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How do Jumbo mortgage rates compare to Conforming Mortgages?

MortgageRight now there is very little difference between jumbo (aka non-conforming) and conforming mortgages with 30 year fixed rates. Rates change constantly and sometimes there may be larger price difference between conforming and jumbo mortgage rates.

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10 Percent Down Jumbo Mortgage

A “jumbo” (aka non-conforming) mortgage typically requires at least 20% down payment. Mortgage Master is now offering a non-conforming jumbo mortgage that will go up to a 90% loan to value (10% down payment) with lender paid mortgage insurance (lpmi). In the greater Seattle/King County area, jumbo mortgages are any loan amounts over $506,000 for a single family dwelling (this is also true for homes in Snohomish and Pierce County). In most other Washington state counties, the conforming loan limit is $417,000. Click here for a complete list of conforming loan limits in Washington state for 2014.

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Financing Your Million Dollar Seattle Home: Jumbo (Non-Conforming) Mortgages

Jumbo mortgages have been slowly returning since the "mortgage meltdown" and the pricing is becoming more competitive as lenders re-enter the non-conforming markets.  Loan amounts that are higher than conforming loan limits have different underwriting guidelines than conforming, typically requiring additional reserves (assets) from the borrower, lower debt-to-income ratios and higher credit scores.  It's not unusual to have underwriting require a second appraisal after reviewing the first one with a fine tooth comb.  Because these loans are not backed by Fannie or Freddie, they tend to be scrutinized more than mortgage with a conforming loan amount.

The higher the loan amount is, the more reserves the borrower is required to have.  One lender I work with requires 6 months reserves for loan amounts of 1 million or less and 12 months reserves if the loan amount is over 1 million.

In the greater Seattle area (King, Snohomish and Pierce Counties), a jumbo loan currently is any residential mortgage with a loan amount higher than $567,500 (click here for a list of loan amounts by county).   If you're eligible for a VA loan, jumbos are a different story.  This post will focus on non-conforming jumbos.

Non-conforming loans have several factors that impact pricing including credit score, loan to value and loan amounts.  Here's a comparison of rates using a 30 year fixed based on current pricing based on home valued at 1.3 million, purchase with credit scores of 740 or higher and taxes and insurance included in the mortgage payment:

Loan amount of $1,000,0000:  5.625% priced w/1 point (APR 5.767)  NOTE: 20% down payment would not work with this scenario as most lenders require 25% down when loan amounts are over 1 million.

Loan amount based on 75% loan to value: $975,000: 5.500% priced w/1 point (APR 5.641).

Loan amount based on 60% loan to value:  $780,000: 5.375% priced w/1 point (APR 5.522).

For reference, I'm quoting 5.00% for a 30 year fixed a high balance conforming ($567,500 - $417,001 loan amount) at an 80% loan to value (apr 5.147).  If the loan to value is 60% or lower, the rate is reduced to 4.875% (apr 5.024). 

Loan amounts from 1.5 – 2 million typically require a down payment of 30%.

NOTE:  Adjustable rate mortgages are available and 30 year fixed with interest only payments (requires more equity and higher credit scores than fully amortized jumbos).  I'm using a 30 year fixed amortized for comparison sake to illustrate the difference in rates based on various down payments.   For your personal rate quote for homes located in Washington state, please contact me.

How Much Do I Need for Down Payment to Buy a Home?

When you buy a home, most loans require a down payment.  A “down payment” is the difference between the loan amount (what is being financed) and the sales price.   Down payment percentages are based on the sales price.  Be prepared for every dollar that is used for your down payment to be documented or sourced (including large deposits reflected on your statements).  In addition to the down payment, there may be closing costs and reserves.  

Closing costs can be paid by lender credit (via an increase in interest rate) and sometimes the seller can contribute to closing costs.  If the seller is paying for closing costs, there may be restrictions based on the program type and the amount of down payment you are making.  If the seller is paying your closing costs, it needs to be negotiated in the purchase and sales agreement.   Reserves are the savings the lender wants you to have in your account after closing typically measured by months of your proposed mortgage payments.   It’s safe to plan on at least two months of proposed mortgage payments to be in your bank after closing for “reserves” whether your lender or loan program requries it or not. 

