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Jumbo Loans - the definitive guide

Jumbo loans used to be something that only wealthy people needed to worry about.

Not anymore!

Nationwide, homes selling for over $500,000 accounted for over 12% of all homes sold in 2013.

… up 50% from 2012!

Many of these home purchases will require the use of a jumbo loan.

And since jumbo loans have stricter down payment requirements, reserve requirements, and credit requirements, if you’re in the market to buy a home, you MUST educate yourself on them.

Until now, though, resources on line for jumbo loans have been scarce, or poorly organized.

That’s why I decided to create the most comprehensive guide to jumbo loans anywhere.


 

Quick Chapter Guide

 


Introduction

National statistics show that the median home sales price increased 11% last year and homes selling for more than $500,000 now account for 12% of all homes sold. 

… The previous year, homes over $500,000 only accounted for 8% of sales nationally.

In San Diego County, the numbers are even more staggered toward Jumbo Loans.  In the 2nd quarter of 2014, San Diego County had 15,979 home sales and  8,817 of those sold were over a $700,000 sales price.

That means an unbelievable 55% of all sales were over $700,000! 

If the average down payment was 20%, all those buyers would have to obtain jumbo financing.

As a San Diego mortgage broker, I’ve helped hundreds of home buyers with Jumbo Loans.  Some may even say I am a jumbo loan expert.  I work on Jumbo Loans on a daily basis and therefore feel that I am the right person to be putting this resource together.

The need for Jumbo Loans will continue to grow as home values increase around the country.  My goal with this resource page on Jumbo Loans is to assist you and answer any questions you may have.  If you are in need of a Jumbo Loan it is important for you to know your options.

What is the Definition of a Jumbo Loan?

Obviously by use of the term “Jumbo”, you know that a Jumbo Loan is large, like a Jumbo Jet or a Jumbo-tron (Not sure if that term is still used, but for you younger readers that was what the large screen at a stadium was called).  Let’s try to define it in a little more detail.

First, in order to know what a Jumbo Loan is, we have to define what a conforming loan is.

A conforming loan falls under loan limits set by Fannie Mae and Freddie Mac for each county.  Each county can have a different conforming loan limit.  If your loan amount falls below these loan limits, then you can obtain a traditional conforming loan that is underwritten to Fannie Mae and Freddie Mac guidelines.

In most counties across the United States the maximum conforming loan limit is $417,000.  In more expansive housing areas, the conforming loan limits are set a little higher under the High Balance Conforming Loan program.

In San Diego, the maximum loan amount you can get using a conforming loan is $546,250.  In other expensive counties of California like LA County, Orange County, and San Francisco County the conforming loan limit could be as high as $625,500.

Any loan amount above the $417,000 conforming loan limit in most counties or the High Balance Loan limits in more expensive markets would be considered a Jumbo Loan.

A Jumbo Loan is really any loan amount that is greater than the conforming loan limit set for that county.

What’s the Biggest Loan Amount I can Get Using a Jumbo Loan?

The biggest Jumbo Loan that I have seen and have access to is up to $5 Million.  There may be some sources out there that go higher, but it will be pretty uncommon.

Now that we have defined what a Jumbo Loan is as far as dollar amount and the maximum size, let’s look at what types of programs and products are available and the underwriting guidelines associated with Jumbo Loans.

Why You Need this Guide

Jumbo loans don’t play by the same rules as conforming loans.

You may have heard of loan programs where you can put 3% or 5% down on a house.

That would NOT be available in the case of most jumbo loans.

Think you can get a jumbo loan with a 600 FICO score?  

Think again!

If you’re in the market for a home valued at over $500,000, you’ve got to learn a few basics about jumbo loans.  So grab a coffee, get comfy, and do yourself a huge favor by reading this guide.

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types and sample rates of jumbo loans

Jumbo loans come in many shapes and sizes.  Let’s have a look at some of the types of loans available, as well as sample rates for each.

Jumbo Loan Term Lengths: 15 Year Fixed, 30 Year Fixed and ARMS

Jumbo Loans are available with fixed rates of usually 30 or 15 years and ARMs (Adjustable Rate Mortgage) of differing lengths.

Fixed Mortgage Options

The fixed options are pretty straight forward.

They work just like a conforming fixed rate loan.  The payment will be amortized (Def: The paying off of debt in regular installments over a period of time) over the 30 year or 15 year term.  The interest rate will stay the same the whole time and at the end of the term, your loan will be paid off.

amortization

30 and 15 year Fixed Rate Jumbo Loans are not offered by as many lenders on Jumbo products as the ARMs are, but this is slowly changing.  Lenders don’t typically like to tie up large amounts of money for 30 years.  They prefer to have the loans paid off in a shorter period of time.

The ARMs that are offered can have different fixed periods of 3, 5, 7, and 10 years before the interest rate can adjust.

jumbo loan fixed period armsThe ARMs are still amortized over 30 years or in some options 40 years.

What does this mean? 

Refer to the section below to see how ARMs can adjust and what impact this can have on your payment.

