Not only have home prices recovered from their lows over the past few years they’re hitting new records in some areas. This isn’t something to be concerned about. The housing bubble of the last decade was primarily created by toxic loan programs that would approve just about anybody that applied. Today, those toxic loan programs are gone along with the lenders who made them. Today, home values are appreciating due to an improving economy, wage growth and competitive interest rates. But as the demand for housing increases, naturally the price for homes will also rise as buyers compete for the same properties.
That means more and more properties are falling into the “jumbo” category. There are three types of loan limits for most parts of the country, conforming, high balance and jumbo. Conforming loans are those that are $453,100 or less. High balance loans are in areas where the cost of real estate is much higher compared to other areas. The high balance loan limit is $679,650, but in most of the country there are two limits, conforming and jumbo. Anything above the conforming limit is a jumbo loan. Each year, the Federal Housing Finance Agency reviews the national average value for homes in October and compares that value with the previous year. If there is an increase, the new conforming loan limit for the following year is adjusted upward by the same percentage. In 2017, the conforming limit was $424,100 and for 2018 adjusted to $453,100 due to the year over year increase in prices.
Jumbo loan programs ask for a down payment of at least 20 percent but you can get a slightly better rate if the down payment is 25 percent of the sales price of the home. For a $750,000 home, 20 percent is $150,000. 25 percent is $187,500. That’s quite a bit of money. An FHA loan for a conforming purchase is just 3.5% of the sales price and conventional mortgages for a conforming loan can ask for as little as 3.00 to 5.00% down.
Why such a large down payment requirement for a jumbo loan? Recall that any down payment less than 20 percent of the sales price for a home will require a private mortgage insurance policy for conventional loans. Yet there currently are no mortgage insurance policies that cover jumbo loan amounts, hence the 20 percent minimum. Yet what happens when someone finds a higher end home to buy and finance the purchase with less than a 20 percent down payment? What do they do, just wait until they save up some more money?
There is an option for buyers to put down less than 20 percent by using two loans to finance the purchase instead of just one. Sometimes referred to as a “piggyback” or an 80-10-10 or 80-15-5, buyers put down 5.00% to 10% of the sales price and take out a second, subordinated loan for the rest, keeping the first mortgage at the magical 80 percent mark.
Let’s refer back to the $750,000 purchase price. With an 80-10-10 loan, the buyers make a 10 percent down payment of $75,000 instead of $150,000. They also apply for a second mortgage for $75,000. This means no private mortgage insurance and much less cash to close.
Each month, the borrowers will make two monthly mortgage payments. One to the first lien holder and one to the second. It’s important to remember these are two separate loans so that means two separate applications. That also means you’ll provide copies of your pay check stubs, W2s and tax returns, bank statements and other documentation for each lender. But you don’t have to take that route. By working with us to finance your jumbo purchase, we can handle the additional documentation for you so you don’t have to.
There’s certainly a lot to consider when making a purchase that requires jumbo financing. It’s a bigger financial commitment than what many are used to which means more money at the closing table. Jumbo loans will also ask for interest rates slightly higher compared to current conforming rates are today. Not by a lot, but higher still. A jumbo will also ask for higher minimum credit scores as well. But there is still the prevailing myth that one needs a 20 percent down payment to buy a home, any home, and the myth is even more pervasive as it relates to jumbo financing. But there are options. If you’re thinking of financing a jumbo purchase but not ready to part with a 20 percent down payment, let’s talk. You do have other choices.