Some home buyers select their mortgage based on down payment requirements.  Here are some different programs beginning zero down payment options for homes that are owner occupied/primary residence.

VA Loans.  If you served our country, thank you.  You may qualify for a VA loan which allows zero down payment and the seller is permitted to pay 100% of your closing costs.   Zero down payment is available up to the VA loan limit, which in King, Pierce and Snohomish county is currently $481,250.   If your loan amount is above the current VA loan limit, your required down payment is 25% of difference between the loan limit and the sales price.   There is no mortgage insurance, however VA loans do have a one time funding fee.

USDA loans.  Homebuyers who are willing to live in a rural area and who meet income guidelines can also buy with zero down payment.  Like VA loans, there is no mortgage insurance and there is a one time funding fee.  Again, USDA loans have income and geographic restrictions.

FHA.  Currently FHA will allow a down payment as low as 3.5%.  Current FHA loan limits in the greater Seattle area is $567,500.  FHA loans do have mortgage insurance (upfront and monthly).  Sellers can currently contribute up to 6% of closing costs and prepaids, however this (and possibly the down payment) guideline are expected to change.  A family member can gift the down payment requirement of 3.5% which would effective make an FHA loan “zero down” for the home buyer.

Conventional.  Conventional programs are Fannie Mae and Freddie Mac programs.  If you’re putting down 20% or more, you avoid private mortgage insurance.   Any purchase with less than 20% down payment will most likely have private mortgage insurance.  Seller contributions towards closing costs and gifts from parents vary depending on your amount of down payment.

Private mortgage insurance rates and guidelines vary based on the loan to value (the amount of your down payment), credit scores and programs.  The lower your down payment, the more expensive the cost and the tougher the guidelines are because the loan is more risk for the private mortgage insurance company.

Fannie Mae Homepath.  Fannie Mae’s Homepath allows home buyers to purchase a foreclosed home owned by Fannie Mae with as little as 3% down payment, with no private mortgage insurance and no appraisal.  Fannie Mae often offers additional “special” incentive programs, including contributing towards closing cost.  This program is limited to specific homes that Fannie Mae currently owns.

Non-conforming/Jumbo loans. In the Seattle/King County area, any loan that is over $567,500 is a “jumbo loan”.   The loan limit varies depending on what county the home is located in.  For homes that are not in a designted ”high cost” area, a non-conforming loan amount is any loan $417,001 or higher. 

Plan on at least 20% down payment and having roughly six months reserves after closing depending on how many properties you currently own.  

I do have other resources that will allow a lower down payment of 10% down with a loan limit of $600,000 and “self insurance” (slightly higher rate in lieu of private mortgage insurance). 

What happened to piggy-back mortgages?   Every once in a while I’m contacted by a borrower who is interested in an 80-10-10 which would allow a borrower to put 10% down payment, using a second mortgage to make up for the difference between the first (primary) mortgage and the down payment.   Currently, most lenders are offering a maximum loan to value of 75 or 80% 85% which rules out the 80/10/10 scenario.  UPDATE August 25, 2011: Some of the lenders we work with are offering second mortgages up to 85% loan to value to well qualifed borrowers.

If you are considering buying a home located in Washington state, I’m happy to review your down payment options with you and help you develop your home purchasing plan.

Related post:

How to Buy a Home with $10,000

How Much Home Can I Afford?

Waiting for the Jumbo Shoe to Drop

The Government has reached out to home owners who have conforming or FHAMortgageporterjumbo financing.  However if your mortgage is a jumbo (aka non-conforming); your options for refinancing are few…there is no HARP for you.   Many home buyers used various types of mortgages to buy their dream or "move-up" homes a few years back during the loosey goosey days of mortgages and now are either dealing with or waiting for these large mortgages to adjust.

Recently I've added Jumbo mortgages back to my Friday rate quotes, including fixed and a couple of adjustable rates mortgages.  The difference now is that people must actually qualify for their mortgage.  No more stated income or qualifying at a teaser low interest only payment.  And as I mentioned, there is no assistance for you unless your mortgage servicer is willing to do a modification.