Adjustable Rate Mortgage Options

As stated above, ARMs available on Jumbo Loans will start off with a fixed period of 3, 5, 7, and 10 years.

During that time, the interest rate will stay constant based on what the start rate was.  After the fixed period, the rate can adjust.

The remaining time on the loan will be 30 years minus the fixed period.  So, for a 5 year fixed ARM, there will be 25 years left on the loan after the initial rate change.

margin_and_index_equals_interest_rate The interest rates on all ARMs are calculated by adding a margin and an index together.

The margin is a fixed value that does not change.  In most cases it is 2.25% – 2.5%.

The index is the part of the rate that can adjust.  The indices used are usually the 1 year LIBOR, 6 month LIBOR, or 1 year Treasury average.

How often the rate can adjust after the fixed period will be based on the index used.  Any index based on a 1 year average can only adjust once per year, therefore we call these loans 3/1, 5/1, 7/1, and 10/1 ARMs.

If the index is a 6 month average, that could adjust once every 6 months after the fixed period is over.  These are called 3/6, 5/6, 7/6, 10/6 ARMs.

ARMs will have adjustment caps in place to limit how much the rate can adjust over a certain period of time or the life of the loan.  These are usually 2/2/5 caps or 5/2/5 caps.

  • The first number is how much the rate can adjust at the first adjustment date (2% or 5%).
  • The second number is how much the rate can adjust per year after the first adjustment (2%)
  • The last number is how much the rate can adjust over the life of the loan from where it started (5%)

adjustment_cap_example_001

Let’s look at an example:

In this scenario we will be working with a 5/1 ARM with a 2.25% margin, 2/2/5 cap structure and a 30 year amortization.  The loan amount will be $1 million and the rate 2.875% for the first 5 years.

sample interest rates for jumbo loan

Can I get a Jumbo Loan with an Interest Only Payment?

Interest only loans have become harder to find, but there are sources that offer an interest only payment option on Jumbo Loans.  This is something that many Jumbo borrowers look for to help keep their monthly mortgage payment down.  Interest only options are available on primary residences, second homes, and investment properties.

The interest only payment option is usually only available on the fixed period ARMs.  With an interest only payment you would not be paying any principle down during the interest only period.  That period will usually mirror the fixed rate period.  So if you have a 5/1 ARM, the interest only period will be the first 5 years.  Here is an example of an interest only payment versus the principle and interest payment from the above example.

interest only loan vs principle and interestInterest Only Payment: $2,604.17 VS. Principle and Interest Payment: $4,148.92

With the interest only option some lenders will let you choose either a 30 year amortization or 40 year amortization period.  This can make a big difference in what your payment may be at the end of the interest only period because interest only loans have to be amortized over the remaining period of the loan after the interest only period is up.

On a 5/1 interest only loan with a 30 year amortization, that would mean the loan balance would now have to be paid down to ZERO in 25 years.  On a 40 year amortization it would be stretched out over 35 years, giving you more time to pay the loan off.

30 year mortgage vs. 40 year mortgagePayment on 30 year amortization in year 6: $5,347.63 Vs. Payment on 40 year amortization in year 6: $4,503.04

If you combine having to pay the loan off over a shorter period and the rates potentially increasing after the fixed period, your payment could go up substantially.  You want to make sure you can afford this increased payment or have other plans in place.

Here is an example of the scenario we looked at above as an interest only loan with a 30 year amortization:

how interest only payments adjust

Can I get a VA Jumbo Loan?

Yes, VA Jumbo Loans are available.  The VA loan program is best known for its 100% financing options.  In San Diego, a veteran can obtain a 100% LTV loan up to $546,250, but most people are unaware that the VA program can be used with a down payment on loans as high as $2 million.  The VA program actually does not have a maximum loan amount, but individual lenders impose their own loan limits.

Let’s look at an example of using a VA jumbo loan in San Diego to purchase a home priced at $1,000,000 based on the maximum loan amount and down payment calculations VA loans require.

Here’s how to determine the Down Payment and Loan Amount:

down payment and sample jumbo rate

There are not many Jumbo Loan programs that allow as little as 11% down payment at these loan amounts.  If you are a Veteran, first, thank you for your service, and utilizing the VA loan program for your Jumbo Loan may be your best option.

Can I get a Jumbo Loan on a Second Home/Vacation Home?

Yes, you can.  Not all lenders will make Jumbo Loans on a second home, but there are some that will.  The lender will require more money down and a smaller loan amount comparatively on a second home than a primary residence.  The interest rates may be higher as well.

For example, you may be able to get a loan amount up to $750,000 at an 80% LTV, $1 million at a 75% LTV, $1.5 million at a 70% LTV, and up to $5 million at a 65% LTV.  Interest only payments would be available up to those same limits.

Can I get a Jumbo Loan on an Investment Property?

Yes you can, but there are even fewer lenders that will make Jumbo Loans on an investment property than a second home.  The down payments will be even larger and the maximum loan amounts allowed smaller.  The interest rates will be higher as well.

On an investment property you could get a loan amount up to $1 million at a 70% LTV.  Interest only payments would be available at 65% LTV up to $1 million.

