As home prices continue to rise, many home buyers find the home they really want to buy has just been pushed into the “jumbo” price range. Jumbo loans will carry slightly higher interest rates than conforming ones and credit scores need to be a bit higher. Other than that, jumbo mortgages in Phoenix are approved in much the same manner as any other Conventional or FHA mortgage. Today, a jumbo loan is any loan above the current conforming loan limit of $453,100. This conforming loan limit applies to most of Arizona and most of the U.S. but certain high-cost states are a bit higher.
Back in 2008, Congress implemented the Housing and Recovery Act of 2008 as an attempt to stabilize the ailing economy. There were several sections within HERA that addressed various housing and economic issues but one of them, as it relates to mortgages, was forming the Federal Housing Finance Agency, or FHFA. For the first time, a protocol was established that identified how the conforming loan limits would be set and subsequently what is considered a jumbo loan. FHFA guidelines require the agency to view the national median home value at the beginning of each fiscal year, in October and compare that value with prices one year earlier. If there is no change, the loan limits will stay the same for the following year. Further, if values fall, the loan limits will still stay the same. However, if there is a year-over-year increase, loan limits for the following year will be adjusted accordingly while at the same time pushing up the jumbo limit.
Today, bank and lenders follow mortgage guidelines set forth by jumbo lenders. Because there is no secondary market for a jumbo loan similar to the ones for conventional loans approved using Fannie Mae or Freddie Mac guidelines, lenders are free to set their own rules for an approval. If a loan is approved using those standards, the loan can be sold to the investor who set the guidelines. Without the ability to sell jumbo loans, lenders would run out of cash to make those loans. Selling them replenishes the lender’s credit lines and allows them to make more loans.
As it relates to credit, jumbo loans will typically require a higher minimum FICO score before an approval can be issued. Depending upon the program, conventional credit score requirements can be as low as 620 but jumbo loans typically ask for minimum credit scores to be closer to 680, higher for larger jumbo loan amounts. Also, down payment requirements can be greater when looking at a primary residence versus a rental property.
Pretty much all Jumbo loans will require verification of income. This means the applicants will be required to provide recent pay check stubs covering a 30 day period and copies of their last two years of W2 forms. If someone is self-employed or receives other income outside of employee earnings, two years of tax returns will be needed, both personal and business. For the business, a year-to-date profit and loss statement should be provided. No longer are there any “no document” jumbo loans where income or assets are not verified. There are programs that review 12 months of bank statements that look for regular deposits as business income in lieu of tax returns, but that’s about as far as a “stated” loan that’s available.
What about the down payment requirement? That can vary but just like conforming loans, any loan amount that represents more than 80% of the current value of the property will require private mortgage insurance or PMI. Yet in the jumbo realm, there is no PMI available for a jumbo loan. That means borrowers will need to put down at least 20% for a jumbo purchase. With a 25% down payment, the rates will be slightly better. But many higher end buyers would rather hold onto their cash instead of making such a large down payment. What down payment options are available to buyers that don’t want to make 20% down payment?
One workaround that’s an effective method is to purchase a jumbo home with two mortgages instead of one. For instance, a buyer can make a 10% down payment and then take out a second mortgage for the other 10% which keeps the first mortgage at 80% of the sales price and thus avoiding PMI. This is called an 80-10-10 "piggyback" loan. Another structure is an 80-15-5 where the buyers put down only 5% with a second mortgage representing 15% of the sales price.
There are also other jumbo loan programs that require a greater down payment if the purchase price is higher than what typical jumbo guidelines require. Some jumbo loans set a maximum loan limit at $3 million for example with a down payment of say 10% using the 80-10-10 scenario. If a jumbo loan limit is set at $5 million, the down payment requirement would be higher, likely in the 25-30% range.
Low down payments can also vary based upon the credit score by referring to what lenders refer to as a Loan Level Pricing Adjustment. This is essentially a grid that looks at the amount of down payment available and the qualifying credit score. With a down payment of 10%, the minimum credit score requirement might be 680 but if the down payment were closer to 30%, the minimum qualifying score might be something closer to 650. Borrowers can read all latest 2018 down payment standards here.
If you’re not sure how much you’d like to put down and want to explore your options, please contact us below. After a review of your personal situation and goals, we can look at your loan application and provide you with various options. With interest rates still very competitive, many high-end buyers want to leverage current interest rates and finance their jumbo purchase. This is still an excellent time to buy but rates have been on a gradual incline over recent weeks. Let’s talk today about your jumbo loan choices.