As Diana Olick's video above addresses, banks have a large "bucket" of mortgages that are getting ready to go into foreclosure.  Many are jumbos.   Even if Obama's programs for loan modifications and refinances reached out to the high end home owner in need of a lower mortgage payment; if the home owner has lost their job, odds are against them.

The timing of no available mortgages for the high-end home owner couldn't be worse.   For the past few years, the pricing was not attractive for jumbos.  Someone with an option ARM, for example, would not want to nor probably qualify for the much higher rates if they wanted a more secure fixed rate product.   This also prevents the jumbo home owner from being able to sell their home should they decide they can no longer afford it.   Their home's potential prospects are limited to those with significant cash down payment to have a "high balance" loan limit (currently in the Seattle area, the 2009 high balance loan limit is $567,500). 

The Seattle-Bellevue area also has a significant amount of high end homes.  How many are waiting to go into foreclosure?   This is one sector of the market who odds are will not see a bail out.

Can I buy a $620,000 home with a low credit score?

This morning I received this email:
My wife and I found a house we are in love with. I wanted to write and tell you our situation, maybe you can tell us if we are even in the "ballpark".    The house we like is 620,000. We have 20% to put down. We have very little debt and well documented income. I have a low credit score, 660 or lower. Is this worth pursuing or is the credit score too low?
Based on current guidelines/pricing, you really need to have your credit scores above 660 if you’re considering loan amounts above "true conforming" (presently $417,000). It’s very possible that this couple can buy a home utilizing an FHA jumbo mortgage which leans more towards credit history rather than credit score.  Here are some factors that would indicate whether or not this is a possibility for this couple:
  • Credit history.
  • Loan limits.

Unfortunately the loan limits where this couple are considering to purchase are much lower than what we have in the King County area.  They’re wanting to buy in Clark County which currently has a temporary jumbo limit of $418,750.   They would need about $200,000 for their down payment with the seller paying closing costs and prepaids (est. at $12,000).   Or they could opt for conforming financing with a loan amount of $417,000 and try to get a conventional approval (with a larger down payment, it’s possible).

If they were buying in King, Pierce or  Snohomish County, the loan limit is currently $567,500 and would have the option of putting less than 20% down (as low as 3.5%), should they wish assuming they qualify for the payment.

Regardless of where the property is located, the last 12 months of credit history is more critical than credit score (as long as the credit scores are 600 or higher) for a purchase using an FHA insured loan.

FHA loans are full doc and will need to be sourced and seasoned.  Buyers should be prepared to provide their last 2 years of W2s (and possibly tax returns) as well as at least 30 days of income on their paystubs.

Remember, we should be learning in early November what the new jumbo loan limits will be.  I’ll keep you posted!

How Will the New Jumbo Limits Impact You?

If you’re buying a home $520,000 or below over the next year, you won’t really be impacted by the reduced FHA Jumbo and Conforming Jumbo limits.   However, if you’re considering buying a home with minimum down, you’re losing $45,000 of financing power on January 1, 2008 with a $522,100 loan limit.

I wrote an article at Rain City Guide in June about how much home $17,550 can buy you in King, Pierce and Snohomish County with the current loan limit of $567,500.  The answer: $585,000 utilizing a FHA Jumbo.   Once the new loan limit is in place for our region, the most you can buy with minimum down will be closer to $540,000.   Although the new minimum required investment at 3.5% (effective October 1, 2008) will increase the amount required to $18,900 (based on a $540,000 sales price).

Want to do conventional 20% down and stay away the "true jumbo" rates by utilizing the maximum conforming jumbo?  Currently, a sales price (or appraised value in the case of a refinance) of $709,000 will get you pretty close to the existing limit at $567,200.  As of January 1, 2009, that sales price (or appraised value) is reduced to $652,500 for a loan amount of $522,000.

Refinances may also be impacted depending on what the payoffs are on the existing balances and if it’s classified as a "cash out" refinance (second mortgages not obtained from when you purchased your home is considered cash out) which have tougher guidelines than a "rate term" refinance.  Underwriting guidelines continue to tighten and will continue as well.

As always, I highly recommend that if you are considering buying or refinancing in the next year, to contact a local Mortgage Professional at your earliest convenience.   The loan limits may not even impact you, it’s never to early to prepare considering our current climate.