Prior to the recession that began in 2007, a jumbo mortgage was extremely popular. Numerous banks used these mortgages as an easy way to make money. At a time when many lenders would originate a conventional mortgage and then sell the loan to a big investment firm, a jumbo loan was treated quite differently. These loans were retained by the lenders in order to profit from the interest. That changed when the recession hit.
While some banks have stopped offering this type of home loan, they are still readily available. Some people have actually given up on buying the luxury home of their dreams due to bad information. The following list represents the top five jumbo mortgage myths that are holding you back from owning your home.
Jumbo Mortgage Myths: #1 Higher Interest Rates
First and foremost, the average rate for a jumbo mortgage is in fact higher than the average rate for a conventional loan. HOWEVER, it is not 5% or 10% higher. Most of the time it is 0.5% to 1% higher. Jumbo loans are obviously much larger than conventional loans. The added interest rate helps protect the lender against the higher risk in the event the borrower is no longer able to make the payments.
The higher rates are usually offered on fixed rate loans. Jumbo mortgages are often advertised with attractive adjustable rates that are fixed for a certain amount of time. Normally, the rate will be fixed for either the first year, or the first 3 years or the first 5 years of the loan. After the predetermined period ends the rate can adjust up or down based on the index connected to the loan.
Each lender will use a slightly different index for adjusting the mortgage rate. This is a good reason to deal with a mortgage lender that has numerous avenues for a jumbo loan to make sure that the future rate adjustments are not unreasonable.
Jumbo Mortgage Myths: #2 Single Family Luxury Homes Only
The property types allowed by jumbo mortgage guidelines are very similar to the guidelines for a conventional home. A single family home can qualify just as easily as a place on the beach or even a condominium. In fact, a duplex, a triplex and a 4-unit home all can qualify for a jumbo mortgage.
Jumbo mortgages can also be used to purchase a second home as well as to buy that secluded spot at a vacation destination.
Although it is not as common, jumbo mortgages can be used to purchase rental property. The same type of credit requirements and debt to income ratios would apply to this kind of purchase in the same manner that they apply to a conventional loan.
Jumbo Mortgage Myths: #3 $1 Million+ Homes
This is one of the worst myths that consumers believe about a jumbo mortgage. In most places, a home loan is considered a jumbo mortgage if it exceeds the $484,350 limit for Fannie Mae and Freddie Mac loans.
That’s it. No million dollar loan.
A $453,101 home loan is considered a jumbo mortgage just as much as a $3 million home loan.
To be fair, there are some places in the country where the limit for a Fannie Mae or Freddie Mac loan is a bit higher than $484,350.
For example, in Honolulu, HI the loan limit on a single family home is $721,050. This means that a loan of $722,000 would be considered a jumbo loan in Honolulu.
In Fairfax, VA the loan limit is $625,000
Jumbo Mortgage Myths: #4 Astronomical Down Payment Required
It is true that getting a jumbo mortgage is impossible without a down payment. During the aforementioned recession, the only way to qualify for a jumbo mortgage was to pay at least 20% of the asking price up front as a down payment. For a home priced at $600,000 this would mean a down payment of $120,000!
Thankfully, that has changed. It is quite common for banks to offer jumbo mortgages with only 10%** down. Even a few lenders have started offering a 5%* down option for certain loan sizes. This has opened the door for more qualifying buyers to be approved for jumbo lending while also allowing them to keep their excess funds in alternative forms of investments.
Prospective borrowers will need to be prepared to show documentation of their down payment.
Money that will come from a checking or savings account for the down payment will need to be seasoned for 60 days. This means that two months of statements must show the necessary down payment amount in the account.
Funds that are coming from a retirement account will need to show the most recent account statement as well as documentation explaining how the funds can be withdrawn.
In addition to providing evidence of the down payment, borrowers will likely need to also document a certain amount of reserves above the down payment.
Reserves, in the eyes of the lender, are accounts that the borrower has which are easily accessible such as checking, savings, money market, CD’s and certain retirement programs. The lender wants to see that the borrower has enough money in these accounts to cover 6 to 12 months worth of mortgage payments. This shows that the borrower is properly managing their funds and a better risk for the bank.
Jumbo Mortgage Myths: #5 PMI is Required for Every Jumbo Loan
Private mortgage insurance is required on conventional loans if the borrower pays less than 20% down at purchase. Mortgage insurance is also required on government mortgages such as the VA and FHA loans.
In contrast, lenders who typically keep and maintain the loans without any backing from the federal government offer the vast majority of jumbo mortgages. This gives the lenders a bit of discretion.
For this reason, most jumbo mortgage lenders do not require private mortgage insurance. However, this is not an option open to every potential borrower. In order to waive the private mortgage insurance the bank will do a very thorough job of combing the application. This means the credit scores will need to be very high, the borrower’s income will need to more than enough to handle their current debt along with the new home loan and they will need to have quite a bit of money in savings and/or investment to protect against financial problems.
In fact, the borrower may have to provide some type of documentation explaining that their current employment situation should remain at or above their current level of income for the foreseeable future.
BONUS: There is One More Myth to Debunk – Only a Select Group of Lenders Offer Jumbo Loans
Since the latter part of 2014 more lenders have started offering jumbo mortgages. In fact, an article from the Wall Street Journal states that the jumbo housing market has improved better than the conventional home loan market.
In order to get a more informed opinion from another segment of the market, I reached out to Bill Gassett, one of the best real estate agents in Medway MA to get his take on what he sees with the jumbo mortgage market. I asked Bill about any myths about the jumbo market that he has seen or heard. Here is what Bill had to say. “Luke thanks for having me along to speak with your readers. Working as a real estate agent for the last 29 years one of the myths that has prevailed is the belief that jumbo mortgage rates are much higher than conventional mortgage rates. As I am sure you can attest this is not always the case. The rates for jumbo loans right now could not be that much better!
Another myth we often see is that Jumbo down payment requirements are significantly higher than conventional loans. This is also not the case as most often you can get a jumbo loan by putting 5-15 percent down. There are many lending institutions that really want to write mortgages for borrowers looking for the jumbo loan product.”
As you can see from Bill’s comments, these jumbo mortgage myths are prevalent across the whole country!
Most mortgage lenders have access to multiple loan sources. This gives the lender the flexibility to provide more than one option to you, the client, in order to find a mortgage that fits best your needs.
Don’t fall into the trap of believing these luxury home buying myths! Talk to your mortgage lender today and get on the path to owning your dream home.
- Important Disclosure
*5% down payment on $625,000 purchase price, 3.250% / 3.772% APR, 740 FICO, 7/1 ARM mortgage. Mortgage insurance is required. The initial rate is subject to increase after the initial fixed rate period of 7 years ends. Rates subject to change. Subject to credit approval.
**10% down payment on $625,000 purchase price, 3.250% / 3.671% APR, 740 FICO, 7/1 ARM mortgage. Mortgage insurance is required. The initial rate is subject to increase after the initial fixed rate period of 7 years ends. Rates subject to change. Subject to credit approval.
Luxury Real Estate Resources for buyers and sellers:
10 Things To Do Before Selling Your Luxury Home by Debbie Drummond
Marketing Your Luxury Home by Karen Highland
Tips For Selling a Luxury Home by Paul Sian
8 Tips That Must Be Considered When Selling a Luxury Home by Kyle Hiscock
Should Buyers Purchase a Luxury Home or High End Condo by Anita Clark
Tips For Buying Luxury Real Estate by Investopedia