How are Rates Different for Jumbo Loans?

Interest rates for Jumbo Loans are traditionally higher than the rate you can get for a conforming loan.  Historically they are about a half percent higher.  As of the writing of this resource page in June 2014, some jumbo interest rates are actually just as low or lower than conforming interest rates.

When calculating Jumbo mortgage rates, the Credit Scores and loan-to-value (LTV) can have a big impact on the rate available.  In some cases there are added benefits if you have credit scores above 780 or LTV’s below 75%.

Here are a few sample scenarios and rates:

1,000,000 jumbo loan rates and credit score

One thing to remember is that as you need larger loan amounts, lower down payments, lower credit scores, or higher debt-to-income ratios, the lenders that offer these options, are going to charge higher rates.

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qualifying for jumbo loans - credit score - down payment - reserves

With higher dollar loans, qualification is a bit tougher.  Here are the most common questions and tricks of the trade associated with qualifying for jumbo loans.

Income Qualification for a Jumbo Loan

There is not a minimum income needed to qualify for a Jumbo Loan.  Just like all loans, the lender will look at the borrower’s debt-to-income ratio to determine if they can qualify for the loan.

Jumbo Loans do usually require buyers to have lower debt-to-income ratios.

The debt-to-income ratio (DTI) will differ from lender to lender based on their distinct guidelines.  On the more conservative side, borrowers may see a housing ratio of 36% and a total Debt-to-Income ratio requirement of 40%.  Other lenders just focus on the total DTI and most will cap it at 43%.  In some more liberal situations the lender may go to 45%.

debt to incomeTo learn more about what a debt-to-income ratio is, click HERE.

How Much of a Down Payment do I Need for a Jumbo Loan?

The amount of down payment you will need for your Jumbo Loan will depend on several factors like:

  • loan amount
  • credit score
  • type of program (fixed or ARM)
  • and if the property is your primary residence, second home or investment property

In some cases you may be able to structure the loan as a first and second mortgage instead of a single loan or have mortgage insurance which will allow for a smaller down payment.  Each lender will have their own requirements as to the down payment they allow and the corresponding factors.

One of our lenders will allow us to go up to a $2 million loan amount on a primary residence with a 20% down payment and a 720 FICO score.  This can be either a fixed rate or ARM.

Many lenders may only allow 80% LTV up to a $1.5 million loan amount and then require 25% down payment up to $2 million.

If you would like a loan amount above $2 million, you can go up to $5 million with 30% down payment.

down payment for jumbo loans

Down Payments on Second Homes and Investment Properties

If you are looking to buy a second home or investment property, the down payment requirements are going to be much higher.  In fact, many lenders will not offer Jumbo Loans on second homes or investment properties, so you have to find the ones that will.

Second homes are a little easier than investment properties.  We have a lender that will allow up to a $1 million loan amount with 25% down payment, $1.5 million with 30% down, and $5 million with 35% down.

If you are looking for a Jumbo Loan on an investment property, you are going to be looking at a maximum loan amount of $750,000 with 30% down or $1.1 million with 35% down payment.

How Can I Lower My Down Payment?

*Pro Tip*An option to lower your down payment when utilizing a Jumbo Loan is to use a first and second mortgage combined.

There is a Home Equity Line program available that allows a combined loan amount of $1.275 Million up to an 85% CLTV (Combined Loan to Value) or up to a combined loan amount of $750,000 at a 89.99% CLTV.

The key to this program is to find the lender for the first that allows this high of CLTV.  At the 85% CLTV option the first mortgage could go up to 80% and $1.1 million and the 2nd would be the remaining 5%.  Some lenders may only allow the first to be up to 75%.  Then, your second would be 10%.  The first can either be a 30 or 15 year fixed or a 5/1, 7/1, or 10/1 fully amortizing ARM.

The other option to decrease your down payment is to get a Jumbo Loan with mortgage insurance.  This can either be borrower paid mortgage insurance or lender paid mortgage insurance.  Borrower paid mortgage insurance is where the mortgage insurance is paid separately by the borrower and lender paid mortgage insurance is where the mortgage insurance premium is built into the rate of the loan.

There are not too many jumbo lenders that allow these options, but there are a few.  If you are looking for a Jumbo Loan with borrower paid mortgage insurance, there is a lender that allows up to a $750,000 loan amount with a 90% LTV.

With the lender paid mortgage insurance option there is a lender that allows up to a $750,000 loan amount with a 90% LTV or $850,000 loan amount with an 85% LTV.

What Credit Score Is Required for a Jumbo Loan?

The credit scores that are required for Jumbo Loans will vary for different lenders and will depend on:

  • the total loan amount
  • down payment
  • and loan-to-value needed

In general, higher credit scores are required for Jumbo Loans than conforming loans, especially if you want to get a competitive interest rate.

For example, most jumbo lenders will require a 720 FICO score for any loan amounts above $1 million.  Some lenders will allow a credit score down to 700 if you are putting 30% down and have a loan amount below $1 million or a credit score of 680 with a 35% down payment and a loan amount below $1 million.

