The so-called jumbo mortgage market is strong, competitive and growing, with more lenders, and more loan products now being offered, which means it’s more important to look at all options available before buying.
Most lenders-large and small, even some credit unions now will make jumbo mortgages, which is something we haven’t seen before. As recently as 2009, just a handful of big banks had dominated the market for jumbo mortgages, also called nonconforming loans, which exceed $625,500 in high-cost areas like Los Angeles. (Conforming mortgages meet specific guidelines of Fannie Mae and Freddie Mac, which purchase the loans and resell them to investors. Because lenders assume less risk, interest rates for conforming loans typically have been lower than for nonconforming.)
Some experts had predicted that higher-end real estate would suffer after Fannie and Freddie lowered the maximum amount on conforming mortgages last October from $729,750. Instead, lenders have added products and even eased qualifications for some borrowers. There is an estimated 20% jump in lenders coming into the jumbo arena. The acceleration in activity has occurred over the last 6 months, with smaller lenders jumping into the fray. Banks are flush with cash and need to lend.
Lenders made $63.8 billion in jumbo loans in the first quarter, 18 percent more than in the first quarter last year, according to the latest data available. Jumbo loans accounted for 16.6 percent of all loan origination’s in first quarter, up 9.9 percent from all of 2009.
Lenders see the jumbo market as profitable because it is generally populated by borrowers who tend to have a higher net worth and credit scores, and because borrowers are often required to make larger down payments, usually starting at 25-30 percent of purchase price.
As they compete for business, some lenders are seeking to carve out niches, such as foreign nationals, loosening requirements on self employed borrowers, and even offering interest only loans to borrowers who meet certain income standards. And we are now seeing asset depletion loans, in which lenders can qualify people who may have large bank balances and other assets but not enough income. Yes there is far more creativity in the jumbo space than there is in the conforming market. The old school thought pattern for underwriting is slowly coming back to “common sense”. What does this mean? Basically a bank looks at a loan and decides if they feel the borrower is credit worthy based on an overall financial view of them, not on some crazy guideline that Fannie Mae or Freddie Mac has set.
So because there are “31 flavors in the jumbo market”, it is important for borrowers to take the time to compare loan products. And most importantly borrowers should get preapproved, because some lenders tailor their requirements to the size of the loan, credit scores, and cash reserves.