The wealthy have some very obvious advantages over people with middle and lower incomes, and, right now, the ability to purchase luxury homes with easier terms is among those advantages. Lenders are now more willing to allow buyers to obtain mortgages on multi-million dollar homes with less than 20 percent down, while possessing lower credit scores and getting lower mortgage interest rates (as well as lower home refinancing rates which MyBankTracker wrote about previously).
Jumbo mortgages are loans for homes of high value in which the price of the home exceeds lending limits allowed by Fannie Mae and Freddie Mac. Jumbo loans start at $417,000 and higher in most areas but start at $625,000 or more in high-cost areas such as Atlanta, Chicago, Denver, Miami, New York City and San Francisco.
In the special exception areas of Alaska, Hawaii, Guam and the Virgin Islands, the allowed amount by Fannie and Freddie is up to $938,250 for a one-unit home, so jumbo loans in those areas can be quite steep. (The starting loan amount for multi-unit homes is much higher in all regions.) Because Fannie and Freddie set loan limits, jumbo loans are only issued by conventional banks without government backing from the Federal Housing Authority.
In the past, interest rates on jumbo loans have been higher than loans which conform to Fannie Mae and Freddie Mac standards, but this is currently no longer the case. Requiring less than 20 percent down on a home loan is also a relatively new practice. Last year, Wells Fargo was the first to drop its down payment requirement of 20 percent down to only 15 percent on jumbo loans. Bank of America followed by reducing its down payment to 15 percent on loans for over $1 million.
Is it covered?
Because the government doesn’t insure jumbo loans, but banks still want protections from default, the lowered down-payment requirement has opened up the market for private mortgage insurers. Like FHA loan guarantees, private mortgage insurance is designed to protect the lender if a buyer goes into default. Borrowers putting less down on expensive homes are generally required to purchase the insurance against default.
Several private insurance companies have increased the loan amount they will insure to accommodate mortgage insurance on higher jumbo loans. Recently, Mortgage Guaranty Insurance and Genworth Financial both raised the maximum guaranteed level to $850,000, up from $750,000 and $635,000 respectively. United Guaranty recently began a limited program in which certain loans for up to $1 million may be insured.
However, down payment requirements are not the only terms lenders have dropped.
“Six months to a year ago, if you weren’t at a 720 credit score or a 740, you couldn’t get a (jumbo) loan,” Jason Auerbach, divisional manager for First Choice Loan Services in New York, told Newsday in late December. “Now, there are opportunities to get jumbo financing with credit scores as low as 700. And there may be lenders out there that will go below that.”
It won’t be easier for everyone. As credit scores go down, banks will require more money up front in the form of a down payment, so not all wealthy buyers will have access to the same deals—especially those who are cash-poor. Lower down- payment jumbo mortgage loans will likely only be available to buyers with excellent credit along with a solid debt-to-income ratio.
What is left to be seen is whether or not the loosened down payment requirements are a sign of an upwardly-mobile economy or of more risky lending practices that will result in more foreclosures.
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