Having said that, let’s modify our previous down payment chart to include FICO credit score requirements:

fico scores and down payments

Most jumbo lenders will offer their best interest rates on Jumbo Loans for borrowers with credit scores above 760.

I know of one jumbo lender that does not have a minimum credit score requirement, but will look at your credit history instead to see that you have a minimum of 3 active tradelines that have been open for at least 6 months.  They will be looking at how well you have handled your credit over the last 2 years.

If you have had foreclosures, short sales, or bankruptcies in the past, it is much more difficult to get a Jumbo Loan.  Most lenders will require 7 years from the date of the foreclosure, short sale, or bankruptcy before you can obtain a Jumbo Loan.  If the borrower has extenuating circumstances that period of time may be shortened to 5 years.

What is an extenuating circumstance?  Here is how one lender defines it:

Extenuating circumstances are defined as a nonrecurring or isolated circumstance, or set of circumstances, that was beyond the Borrower’s control and that significantly reduced income and/or increased expenses and rendered the Borrower unable to repay obligations as agreed, resulting in significant adverse derogatory credit information.

Again, this will change from lender to lender.  One lender will allow financing after 4 years from a foreclosure, short sale, or bankruptcy or 2 years with an extenuating circumstance and re-established credit.  There are a number of items that need to be met to have re-established credit.

What are Reserves and How Much do I Need?

Reserves are funds that the lender wants the borrower to have available in case of a loss of job or other situation so they can continue to make their mortgage payment.  Each lender will have their individual reserve requirement.

The reserves are based on:

  • principle
  • interest
  • property taxes
  • insurance
  • HOA payment.
  • and mortgage insurance (if applicable)

Some lenders require 6 months of reserves up to a million dollar loan amount, while others require 9 months.  A loan amount of $2 million requires 12 months of reserves.  24 months of reserves are required for loan amounts up to $4 million.

reserve requirements for jumbo loans

The source of the reserves can be from the following types of accounts:

  • Checking & Savings
  • Money Market Accounts
  • Publicly Traded Stocks
  • Mutual Funds
  • Government Securities
  • Cash surrender value of Life Insurance can also be used

Some lenders will not allow the use of retirement funds unless you are of retirement age.  In some cases, they will only give you credit for 60%-70% of the retirement accounts.  For stocks, some lenders will only use 70% of the value, others will use 100%.

Assets that can’t be used for reserves include:

  • gift funds
  • borrowed funds
  • stock in a closely held corporation
  • proceeds from the sale of assets other than the sale of a residence
  • (in some cases) proceeds from a cash-out refinance

The calculation of the reserve funds available must be after any down payment and closing costs are accounted for.

If the borrower owns rental properties, some lenders may require up to an additional 6 months of reserves for the payments on each rental property.

Can I Get a Jumbo Loan Based on My Assets?

Yes, there are programs called Asset Depletion programs that will allow borrowers who have large amounts of assets and little to no normal income to be able to qualify for a Jumbo Loan.  These programs are unique and not offered by too many lenders.

Here is how the program works.  The lender will give the borrower credit for income from “annuitizing” their assets over a period of time.

The assets don’t actually have to be touched.  The lender is just calculating an income based on those assets if they needed to be drawn upon.  This calculated income can be used on its own or added to employment income, social security, pension, or other investment income to help the borrower qualify.

Depending on the type of asset, a percentage of the asset will be allowed to be used for the asset depletion calculation.

For example:

  • 100% of checking, savings, money market funds, and CDs can be used.
  • Stocks, Bonds, and Mutual funds may be limited to 65% – 70% depending on the lender.
  • Retirement accounts like *IRAs and 401ks are allowed at 60% – 65% if the borrower is not taking any withdraws.

*If the borrower is already receiving income from an IRA or 401k, the income from those withdraws will be used and those assets will not be included in the asset depletion calculation.
Same thing would occur if the borrower wants to use interest or dividend income from investments that are showing on their tax returns.  Those assets could not also be used for the asset depletion program.  It will need to be decided which option gives the most income.

In addition, any funds needed for down payment, closing costs, and reserves would need to be subtracted out of the assets before any income calculations are done.

Each lender will use a different rate and amortization period to calculate how much income will be available.  For example, I have one lender who uses the 1 Year Libor Index (currently at .534%) over a 30 year period and another lender who uses 2.5% over a 15 year period.

Here’s an example of how the income would be calculated using the 2nd lenders approach.  Let’s say that the borrower has $1,000,000 in liquid assets after any down payment, closing costs, and reserves are accounted for and any adjustment calculation has been made for the types of accounts.  The $1 million would be given an interest rate of 2.5% and amortized over 180 months.  The monthly income that would be generated would be $6,668.

qualifying for jumbo loan with assets

The borrower can now use that calculated income to qualify for a loan they normally would not be able to.

The maximum loan-to-value for this program varies between 70% -75%.  The maximum loan amount is $2.5 Million and minimum loan amount is $300,000.  This program can be used for a purchase or refinance.

