When the credit crisis hit jumbo loans was one of the first markets in mortgage financing to get hit hard. Banks pulled their jumbo loan programs off the market in a hurry and it had a big impact on the demand for homes over $500,000.
There is not much of a secondary market for jumbo loans or no one to buy up the securities they are pooled into. That means the initial investor that underwrites and buys the loan is typically the servicer. The jumbo loan market has started to come back and there are great loans out there at very competitive rates.
What is a Jumbo Loan?
A jumbo loan is a loan amount typically above $417,000 or above the Fannie Mae/Freddie Mac limit. Fannie Mae/Freddie Mac is currently allowing loan amounts up to $729,000 in some high cost areas but not for us here in Arizona.
What can I expect when qualifying for a jumbo loan?
- Higher Rates: You can expect to pay higher rates than for a conforming loan. Because there is no secondary market to securitize these loans you can expect higher rates. Once your loan amount goes over 1 million expect even higher rates. Don’t let this scare you away; you can still get rates in the mid 4’s for some great ARM products. There are still plenty of interest only loans available too.
- More money down/ more equity: Unlike an FHA loan, you can expect to make a larger down payment or have more equity in your home for a refinance. Most jumbo loans are requiring a 20% to 30% down payment depending on loan amount, credit score and other factors.
- Higher reserve requirements: Banks want to see that after closing you have a good cushion of liquid reserves and that you have access to those reserves should you have a loss in income or some other hardship.
- Tighter credit restrictions: Banks want to see higher credit scores and longer credit histories. Typically over a 700 score is acceptable, but to get the best rate you will want a score over 740.
First Mortgage Line of Credit
Another product I wanted to mention that recently came back is the first mortgage line of credit. This is not specific to just jumbo loans but it does allow for loan amount up to $2.5 million. The index is the 1 month Libor which is currently about .239. This is a great index for a line of credit and add your margin of about 3.00% and you will be paying about 3.5% on a jumbo loan!
Because it is a line of credit it has great flexibility to draw and pay down as you please and you pay simple interest which can mean less interest over the life of the loan. This loan alone deserves its own post but I will stop there for now.
When thinking about jumbo loans, be aware that as long as you are working with loan officers who know what they are doing… there are financing options available.
And some of the best deals on houses right now are for homes over $500,000.