Fannie Mae just announced the new conforming loan limits for 2020 as they do every November. Last year, due to recovering home values, we witnessed the first year-over-year increase in the conforming loan limit in nearly a decade. Yet the increase does have a method to it.
The Federal Housing Finance Agency, or FHFA, compares the national median home value from October of the previous year to the current one. If there is an increase, the conforming loan limit will be raised accordingly. This time, home values rose by 6.8% and so did the conforming limit.
For most parts of the country, 2020 Conforming Loan Limit is $510,400 for a single family home. In so-called “high cost” areas, where the median home values for the area exceed 115% of the local median home value, the high cost conforming loan limit will be increased to $765,600. Most of the high-cost locations are concentrated in states like California, Florida, Alaska, Hawaii, Colorado, Virginia-DC and New England.
Jumbo Loan Defined:
Anything above the conforming loan limit is considered a jumbo loan. What are the basic differences between a conforming and a jumbo loan? The most important difference is the interest rates issued for each. Jumbo loans normally carry a slightly higher interest rate ranging from 0.25% to 0.50%, depending upon credit and loan to value.
Other differences include down payment requirements. Jumbo loans, like conforming loans, provide different rate structures for the same program based on credit scores and down payment amounts. The very best rates are reserved for those with a down payment of at least 20% and a credit score at or above 740 for most programs.
The primary reason conforming loans have slightly lower rates than jumbo loans is in major part due to the secondary market. When a lender or bank approves a conforming loan using Fannie standards, the loan can easily be sold directly to Fannie or even to other lenders.
Lenders sell loans to free up cash to fund new applications. Both Fannie and Freddie combine to take up around two-thirds of all mortgage loans approved today, including high-cost areas.
Jumbo Mortgage Qualifying:
Qualifying for a jumbo loan is very much like qualifying for a conforming loan. Lenders will verify income and employment by reviewing copies of a borrower’s most recent pay stubs covering a 60 day period along with the last two years of W2 forms.
For someone that is self-employed or otherwise receives more than 25% of their gross annual income from sources other than an employer, two years of federal income tax returns will be required. When reviewing federal income tax returns, the lender will compare the year-over-year net income for self-employment and then average those two years to arrive at a monthly amount.
For example, an individual filed income tax returns and showed $150,000 in one year and $165,000 the following year. These are the two most recently filed returns. $150,000 + $165,000 = $315,000. $315,000 divided by 24 (months) = $13,125. $13,125 is the amount used for qualifying.
Lenders like to see some consistency from one year to the next and are cautious about any significant drop off from one year to the next. For instance, one year the income is $165,000 and the next $150,000. While that’s a decrease, a lender would simply consider it a nominal change and normal for a business. When the decrease is more than 10-20%, the lender may require an explanation regarding the decline and could even turn down the application.
Employment is verified by communicating directly with the employer verifying income, how long the employee has worked there and the likelihood the employee will continue to be employed among other items. To make sure there are enough documented funds available for a down payment and closing costs, as copies of bank and investment statements from these accounts will be required.
In addition to a down payment and closing costs, borrowers will be required to show additional funds in a liquid or non-liquid accounts totaling 3-12 months of mortgage payments. These funds are referred to as cash reserves and the exact amount needed will depend on the loan amount, LTV, etc.
If for example a jumbo loan amount is $700,000 and using a 30 year fixed rate of 4.00%, the principal and interest payment is $3,342. If you add a monthly amount of insurance of say $350 per month and taxes at $700, the total mortgage payment is then $4,392. If three months of cash reserves are required, the borrower will need to document an additional $13,176 in a liquid or non-liquid account. Again, exact cash reserve requirements can vary based on credit scores, loan amount and down payment.
Jumbo Down Payment Options:
Because interest rates on jumbo loans can be adjusted based upon the equity in the transaction, the better rates are reserved for purchases where the borrowers make a down payment of 20% or more. Yet high-end buyers don’t always like to tie up their funds when buying and financing real estate.
While equity in the property belongs to the borrowers, when a down payment is made in order to finance the property, the equity is no longer considered liquid, such as funds in a checking or savings account. Yes, the owners can take out a home equity line of credit to tap into the equity in their home but that involves a new HELOC and monthly payments.
Further, jumbo buyers may prefer to keep their cash and make a lower down payment than 20 or 25%. Instead of a down payment, the funds can be kept in an investment portfolio earning interest and dividends. But then there comes a dilemma, keeping down payment funds liquid and making a down payment less than 20% of the sales price would mean private mortgage insurance or PMI. PMI is a separate insurance policy that covers the difference between 80% of the sales price and the down payment amount.