Due to the added flexibility of this loan option, the interest rate is going to be higher than a traditional Jumbo Loan.  This loan offers 30 year and 15 year fixed, as well as 5/1, 7/1, and 10/1 ARMs.

Can I get a No Income Verification Jumbo Loan?

Yes, there is a new program being offered on Jumbo Loans for self-employed borrowers that will allow no income verification for their income.  Non-self employed borrower’s income will be verified in the traditional ways.  This program could be a great option for those borrowers who have income from their business and reserves, but due to write offs and tax planning cannot show a 2 year history of strong income on their tax returns.

Now before the comments section lights up and social media goes crazy (which I hope it does anyway with this wonderful resource) with critique of how bad of a program this is and how the lenders are going back to the way they were before, this program has some safe guards built into it and it is not being offered to anyone with a pulse.

This loan requires a minimum 700 FICO score and is for loan amounts from $417,000 up to $2 million.  With loan amounts up to $1 million, the client must have a 30% down payment.  Above $1 million, the down payment needs to be 40%.

This program also requires considerable liquid reserves.

  • Loan amount <= $650,000, minimum liquidity = $100,000
  • Loan amount >$650,000 to $1,000,000, minimum liquidity = $250,000
  • Loan amount >$1,000,000 to $1,500,000, minimum liquidity = $500,000
  • Loan amount >$1,500,000, minimum liquidity = $1,000,000

Cash, cash equivalent securities and other readily marketable securities may be used as verified liquidity (70% of the value of stocks and bonds will be used).   Personal and business funds are acceptable, but retirement accounts are not.

The borrower cannot have a bankruptcy, foreclosure, or short sale on their credit.  This program is offered on a 5/1 ARM, 7/1 ARM, and a 15 year fixed.  You can expect the rates to be higher than they would on a traditional jumbo loan.

What can I do to Prepare to Use a Jumbo Loan? 

If you know that you are going to be in need of a Jumbo Loan, there are a few things that you can do.

  1. First, you may want to review your credit and make sure that your score is high enough to qualify or get the best rate.  To learn what you can do improve your credit score, click HERE.
  2. You will also want to make sure you have enough money for your down payment, closing costs, and reserves.  Please review the section on reserves above to know how much money you may need and what types of accounts the lender will accept.
  3. Also, check your debt-to-income ratio.  If it is a little high for a Jumbo Loan, you may want to pay off some credit card debt and keep it at a 0 balance until after the loan has closed.  The pay off of debt must occur before loan application.  This is something that your loan officer can help you determine as well when preparing ahead of time.
  4. And last of all, if you are self-employed, the lenders are going to require 2 years of tax returns to average your income.  It is best to have these returns reviewed early on by your loan officer to make sure the income that the lender will accept from the returns is enough to qualify.

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home equity line and structure of jumbo loans

Once you know you’re going to need a jumbo loan, there are some specific questions you may have about combining your loan with other terms you may be familiar with, such as mortgage insurance and equity lines.  Let’s see how we can structure jumbo loans with these additions.

Can I get a Jumbo Loan with Mortgage Insurance?

Yes, you can get a Jumbo Loan with mortgage insurance.  It is not a common option, but is available from some lenders.  Getting a Jumbo Loan with mortgage insurance allows borrowers to decrease their down payment to less than 20% without having to get a second mortgage.

There are 2 options when it comes to mortgage insurance.  There is borrower paid mortgage insurance and lender paid mortgage insurance.   Borrower paid mortgage insurance is a separate premium paid in addition to the principle and interest mortgage payment.

The Borrower paid option allows up to a $750,000 loan amount with a either an 85% or 90% LTV.  At an 85% LTV the added mortgage insurance premium is going to be .43% annually for a 30 year fixed.  At a 90% LTV the premium is .59%.  Once the loan-to-value decreases to 78%, the mortgage insurance will be removed.

Let’s see how these numbers look:

Graphic_4

The second option is the lender paid mortgage insurance where the mortgage insurance premium is built into the rate of the loan. The lender simply increases the interest rate they charge to cover the cost of the mortgage insurance.  The rate will never decrease even when the LTV goes below 80%.

With the lender paid mortgage insurance option the lender allows up to a $750,000 loan amount with a 90% LTV or $850,000 with an 85% LTV.

Here is a sample loan calculation:

Graphic_5

Can you Combine a Home Equity Line with a Jumbo?

Yes, there are situations where you can combine a Jumbo first with a second to increase your total loan amount or decrease your down payment.

There is a home equity line second that allows the combination of a first mortgage and second mortgage up to a $750,000 loan amount at an 89.99% CLTV with a 700 FICO score or up to a combined loan amount of $1,275,000 at an 85% CLTV with a FICO score of 720.

*CLTV = Combined Loan to Value is used in place of Loan to Value when a First and Second mortgage are used rather than just a First.

The equity line is an adjustable rate mortgage based on the prime rate plus 1.99%. Currently, that totals 5.24%. The payment is calculated over 30 years. The first 10 years is interest only and then it becomes amortized over the remaining 20 years.  The qualifying ratios for the housing payment are 38% and 45% for the total debt to income ratio.

