By Rae Oakley, Flyhomes Mortgage
If you’re in the market for a jumbo loan, you might be wondering how the COVID-19 pandemic has impacted your ability to get one. We outlined three key things to know so you can stay prepared.
1. Jumbo loans present a significant amount of risk for lenders. Approval requirements have tightened in order to mitigate that risk.
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 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.
2. Although some lenders have temporarily stopped offering Jumbo loans, there are still options available.
With the heightened risk, some Jumbo lenders have gone so far as to stop offering Jumbo loans altogether. The Mortgage Credit Availability Index (MCAI), a measure of the availability of mortgages by the Mortgage Bankers Association, shows a 37% decrease for Jumbo loans since the start of the crisis. For comparison, the MCAI has decreased only 2.7% for conforming loans, thanks in part due to the safety measures put in place by the Federal Reserve.
The good news is that there are still Jumbo lenders originating and servicing jumbo loans. As mentioned in tip #1, there may be adjustments to the qualification and underwriting process, but there are options out there! Ask your real estate agent for recommendations or check with a larger bank or credit union.
3. Consider alternatives to a Jumbo loan.
One option is to increase your down payment enough to get yourself underneath the conforming loan limit in your county (look up yours here). 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 (pronounced “eighty ten ten”) 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 at 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.
Make the right choice for you
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 loan officer, and make the decision that you’re most comfortable with.
Mortgage questions? Let’s chat!