wealthy Clients with Low Jumbo Mortgage Rates
From the lender standpoint, because a large down payment, very strong credit, a high income, and the preference for a strong cash reserves is usually required to qualify for a jumbo loan, they know that these borrowers are typically less risky than the average home buyer. In short, lenders want to entice these wealthy borrowers by offering competitive jumbo loan mortgage rates and terms, and then hopefully introduce them to their other financial products as well. As such, if you’re aiming to qualify for a jumbo mortgage, be prepared to have very strong credentials and undergo a thorough underwriting process.
A Great Time to Apply for a Jumbo Mortgage
As the luxury home market heats up, jumbo mortgages are keeping pace. Purchasing a higher priced home is now just a jumbo loan away for many buyers. And for good reason. Homebuyers who meet the qualification standards get a large loan, low rate, and a lender who really wants their business.