The guidelines for the first will also need to be taken into account. They may require different credit scores, debt to income ratios, or reserve amounts.

Let’s look at a scenario where a client is looking to buy a home for $1.5 Million using a jumbo loan and second combined up to an 85% CLTV. In this scenario we will use a 5/1 ARM for the first mortgage up to $1.1 Million and the remaining amount on the equity line.

first and second mortgage with jumbo loan - CLTV

Down Payment: $225,000
1st lien loan amount: $1.10 Million
Rate on 5/1 ARM: 3.00%
Payment: $4,637.64
2nd lien loan amount: $175,000
Rate on Equity Line 5.24%
Interest Only Payment: $764.17
Total Mortgage Payment: $5,401.81

Now that we’ve looked at the types of jumbo loans and how to structure them, let’s move on to the most important chapter, “Consumer Application”.

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jumbo loan structure - refinance - cash out questions

We know a bit about how jumbo loan programs work now, as well as how to qualify for them.  Now let’s have a look at some common questions you might have about jumbo loans as well as ways you, the consumer, can put jumbo loans to use.

Refinancing a Jumbo Loan – ¿Es posible?

Yes, refinances are available for Jumbo Loans.  The LTV’s allowed may be lower for some lenders, but most other guidelines will be the same and it should be the same process as any other refinance.

On a rate and term refinance a loan amount up to $750,000 at a 90% LTV with borrower paid MI is available.  If the borrower would rather have a lender paid MI program, a loan amount up to a $750,000 with a 90% LTV or a loan amount of $850,000 with an 85% LTV is available.  A loan amount up to $2 million is available at an 80% LTV.

rate_and_term_refinance_loan_amounts

The Home Equity Line of credit combined with a Jumbo Loan is also available on a refinance with an 80% first and 9.99% second up to a combined $750,000 loan amount.  The second is available up to 85% at a combined loan amount of $1.275 million with a 75% maximum LTV first.

Can I Take Cash Out with a Jumbo Loan?

Yes, some lenders will allow borrowers to do a cash out refinance on a Jumbo Loan.  The maximum loan to values will be less in many cases than if it were a rate and term refinance.  You could expect in best case to be able to go up to a loan amount of $1 million at a 75% LTV and up to a $5 million loan at 65%.

Some lenders will cap the amount of cash out you can take.  Some lenders say $250,000, while others will allow up to $500,000 based on the LTV.  There are a few lenders who do not have a cap at all and will allow you to pay off debt to be able to qualify with the cash out.

What are The Negatives of a Jumbo Loan?

The drawbacks of a jumbo loan are the stricter underwriting guidelines encompassing the lower debt-to-income ratios, higher overall credit scores, and amount of reserves needed.  The down payment needed is also typically higher, although I have shown some options to get the down payment lower.

Another drawback is usually the interest rates.  Under normal circumstances Jumbo Loan rates are higher than regular conforming rates.  At the time of this writing though, some Jumbo Lenders are actually offering more competitive rates on their Jumbo products than on conforming loans.

As you can see from this resource, not all lenders underwrite Jumbo Loans the same.  This can make it more difficult to find a Jumbo Loan that matches the borrower’s needs.  More research has to be done and sometimes the process can take longer to find the right match.

In addition, the actual underwriting process may also take longer.  Many Jumbo Loans require management approval or additional scrutiny.  All of this must be taken into account when setting up escrow periods on a purchase.  A 30 day escrow is possible if all parties work together, but sometimes a longer escrow is better.

How can I Avoid a Jumbo Loan?

Many people want to be able to avoid a Jumbo Loan due to the traditionally higher interest rates, tougher underwriting guidelines, and stricter credit requirements.

This can be accomplished depending on the total loan amount needed and in certain states and counties with the use of a Conforming High Balance Loan and a home equity line second.  The conforming high balance loan program is available in high cost counties designated by Fannie Mae and Freddie Mac.  In San Diego County, the conforming high balance loan limit is currently $546,250.

The second mortgage program allows the combination of a first mortgage and second mortgage up to a $750,000 loan amount at an 89.99% CLTV with a 700 Fico. The second is a home equity line with a 10 year interest only period and then a 20 year repayment term. The rate is Prime + 1.99% or currently 5.24%.

The equity line has a maximum loan limit of $350,000 and qualifying ratios for the housing payment of 38% and 45% for the total debt to income ratio.

Let’s look at a sample loan scenario where a client is looking to buy a home for $833,000 and has a 740 FICO score.  In most cases, the buyer would have to put 20% down and get a Jumbo Loan for $666,400.  Now let’s look at the same scenario using the first and second approach mentioned above.

jumbo loan with 20% down, 1st and 2nd mortgage

What Do Other Real Estate Professionals Have to Say

I thought it would be helpful for buyers and potential users of Jumbo Loans to see what some other real estate professionals had to say in regards to Jumbo Loans and the associated housing market.  I reached out to a few of my trusted Realtors around the country to get their expert opinion. Here are their thoughts.

