What is a jumbo loan?

Question of the week:  What is a jumbo loan?

 Answer:  With real estate prices jumping up significantly over the past eighteen plus months in Southern California, and across the country, many homebuyers are hearing, “you will need a jumbo loan for financing.” What is a jumbo loan?

Jumbo is a generic term for a mortgage that is over the Fannie Mae/Freddie Mac maximum loan limit, or as listed below the high-balance conforming loan. In most of our region the maximum loan limit is $822,375, if you need to borrow $822,376 to purchase your new home or refinance your current home, you will need “jumbo” financing.

The primary factor that makes jumbo loans different than conforming loans is that there is not a secondary market where the mortgages are bought and sold. As long-time readers of the WR&MU know, conforming loans are funded by a lender, packaged with many other loans into a bundle and that bundle of mortgages is sold to either Fannie or Freddie. Fannie and Freddie then package the mortgages they purchase from lenders across the country into bigger bundles and sold on the open market as Mortgage Backed Securities (MBS). The MBS market is fairly stable and secure in that all the mortgages in the MBS packages are underwritten, approved and funded under the same guidelines as established by Fannie or Freddie. Investors know also know that at this time MBS are backed by the United States Treasury, making their investment one of extremely low risk.

Jumbo loans are funded through mortgage banks, and then retained by the bank that funded the mortgage, or sold to investors. Investors in jumbo mortgages can be other banks, credit unions, equity funds or insurance companies.

One of our lending partners may have two, three or even four different jumbo mortgage programs for us to choose from for our clients. Each of the programs have different guidelines for underwriting, and different rates, typically the stricter the guidelines the lower the rates.

Some jumbo programs have looser guidelines than Fannie or Freddie have with their high-balance programs, for instance refinancing a property that has an equity line that will be paid off as part of the transaction. If the equity line has not been used in the past 12-months, some jumbo investors will consider the refinance a “rate and term” transaction, whereas if the equity line was not part of the purchase of the property conforming guidelines consider the transaction a “cash-out refinance.” Since cash-out refinances typically have higher rates than rate and term refinances, it may make sense to apply for a jumbo mortgage than a conforming mortgage.

This type of underwriting guideline tradeoff is important as many jumbo programs have a minimum loan amount that is one-dollar higher than the conforming loan amount of $548,250.

During the pandemic many jumbo investors pulled out, or pulled back with higher interest rates. In the past several months many have re-entered the market and for many clients and situations a jumbo loan product may be a better value than a high-balance conforming mortgage.

We need to reiterate that jumbo underwriting guidelines are not the same as conforming. While many jumbo guidelines are very close to conforming guidelines for much of the underwriting, there are differences that need to be considered. Differences such as required reserves, qualifying income and what is known as continuity of obligation.

What is the best mortgage solution for you? Until we have a detailed conversation regarding your financial situation and what your mortgage need is there is not set answer.

Have a question? Ask me!

You are doing well, better even. That is the news from this week’s economic data for the generic American. Second quarter GDP was revised up slightly to 6.6% growth from the original 6.5% estimate. The revision was mostly due to an upward revision of consumer spending in the quarter, increasing 11.9% from the first quarter.

With your income growing, resulting in more spending, the current estimate for 3rd quarter GDP growth is 7%. Due in some part to the child tax credit funds being transferred from the federal government, incomes spiked up 1.1% in July from June. While incomes jumped, growth in consumer spending was a bit relaxed from June, but still rose 0.3% in July. Despite steady month-over-month increases in spending, Americans are maintaining high savings rates and balances.

“I was of the view…” In a speech earlier today, Federal Reserve Chair Jerome Powell did something that is very rare for Fed Chairs, he gave a personal opinion. In this case in recapping conversations at the last meeting of the Fed’s Open Market Committee (the FOMC that sets the Fed’s rates), in which he, and most of the other members of the committee, felt the Fed could begin to taper its purchase of U.S. Treasuries (currently buying $80 billion per month) and Mortgage Backed Securities ($40 billion per month). Investors and markets have been waiting to see when the Fed will begin to taper its purchase of the two main financial instruments that determine interest rates for consumers and corporations. It appears the slow down of buying will occur in the next four months.

Rates for Friday August 27, 2021: All the economic data this week, and Powell’s comments, point to higher rates—I know I sound like a broken record the past several months. The $120 billion per month the Fed is using to influence rate-based instruments is the primary factor in rates not being a lot higher than they have been. Rates are set to jump once the artificial cap on the market is lifted by the Fed by allowing more Treasuries and mortgages to hit the open market. All of that said and analyzed, rates are flat from last Friday.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS:

30 year conforming                                         2.625%  Flat

30 year high-balance conforming                   2.875%  Flat

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

Joy and pain this weekend for yours truly. The joy will be this evening as Leslie, our youngest and I travel up to Hollywood to see “Hamilton” at the Pantages Theater. The pain will be from 9:00 to 4:00 tomorrow as I sit in front of my computer to complete continuing education for my National Mortgage License.

The NMLS continuing education and testing is an annual event that I am actually glad to go through as the National Mortgage Licensing System that was the result of the SAFE Act that was enacted in 2008. For decades prior to that I was calling for more stringent license requirements for all mortgage lenders, whether they work for mortgage brokers, mortgage bankers or banks and credit unions. At this point those who originate mortgages for banks and credit unions are exempt from the licensing requirement, an exemption I hope will be eliminated in the future.

In the meantime, several hours of joy this evening, followed by a glassy-eyed eight hours tomorrow.

Have a great week,

Dennis

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog