Jumbo Loans Heating Up Along With The Luxury Market

Provided By: Realtor.com

Big, expensive luxury homes come with big, expensive mortgages, and lenders have developed large specialized loans – termed jumbo loans - so that borrowers can have access to higher loan limits. As the luxury home market continues to rise these jumbo loans are heating up the marketplace again. According to the National Association of Realtors, sales of properties worth between $750,000 and $1 million are up 38.7 percent over a year ago and $1 million-plus property sales are up 25.7 percent.

The Narrowing Spread Between Conforming And Jumbo Rates
The housing crisis took a hit out of the jumbo loans market and many lenders stopped making these types of loans. There is renewed interest in these loans partially due to the narrowing of the spread between jumbo rates and traditional conforming mortgage rates. As CNBC’s Diana Olick reports, that spread was as wide as 0.875 percent last summer. The most recent numbers from the Mortgage Bankers Association show the average contract rate for a 30-year fixed conforming mortgage last week was at 3.76 percent with points at 0.43 while the average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances was at 3.85 percent with points at 0.42 . In some cases the rates can be nearly the same.
Limits for jumbo loans have changed over time. In 2011, the maximum conforming loan limits for jumbo loan mortgages decreased in many counties around the U.S. Limits had been raised temporarily in 2008 to give a boost to the housing market and were extended several times during that period. When the conforming limits decrease, buyers are required to take out larger jumbo loans for same total home purchase price.
More lenders are getting back into the jumbo lending market which provides increased flexibility for those applying for a loan. “There are just more options and more programs,” says Keith Lewis, of Lewis Financial, a jumbo mortgage specialist based in Michigan. “In my market I’m seeing refinancing on jumbo loans because housing prices have come back. Also the rapid appreciation in prices in our local market has meant that existing home owners can move up into a larger house that better suits their needs.”

More Money, More Scrutiny
Because there is so much money involved, jumbo loans have more stringent underwriting requirements and only the most qualified of borrowers will generally be approved. This is one of the reasons that the rates are currently so favorable. Loans above certain dollar amounts (the conforming loan limit) must be secured with a jumbo mortgage which tends to carry a higher interest rate and more points. The general loan limits for 2013 remain unchanged from 2012, sitting at $417,000 for a 1-unit property in the continental U.S. Limits can go up as high as $625,500 in more expensive areas. Most banks publish jumbo mortgage rates which change regularly.

Depending on your financial status this could be a golden year to try for a jumbo loan. Standards may get more restrictive in 2014 when rules from the Consumer Financial Protection Bureau take effect. According to a recent NBC News story on jumbo loans, the CFPB rules will doom interest-only mortgages which were roughly 10 percent of the jumbo market.

For borrowers interested in jumbo loans to secure that luxury home of their dreams there are often a lot of hoops to jump through. Borrowers have to prove a high income, excellent credit score and also be able to put down large down payment. Lenders of jumbo mortgages need to make sure borrowers are a good risk and debt-to-income ratio is also scrutinized. As a general rule, your monthly mortgage payment on a jumbo loan should not exceed 38 percent of your pre-tax income.