Bill Gassett

Bill Gassett

A Top Medway, MA REALTOR®

Shanne, thanks for having me provide some insight into buying a million dollar plus home and utilizing a jumbo loan.  What I would suggest is that for most borrowers it makes sense to get the absolute maximum loan amount they can afford. In other words put the least amount of money down as possible! I give this advice for two reasons. The first is the tax benefits still afforded by the mortgage tax deduction that homeowners can claim on their taxes every April. The second and probably even more important is the ability to invest the money elsewhere. The money put down on an expensive home is not going to be working for you. Liquidity to make your money grow is an important consideration as long as you are putting enough down that it doesn’t increase your costs in other areas.

Andrew Fortune

Andrew Fortune

A Top Colorado Springs, CO REALTOR®

My advice to buyers looking to buy in the million dollar plus range using a jumbo loan is to really know the local market and the available luxury inventory to determine whether you should build a new home, or buy a resale property. I network with agents all over the country and the luxury real estate market in Colorado Springs where I work is very different than in many other markets. In fact, it seems that most luxury markets are different from each other and can even vary within the same city. There are over 110 properties in Colorado Springs over $1,000,000 right now, but we only have one or two sell every month. Our luxury inventory is much higher than our demand for these properties. This makes the idea of building a $1,000,000+ home very risky in this area, since there are already so many on the market that are not selling. It also means that you can get a great deal on an existing luxury home for sale, since these buyers are desperate to sell and do not have many options.

In my experience, many luxury home buyers will consider building a home over purchasing an owner resale property, because they have the financial leverage to do so. This becomes a problem if you need to resell the property later on and only 2% of the current luxury listings are selling every month. This can also work the other way around if you are looking to build in Naples, FL or on the coast in California where luxury properties can sell in a few days. You can do very well building in these markets. Think about what it would look like to sell the property later on to determine the best strategy for finding your luxury real estate. Study your local real estate statistics to determine the best approach.

Debbie Drummond

Debbie Drummond

A Top Las Vegas, NV Luxury REALTOR®

Today’s interest rates make it advisable for luxury home buyers to at least consider jumbo mortgages. We just closed on a home where the buyers used a 10 year Interest only ARM. Their interest rate was 3.25%. The payment is less on $1.8M than I paid on a $600K mortgage in 1990. We had double digit interest rates in those days. As my buyers said, “money is so cheap that it doesn’t make sense to pay cash.” Only 46% of the Las Vegas homes that sold for $1 Million plus this year were purchased with cash.

Jumbo loans allow buyers to conserve their cash for other investments but they aren’t for everyone. Some people prefer paying cash and knowing they own the home free and clear. Some buyers have the assets to pay cash but lack the income to qualify for the mortgage. You should consult with your trusted advisors. Your accountant can help you evaluate tax advantages of a jumbo mortgage. Ask your financial planners to calculate the potential ROI if you invest your money elsewhere. Is it more than the interest you’ll pay on the jumbo mortgage? It’s a great time to take advantage of low interest rates, but only if it makes sense for your financial goals.

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costs, appraisal, how to find a good broker

We know that jumbo loans can be harder to qualify for, and have different down payment and reserve requirements than conforming loans.  But what closing costs and appraisals?  Are these different as well?  

In our final chapter, we’ll answer these questions, as well as offer you real life examples of how and when jumbo loans were used, and practical tips you can take away from this guide.

Closing Costs for Jumbo Loans

The closing costs for a Jumbo Loan will be a little higher than on a conforming loan due to the fact that the purchase price is higher and the loan amount is larger.  Although, many of the standard fees will be the same, certain fees like Escrow and Title adjusts based on purchase price and loan amount.  In addition, if any points are paid to buy down the rate, the cost is based on a percentage of the loan amount.  Therefore, 1 Point on a million dollar loan will be more than on a $500,000 loan.

The cost of the appraisal may also be higher.  Some appraisers charge a higher fee on more expensive homes because it can be harder to find comparables.  In some cases, if the total loan amount is above $1 million or $1.5 million a second appraisal may be required.

If you would like a more detailed look at potential closing costs click HERE

Are Appraisals Different for Jumbo Loans?

The appraisal process is no different for a Jumbo Loan.  The cost of the appraisal may be higher if the purchase price is above $750,000.  In addition, many lenders will require a 2nd appraisal if the loan amount is above $1 million.  Some lenders have a higher threshold of $1.5 million.

The lender will base the value off the lower of the 2 appraised values.  The loan amount and LTV would then be calculated based on that value.

Tips for Shopping for Jumbo Loans

As you can see, Jumbo Loans can be complicated and have a lot of factors.  They can also be structured in many different ways.  In many cases, how the loan is structured, will determine if you are able to get approved for the loan.

Here are a few tips you should take into consideration if you are in the market for a Jumbo Loan.

tip-1aMake sure you work with a loan officer who is familiar with Jumbo Loans and has multiple sources that offer Jumbo Loans.  Since each lender has different guidelines for their Jumbo Loan programs, you need a loan officer who understands the differences and can determine which option will work for you.  If the loan officer does not have multiple choices, you may not get approved because your situation falls outside of the guidelines for the loan officer’s one Jumbo lender.

