Q: Why is a Jumbo Mortgage “Non-Conforming”?
A: In the Chicago marketplace, a “conforming” mortgage is one that is below Fannie Mae and Freddie Mac’s threshold of $417,000. Therefore, from a simple definition, a mortgage that exceeds this dollar amount falls into a category that does not conform to these requirements: jumbo. As a result, one should understand what other differences may appear between the two. Below are the most common questions when it comes to understanding jumbo mortgages:
Q: How much does a buyer need to make as a down payment on a jumbo loan?
A: To begin, understand that the down payment requirements will vary based on a number of factors for a jumbo loan, including, but not limited to: loan amount, credit score and property type.
Some key points to note: Guaranteed Rate is offering as little as 5 percent down payment up to $500,000 (single family home only) and 10 percent down up to a $625,500 loan amount (one unit property) on primary residences. As the mortgage amount increases, the down payment requirement will, as well. With strong qualifications, one can expect as little as 20 percent down to $2 million for properties in stable markets. Larger loan amounts are also available. Credit score and asset reserve requirements are important as loan amounts increase.
Q: Are the rates much higher on jumbo loans?
A: The good news is that as we have seen markets stabilize, the disparity between jumbo and conforming interest rates has lessened. Although the rates may be a bit higher, they are much closer to one another than they have been in the recent past. Remember, the reason that these rates are higher is due to the fact that they cannot be backed by our agencies, Fannie Mae and Freddie Mac. As a result, the bankers lending this money take a higher risk.
Q: Is the process for jumbo financing more cumbersome?
A: Setting the client’s expectations is vital to a smooth lending process. A client with the need for jumbo financing should be working with a loan officer that has experience with this type of lending. These programs typically do require a bit more information for approval. They may require multiple appraisals, or multiple levels of underwriting review. The qualifications a borrower needs may be a bit more restrictive than conforming financing for things such as debt to income ratios.
Most recently, we have seen a surge in lending options and investors with a better appetite for these loans. This means better rates to consumers and more options for buyers and sellers. This trend will certainly help in moving more property. With expectations set appropriately up front, the jumbo financing process should be very similar in time frame and ease to any other.
Chris Knapp is Branch Manager with Guaranteed Rate, Inc. Knapp has 16 years of experience in the mortgage industry. He is a member of Guaranteed Rate’s President’s Club and has been a participant in numerous real estate panels, advisory boards and has been recognized as a top mortgage banker by the Illinois Association of mortgage professionals. Knapp can be reached at 773.290.0372, and by email at chris.knapp@guaranteedrate.com.