If you are looking into purchasing a home in the Seattle area, you are probably wondering if you will need a jumbo loan to finance your dream purchase. A jumbo loan exceeds the limits set by the Federal Housing Finance Agency and helps individuals finance more expensive home purchases.
The availability and rates of jumbo loans are contingent on several factors, including location, the lender’s specific terms and conditions, as well as the state of the economy. Since these things are always in flux, you should inform yourself as much as possible before committing to one of these massive financing instruments.
Jumbo Loans Vary by Location
The federal institutions Freddie Mac and Fannie Mae follow housing prices in regions closely. They then set the limit for conventional or conforming loans based on what they believe is a fair market value for properties. These amounts vary widely between states and even between counties within a state.
For example, in the state of Washington, a single-unit conforming loan will generally get capped at $510,400. However, in King County, that cutoff amount for a single-family dwelling goes up to $741,750.
Mortgages that are even a single dollar over that cutoff are considered jumbo loans, and both Freddie Mac and Fannie Mae will decline to purchase them from your lender. That can be beneficial, because you know your lender won’t change, like it often does with conventional or conforming loans.
Lenders Set Their Own Standards for Jumbo Loans
Conforming loans must meet special guidelines, especially if your lender hopes to sell the instrument to Fannie Mae or Freddie Mac. With jumbo loans, since your lender will likely retain the mortgage indefinitely, they can make their own decisions about credit scores and other key underwriting guidelines.
Depending on your lender, that could make it easier to get approved for a jumbo loan or much more difficult. Your lender will generally expect a credit score of 700 or higher, while 650 is often high enough for approval on conforming loans.
You may also be subject to stricter debt-to-income ratios than others. That means that financing a vehicle or maxing out a credit card could impact your ability to get a loan.
For most conforming loans, lenders cap your debt-to-income ratio at 43 percent, including your mortgage payment. For some jumbo lenders, that number could drop down to 36 percent, limiting your ability to use credit for other purchases for the near future.
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More Debt and Bigger Down Payments Are Involved in Jumbo Loans
The larger the amount financed, the bigger your overall debt load will be. You’ll have to spend more of your income, possibly for more years, to fully pay off your financing.
You will also need more liquid capital upfront to purchase your home. Buyers with less than 20 percent down available will pay for the convenience of that lower upfront investment. You will likely need to pay for private mortgage insurance (PMI), which can substantially increase your monthly payment.
Additionally, a lower amount down could increase the interest rate for your loan. That can end up costing you thousands of dollars over the life of your loan. Make sure that you factor that into your decision regarding how much mortgage and house you want to invest in when you buy.
Current State of Jumbo Loans During the Coronavirus Pandemic
After the housing market crash of the late-aughts, the United States has been slowly building itself back up, and since around 2015, the market has been strong enough to provide relatively low rates for jumbo loans.
However, when COVID-19 hit the United States at the beginning of 2020, the jumbo loan market tanked.
With unemployment rates at an all-time high and a disproportionate number of homeowners entering forbearance agreements, lenders are shying away from giving out loans (some nonbank lenders have stopped offering jumbo loans completely).
According to Black Knight Financial Services, only 15 percent of borrowers paid their mortgage in June. Wells Fargo, who is the largest provider of jumbo loans, has limited their refinancing to those who have at least $250,000 in liquid assets, to be on the safe side.
As stay-at-home orders have eased and businesses have started operating again with restrictions, the current market has once again started the process of rebuilding itself. As of June 2020, conventional mortgage rates averaged 3.3% while the rate of jumbo loans are still higher at 3.5%.
If you’re interested in finding out more about jumbo loans or want to discuss your best route for refinancing your existing mortgage, Seattle Mortgage Planners can help. Contact us today — we look forward to working with you!