You may be wondering what a jumbo loan is and how the COVID-19 pandemic has impacted your ability to get one.
According to Investopedia, a jumbo loan is a type of financing that exceeds the limits set by the Federal Housing Finance Agency (FHFA). A jumbo loan is not eligible to be purchased, guaranteed, or securitized by Fannie Mae or Freddie Mac compared to conventional mortgages. Designed to finance luxury properties and homes in highly competitive local real estate markets, jumbo mortgages come with unique underwriting requirements and tax implications.
Jumbo loans are now presenting a significant amount of risk for lenders. Since government-sponsored entities Fannie Mae and Freddie Mac can’t purchase jumbo loans, jumbo lenders have fewer options for investors willing to purchase their loans on the secondary market.
With risk of delinquency on the rise due to the virus, the potential investor pool is reduced even further. So, jumbo lenders have put measures in place to protect themselves in the event that these loans can’t be sold and need to remain on their balance sheets.
What this means for you is that the approval requirements or available interest rates from your bank may have changed. You might need a higher credit score, more assets in the bank to serve as your reserves, or a higher income with fewer debts … all while the bank is quoting you a higher interest rate than before the pandemic.
When applying for a jumbo mortgage, keep in mind that these requirements can shift weekly— even daily—so keep in close contact with your Weber Mortgage Loan Officer for updates.
If you’re concerned about the changing market dynamics, you can talk with your real estate agent about using a financing contingency in your home offer or you can consider other options.
One option is to increase your down payment enough to get yourself underneath the conforming loan limit in your county. Although it might mean putting more down, it would make qualifying for your mortgage easier due to the more lenient approval requirements. You might also save on interest in the long term due to the smaller loan amount you are taking out.
If you don’t have the ability to make a higher down payment, another option is to consider an “80-10-10 loan” (also known as a Combination Loan or a Piggyback Loan) to get yourself under the conforming loan limit without having 20% to put down.
The way an 80-10-10 works is—as the name describes—you get a first mortgage that is 80% of the value of your home. The next “10” refers to what’s called a purchase second mortgage, which is a type of Home Equity Loan. Second mortgages in this context are typically HELOCs, and they usually come with higher, variable interest rates. The remaining “10” refers to the 10% down payment you would put down on the closing day.
The value-add of an 80-10-10 is that your first mortgage may be underneath the conforming loan limit, extending you more lenient approval requirements and sometimes lower interest rates.
Depending on the size of the payment you make to your second mortgage, this could also be a cheaper alternative to private mortgage insurance, which would not be required as your first mortgage is at or below the 80% loan-to-value threshold.
The coronavirus crisis has brought an unprecedented level of uncertainty to the mortgage market, and it is too soon to say how the changes we have experienced will pan out. Above all, be sure to talk about your options with your Weber Mortgage loan officer, and make the decision that you’re most comfortable with.