Jumbo home loans are mortgage loans for an amounts that are above the limits of a conventional loan, even if the loan has high credit quality. The loan limits on home mortgages in the United States are set by two government-sponsored enterprises (GSEs), Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC). These GSEs that are seeing the growth of jumbo home loans are respectively known as Fannie Mae and Freddie Mac.
Increasing Use of Jumbo Home Loans
Fannie Mae and Freddie Mac specify the maximum value of an individual mortgage they will purchase from a lender, which frees up the lender’s liquidity and allows them to provide more mortgages. Their loan limits are critical factors in determining the availability of mortgages in the U.S. because these agencies buy the majority of residential mortgages in the country. The limit for single-family dwellings is $453,100 for most of the U.S., although it can be as high as $679,650 in some markets within the continental U.S. The limits for properties in areas such as Alaska, Hawaii, Guam and the U.S. Virgin Islands are even higher.
The interest rates on jumbo home loans are generally higher than they are for loans that conform with Fannie Mae and Freddie Mac loan limits. However, the fees for GSEs have been increasing recently, resulting in a decrease in the interest rate for jumbo loans. They are also becoming more common because the property values are increasing in most markets, causing the value of many properties to exceed the conforming loan limits. The National Association of Realtors (NAR) reported in December 2017 that residential property values had increased for 70 straight months nationwide. Furthermore, home prices are currently at all-time highs in almost two-thirds of the major metropolitan markets in the U.S.
Financing with Jumbo Home Loans
The real estate market is regulated by many state and federal laws. However, financing a jumbo home loan involves additional laws to minimize the risks for both lenders and borrowers. The mortgage crisis lasting from 2007 to 2010 in the U.S. resulted in the passage of a series of laws that protect real estate investors. Mortgages are now classified as Qualified Mortgages (QMs) or Non-Qualified Mortgages (non-QMs), although most mortgages are QMs. PMs are much more beneficial to both borrowers and lenders, especially for jumbo mortgages.
The lender in a QM is virtually immune from lawsuits by borrowers, although lenders must also follow additional rules. For example, balloon payments are prohibited for QMs, meaning the final payment for a QM will be for the same amount as the other payments. Furthermore, the prepayment penalties on QMs are limited to 2 percent in the first two years and 1 percent in the third year of the mortgage. Points and fees are also more limited in QMs, and the loan term is limited to 30 years.
Home mortgages that conform to the rules for Fannie Mae and Freddie Mac automatically qualify as QMs, as do mortgages from the Fair Housing Act (FHA) and the Veterans Administration (VA). This rule means that jumbo QMs are more difficult to obtain than conforming mortgages. The typical solution to this problem is for the lender to originate a portfolio loan that is a QM. The lender must keep the loan rather than selling it to another lender, but this arrangement places the loan under a different set of guidelines that are more flexible than those that can be sold.
Among other differences, a portfolio loan has no maximum limit or minimum down payment required by law. These restrictions are determined solely by the individual lender, as other terms such as adjustable interest rates and refinancing the mortgage with cash. In other words, the borrower and lender can negotiate the terms of a portfolio loan with far fewer regulatory requirements, even if it’s a jumbo loan.
Borrowers can also consider non-QM jumbo loans, typically to take advantage of a feature that isn’t available with QM financing. For example, QM mortgages typically limit the borrower’s debt-to-income ratio to 43 percent. Borrowers who are attempting to obtain financing on a jumbo loan immediately after a bankruptcy or foreclosure will also need a non-QM loan in most cases. Additional reasons to look for non-QM loans include alternative methods of establishing income, non-occupant co-borrowers, interest-only financing, low credit scores and longer terms.
The U.S. government has recently enacted legislation that will significantly impact home mortgage borrowers. For example, the interest paid on a mortgage loan for personal real estate is tax deductible up to a specified loan amount. That limit has been reduced from $1 million to $750,000. However, the interest paid on home equity lines of credit is generally not deductible at all unless that money is used for property improvements. Another major change in real estate taxes is that the write-off limit on itemized deductions has been reduced to a total of $10,000 for personal property taxes, state and local taxes.
The overall effect of these changes is to increase the tax bills of property owners in areas with high property values, especially if the taxes in those areas are already high. A CPA or tax attorney will be able to provide you with tax information for your particular area, which is especially important when financing or refinancing a home.
Find the Right Lender
Finding the right lender is especially important for jumbo loans since the loan amount is greater. You have many options when looking for real estate lenders for your loan, whether you’re just trying to get prequalified or have already found a property. Magilla Loans can match you up with lenders who can answer your questions and help make your real estate purchase as easy as possible. Get started today!