Sigmund Freud & Low Down Payment Jumbo Mortgages
In psychology, projection is a form of defense in which unwanted feelings are displaced onto another person, where they then appear as a threat from the external world. Now in a minute, I am going to ask you to relax and tell me a little bit about how you feel about down payments. Specifically those that equal less than 20% of a home's purchase price. We'll analyze if you're projecting your own beliefs, right or wrong, onto reality.
Just for a little background, in mortgage lending, we are not immune from projection. This happens all the time, for example, when we are taken aback by the fact that because we spend an inordinate amount of time and energy navigating regulations, dishing out a byzantine assortment of disclosures and managing ponderous timelines, we expect our clients to join our rallying cry to make lending guidelines more easy to understand, pragmatic and sensible. But they don't...
When it comes to buying a home, they don't seem to be remotely interested in the suffering induced by our compliance nightmares --- even if Freud himself would have been delighted to indulge in them. Instead, when it comes to apprehension about buying, the single biggest hurdle remains far simpler. It's the down payment.
It's no different here in California. The Bay Area's home prices are off-the-charts absurd compared to most of the rest of the country and even though there are many here who earn enough to be resented as "1%'ers," the fact is that coming up with a 20% down payment on a median-priced home, or higher, can be an insurmountable challenge regardless of income levels.
Let's examine how we work to get around this in 2017. For now we're going to limit the scope of our analysis to jumbo loans --- those that fall above the conforming and high-balance conforming and FHA loan limits through California.
80-10-10 or "Piggyback" Loans
This is the most common way a borrower will put down less than 20% on a luxury property and we can extend credit along these lines up to a purchase price of approximately $1,900,000. The first mortgage will either be a fixed rate or an ARM program, and the second mortgage can be either a home equity line of credit (HELOC) or fixed rate second. 80/10/10 solutions can be very aggressively priced, making them the first choice for the less than 20% down set.
Single Loan, No PMI Mortgages
We've seen a surge in these types of programs over the last few years, and these solutions can get a buyer to a purchase price of $2,200,000 with as little as 10% down and to a purchase price of just over $3,500,000 with 15% down. As indicated, these programs do not have monthly PMI, though the risk premium to the lender will be included in the rate to a greater or lesser degree depending on FICO scores, asset reserves and other attributes of the scenario.
No, it's not down payment assistance, but instead what we like to call "down payment enhancement." Unison will match a buyer's 10% down payment (with varying percentages available too) and become a "partner" in the purchase, almost as if you were getting a gift from a family member. Later, when the buyer ends the agreement, he or she will pay Unison a percentage of the value change of the home, either up or down, in some cases. While the Unison agreement is in place, however, the owner makes no payments to them. Unison's funds can help get the buyer to a purchase price of $3.125,000 with as little as 10% down.
So now that we've talked everything through, what do we do? As potential buyers we can and should certainly inquire if interested and if any questions. Perhaps the very information here restores new hope in home ownership. As real estate professionals, we should carefully analyze our thoughts surrounding what we deem to be a sufficient down payment on any offer we structure or receive. While a buyer may have less than a 20% down payment it's important not to project our unexamined beliefs onto these same individuals and broadly assume they are not highly qualified to purchase. Trust me, with home prices expected to continue to rise, perhaps not in lockstep with wage growth, saving enough for a full 20% down payment will remain a daunting task and an increasing number of geographic areas will see buyers testing the jumbo and luxury market with 5%, 10% and 15% down payment offers. Will you be enlightened when they do?
Robert J. Spinosa
Executive Loan Advisor
NMLS: 22343 CalBRE: 01297944
Cell: 415-367-5959 Fax: 415-366-1590
1058 Redwood Highway, Frontage Road, Mill Valley, CA 94941
RPM Mortgage, Inc. – NMLS#9472 – Licensed by the Department of Business Oversight under the Residential Mortgage Lending Act. Equal Housing Opportunity.