As the homebuying season kicks off in earnest in the spring, buyers may find that the lack of inventory = higher prices. If your dream home comes with a steep price tag, you may need to apply for a jumbo mortgage to finance it, instead of a “conventional” mortgage.
What’s the difference? In short, conventional mortgages are backed by Fannie Mae & Freddie Mac, whereas Jumbo loans are not. These jumbo loans are sizes of $500,000 or more that an individual or couple are borrowing to finance a luxury property, or homes in a highly competitive local real estate market.
Unfortunately these days, many of the top 25 cities in the US have become highly competitive markets. Jumbo loans can be especially difficult for first-time homebuyers to obtain, as lenders often require a higher down payment %, additional cash reserves in your bank account, and unique underwriting requirements. Stem Lending‘s mortgage consultants can help walk you through the details to see which loan–conventional or jumbo–makes sense for you.
Ok, but apart from being large, what exactly are jumbo mortgage loans, and how do I know if it’s the right loan option for me, instead of a smaller conventional mortgage loan?
Roughly 90% of all mortgages written in the U.S. are backed by two quasi-public government sponsored enterprises (GSEs), Fannie Mae and Freddie Mac. These two agencies “securitize” these loans by purchasing loans in bulk, packaging them up and reselling them in bond form. Fannie or Freddie will do this for almost any mortgage that conform to their underwriting guidelines, which factor in a borrower’s credit score and history, debt-to-income (DTI) ratio, the mortgage’s LTV (loan-to-value) ratio, and the size of the loan.
Late last year, the Federal Housing Finance Agency (FHFA) announced the maximum conforming loan limits for mortgages to be acquired by Fannie Mae and Freddie Mac in 2019. In most of the US, the 2019 maximum conforming loan limit for one-unit properties will be $484,350, an increase from $453,100 in 2018 and $424,100 in 2017.
For counties having higher cost of homeownership, the new ceiling for conforming loan limit for one-unit properties will be $726,525 — or 150 percent of $484,350.
Loan limits are based on median home prices in the county or MSA (metropolitan statistical area) in which the property is located. For 2019, all but 47 counties or MSAs will get an increase. The new limits are effective for loans closed on or after January 1, 2019. If you’re curious to see if your local area was affected, you can find out by checking Fannie Mae’s Loan Limit Look-Up Table.
When mortgage loans from a potential lender are above the $484,350 threshold, that’s when the loan becomes a “jumbo.”
When it comes to jumbo loan standards, please be aware that even if the mortgage loan is not a conventional, most lenders will still have strict underwriting guidelines to qualify a borrower, especially first-time homebuyers.In most of the US, the 2019 maximum conforming loan limit for one-unit properties will be $484,350. When loan amounts exceed the $484,350 threshold, the loan is termed a jumbo mortgage. Click To Tweet
Because jumbo loans aren’t backed by any of the GSEs (Fannie, Freddie, or GNMA), lenders are exposed to more risk from the borrower, as the lender can’t readily sell the loan onward to Fannie Mae or Freddie Mac; they may have to keep it on their own balance sheet. As a result, most lenders will require proof or documentation for the following items:
In recent months, the average annual percentage rate (APR) % for a jumbo mortgage actually be in-line to or below with mortgage interest rates for conventional mortgages. In fact, it’s not uncommon to see a lower APR for a jumbo mortgage. This is because, as we talked about earlier, the bank is likely going to have to balance sheet your mortgage loan (i.e. hold it on their own balance sheet, using their own capital). As a result, many banks price jumbo mortgage loans below or in-line with conventional mortgage loans as an incentive for prospective borrowers who might be good private wealth clients.
If you’ve ever purchased a home, you probably already know that you can deduct the interest you paid on your mortgage for any given year, from your taxes. But you may not know that there are limits to how much of a deduction you can take.
By law, you can deduct mortgage interest, as long as the mortgage itself is at or less than $1 million. If your mortgage is larger than $1 million, you won’t get the full deduction. For example, if you took out a $2 million jumbo mortgage that accrues $60,000 in interest a year, you can only deduct $30,000 – the interest on the first $1 million of your mortgage.
Getting a mortgage these days is unnecessarily stressful, and filled with potential obstacles. Jumbo mortgages are much more valuable to a bank looking for clients who they can potentially cross-sell other financial products, like private wealth services. Jumbo mortgage loans are also not backed by the government, or government sponsored enterprises like Fannie Mae or Freddie Mac. Borrowers looking to qualify for a jumbo loan must have considerable assets and a strong credit history. Still, there are signs that jumbos are becoming easier to obtain, especially as non-banks continue to grab market-share from the large money-center retail banks.
Is the conventional mortgage or jumbo mortgage loan the right option for you? Give us a call at 833-600-0490, or email us at email@example.com, and we’ll help you find the best mortgage options for you across lenders.