It’s one of those myths or misunderstandings that those buying a higher end home needs to have a down payment of at least 20%, but that’s not the case. As more and more areas across the U.S. seeing property values continue to climb, what was once a conforming loan is now a jumbo.
Conforming loans are those underwritten to Fannie Mae and Freddie Mac guidelines and require a minimum down payment of anywhere from 3-5%. Of course, a conforming loan where the first lien is greater than 80% of the property value requires private mortgage insurance. But there is no private mortgage insurance for jumbo loans, hence the idea that a jumbo loan needs at least a 20% down payment.
Jumbo Loan Without a 20% Down Payment
It is true that jumbo loans do ask for a 20% down payment, and a slightly better rate with a 25% down payment, but it’s not a requirement. Even if the buyers have enough available funds to pay cash for a jumbo purchase, they still might want to use as little cash as possible while keeping their funds in various investment and retirement accounts.
Each and every year the Federal Housing Finance Agency reviews the national median home values each fall. The values are compared to those one year earlier. If the values have risen from the previous mark, the conforming loan limit for the following year will increase by the same amount. If values increase by 10% then the new conforming loan limit will also increase by 10% until the next comparison is made one year later.
Jumbo loan limits will also make adjustments based upon the changes to the conventional programs. Anything above the conforming limit is considered a jumbo loans. 2021 Conforming Limits are currently set to $548,250 for most locations across the U.S., and $822,375 for high-cost locations mainly in California, Florida, Colorado, Virginia, and the North East.
Interest rates for jumbo loans are a bit higher than conforming due to the greater lender risk, but the disparity used to be much greater than it is today. Still, borrowers look for ways to buy a higher end home without having a jumbo mortgage and the accompanying higher rate and down payment.
But for those who are thinking jumbo and deciding where to come up with the down payment funds, they don’t need 20% down, they just need to keep the first mortgage at or below 80% of the value of the property. Which might raise the question, “How can you keep the loan at 80% of the sales price but not putting 20% down?” The answer is how you structure the loan.
Let’s start with the first option where the buyers want to make a 10% down payment instead of 20%. Let’s say there’s a house on the market for $750,000. Instead of making a 20% down payment, they make a 10% down payment, or $75,000. That leaves a mortgage loan of $675,000 but because there is no private mortgage insurance policy for this loan type, something else needs to happen. If we reduce the loan amount to 80% of $750,000, that gives us a mortgage of $600,000. But we’re still $75,000 short and we haven’t even talked about closing costs and cash reserve requirements.
A 20% down payment on this transaction means $150,000 for the down payment alone. How can we put less down and still have no mortgage insurance? The answer is by using two mortgages commonly referred to as a “piggyback” combo loan instead of just one.
Certain lenders can structure a loan where there is a 10% down payment, the first mortgage is at 80% of the sales price and hence avoiding mortgage insurance, plus a second mortgage to make up the $75,000 difference. The loan program is commonly referred to as an 80-10-10. 80% of the value of the property is the first loan, 10% of the value for the second and with a 10% down payment. Another option asks for only a 5% down payment in the form of an 80-15-5. 5% down, the first mortgage at 80% of the value and the second at 15%.
There are other requirements for this structure and we’ll want to talk to you about the difference in monthly payments, choosing a rate and loan terms for both the first and second mortgage. These will all affect your total monthly payment as well as interest paid over the life of the loan.
These programs also require borrowers to have good to excellent credit and really isn’t an option for someone with suppressed credit scores. Also, these programs are for a primary residence only and not available to finance an investment property or rental. But with a low down payment jumbo loan, you don’t need to dip into your savings or retirement account to get approved for the home you really want.
Borrowers can read more about the latest Jumbo Down Payment standards here. We cover all the 90% and 95% credit, down payment and loan amount limits in detail. Please reach out to us anytime with questions by calling the number above, or just submit the Quick Contact Form on this page.