Here is a recent scenario where having multiple programs allowed a client to purchase a home. 

I helped a client buy a home for $735,000 using a 1st and 2nd mortgage up to a combined loan-to-value of 85%.  The first was a 4.375% rate 30 year fixed with an APR of 4.429.  These clients came to me about 6 months before they wanted to buy in order to plan out the best approach.

We were able to look at all loan options and see which would work best for these clients.  That plan included accessing equity from a condo they already owned to help with the down payment on the new purchase.  After that equity line was established, we utilized the program I spoke of above where we had a first of 75% LTV and a 2nd of 10% to give the clients the best rate at the time and limit their down payment.  This plan allowed the clients to put down the least amount possible of their own liquid funds and keep those as reserves.

Now, if you’re in the market for a home loan, odds are that I can’t help you (unless you live in CA), however, I do want to provide a testimonial here that demonstrates tip #1.

The above referenced client wrote me this beautiful testimonial:

In 2012, I noticed Shanne offered mortgage options that were more innovative and tailored to my specific needs than his competitors, even after the financial meltdown. By using his access to options for lenders, he assembled a package that was perfect for me for purchasing a house, using the exact down-payment and interest rate terms that would work for me.  The entire process was very smooth, and I was very pleased. But what made me even happier was that Shanne stayed in touch, and was eager to provide additional mortgage services to me even when they fell outside his normal scope of business and didn’t directly benefit himself or his business. That really cemented my high opinion of him and his operation.

I’d use Shanne again, and I wouldn’t even bother shopping around again.”

Brian H. San Diego, CA

In Brian’s case above, he didn’t quite understand all the hoops I had to jump through and programs I had to check into to “assemble a package that was perfect for him, using the exact down payment and interest rate that would work for him.”  But it worked out in the end precisely because I had multiple programs at my fingertips.

Bottom Line: Ask your mortgage broker about the various loan programs they have access to.  He or she should be able to rattle off an impressive list of lenders and programs they can use for various situations.

tip-2aMake sure the loan officer you choose has great communication skills and will stay in touch with you.  Jumbo Loans can require a lot of documentation and steps to get to the final loan approval.  The loan officer needs to be on top of the transaction the entire way or your purchase could close late or not at all.

Ask your loan officer for testimonials and look for references to them being timely in their response to you or “on top of the process.”  Here’s one testimonial of mine that highlights the type of testimonials you want to see for tip #2.  (my bolding)

We used Shanne of The Mortgage Planners twice now. First in 2012 to refinance our condo and second in 2014 to buy our current home. In both instances Shanne was very professional and answered all of our questions in a timely manner. It was very difficult with the second loan because in this seller’s market you must have a 30 day close and only get a 17 day loan contingency. However, banks have stringent loan guidelines and make you jump through hoops to get a loan – making a 17 day deadline very tight. Shanne and Laura made sure that everything was on track and eliminated a lot of the stress that we would have had if we had to communicate with the bank ourselves. After putting them through all the stress of a 17 day loan contingency we broke the news that we’ll be out of town when we’re supposed to close. Shanne and his team went the extra mile to make sure that everything was in order before we left so that we could still close on time. We will definitely use him again and recommend him to everyone!”
Jarold and Kristie E.  San Diego, CA

Bottom Line: Look for a mortgage broker with excellent communication skills, and testimonials to back it up.

tip-3aMake sure you work with a loan officer who will analyze your file early on and understands how to read tax returns.  It is crucial that the income is calculated accurately early on in the process so your time is not wasted.  If you can’t qualify right away, make sure the loan officer will work with you and give you guidance on what you need to do to get qualified.

I recently helped a client who was purchasing a $1,000,000 home.  This client was self employed with an S-corporation.  When I initially tried to pre-approve them, the debt to income ratio was too high because we had to average 2 years of income due to the self employment.  At the time I was using 2011 and 2012 tax returns.  His 2011 returns did not show enough income to qualify.

I notified the client that we were going to have to wait about 4 months for his 2013 tax returns and let him know the minimum income I was going to need to be able to qualify him.  When the time came, I reviewed his tax returns before he submitted them to the IRS to make sure that the income would work.  The 2 year average income now worked.

In addition, this client had W2 income combined with his self employment income because some of the companies he worked for would only pay him W2.  I had to find the lender that would understand that in the client’s industry it was common for some companies to pay as a W2 employee even though he was not a full time employee.

I was able to accomplish this and the client was able to get an offer accepted on a home.  The loan would be a 30 year fixed for $800,000.  After doing the upfront legwork to find the right lender for this loan, the underwriting process went pretty smoothly.

… The client now owns a beautiful $1,000,000 home.

This was an instance where understanding tax returns came into play.  Rather than waste the client’s time applying for the loan too early, we were able to apply once he would be approved.

Bottom Line: Look for a loan officer who is experienced in reading tax returns and can advise you on qualification issues before applying!

Please Share Our Guide!

We hope you’ve enjoyed our Definitive Guide to Jumbo Loans.  If you know anyone who may be purchasing a home valued at over $500,000, please share this guide with them.

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