PMI policies are typically paid for in monthly installments along with the mortgage payment. Borrowers avoid PMI both for conforming and jumbo loans by keeping the mortgage at 80% of the value of the home where no PMI is needed.
The good news is there is another strategy that avoids a separate private mortgage insurance policy and payment and involves two separate loan amounts, a first and a second mortgage.
For example, let’s say there is a property on the market for $1,500,000. The buyers make an offer and the offer is accepted. They have explained to their loan officer they only want to put down 10% of the sales price. In this example that’s $150,000 leaving a balance of $1,350,000. They also want to avoid any private mortgage insurance. The loan officer then puts together a structure where there are two loans.
The first mortgage loan is kept at 80% of the sales price, or $1,200,000 thus avoiding PMI. That leaves a balance of $150,000 and is financed with a second, or subordinate lien with the total monthly payments being lower compared to one bigger loan and PMI.
The second loan amount of $150,000 is automatically subordinated to the first which means when the property is sold the first mortgage lien holder will be paid off first and the remaining funds used to pay off the second. Lenders refer to this jumbo financing option with 10% down as an 80-10-10 loan structure.
The very same strategy can be used with a smaller down payment of 5% using an 80-15-5 loan structure. Using the same property as an example, the first mortgage would still be $1,200,000 but the second lien would represent 15% of the sales price or $225,000 along with a 5% down payment of $75,000. Low down payment jumbo loans are reserved for those with excellent credit and loan profile.
Qualified home buyers have the following Jumbo options available:
- 90% Jumbo Loans: Loan amounts up to $3,000,000. Min 720 credit score when the loan amount exceeds $2.0mil.
- 95% Jumbo Loans: Loan amounts up to $2,000,000. Min 700 credit score unless the loan amount exceeds $1.5m – in this case a 740 score will be needed.
- Program terms include standard 15 year, 20 year, 30 year fix rate, and adjustable rate 5-1, 7-1, 10-1 terms.
Home buyers can read more about the qualifying guidelines for the low down payment options under the Jumbo Purchase Page.
Jumbo VA Loan
Let’s take a look at another excellent financing option for current and past Veterans. VA loans have always been attractive due to the fact they don’t require a down payment and the veteran is restricted from paying certain closing costs.
For eligible Vets wanting a low cost mortgage, there really is none better than the VA loan. VA recently removed loan limits so more vets can qualify.
For both conforming and VA loans, high cost or “high balance” loans will carry a slightly higher rate but still lower than the comparable jumbo loan. VA High Balance Jumbo Loans carry a guarantee to the lender that compensates the lender at 25% of the loss should the loan ever go into default. This guarantee is financed by what is referred to as the Funding Fee and is rolled into the loan amount.
But what if a VA borrower wants to finance a property using and the sales price is more than the conforming loan limit for that area? This is still possible but will require a down payment of 25% on just the amount that exceeds the conforming loan limit for the county.
Example for a couple purchasing a $525,000 home where the base conforming loan limit is $510,400:
If you subtract $510,400 from the $525,000 sales price you get $40,650. The guarantee only applies to the $510,400 VA limit but the veteran doesn’t have to come to the table with the entire difference. Instead, refer back to the 25% guarantee made to the lender. The borrowers must come to the closing table with 25% of $40,650 or $10,163 in this case. This $10,163 reflects a down payment of less than 2% of the sales price of the home, still extremely competitive for a jumbo loan structure. As a bonus, VA loans don’t have any monthly PMI payment either and carry some very competitive interest rates!
Current homeowners also have an assortment of refinance programs available today. These programs can benefit homeowners that want to reduce their payments or transition from an adjustable rate to fixed.
There are also many cash out programs for those that have available equity in their home. Read more about all the requirements under the Jumbo Refinance page above.
There are more financing options for jumbo buyers in today’s market than there have been for several years. While it used to be standard policy for jumbo borrowers be required to make a down payment of anywhere from 20-25% before being approved. Yet there are more options available that preserve a buyer’s cash while still providing competitive financing options.
Contact us below to review all the latest options available based on your personal situation and preferences. Higher end jumbo buyers today can substantially leverage their purchase with lower down payments and low interest rates.
*Note, low down payment and low jumbo rates will require a better credit profile and these loans aren’t available to everyone. There are several loan structures to consider. Contact us at the number above or just submit the Quick Contact Form on this page to be connected with a specialist quickly 7 days a week.