Jumbo mortgages are back! Here's a primer
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The housing market may still be struggling, but one relic of the boom years is back: jumbo mortgages, or home loans of more than $625,500 on Long Island.
More lenders are making jumbo loans, getting back into the market after shying away during the credit crunch. Combined with historically low interest rates, this has caused the market to thrive, some local lenders and agents say.
"I think that the appetite from the lenders now is greater than ever," says Gregory Frank, manager of Guaranteed Rate, a Garden City mortgage company.
Generally, for most parts of the country, a loan for more than $417,000 (more than standard mortgages) falls into the jumbo category. In high-cost markets such as Long Island, the baseline rises to $625,500. Fannie Mae and Freddie Mac, which usually purchase mortgages from lenders, do not buy loans that are higher than these limits. Because lenders can't sell jumbo mortgages to Fannie and Freddie, they assume more risk, and interest rates are higher than rates for home loans that fall under the limits.
In the first half of this year, $4.3 billion in new jumbo mortgages were taken out on Long Island, nearly double the $2.4 billion taken out over the same period in 2011, according to data compiled by LPS Applied Analytics, a division of Jacksonville, Fla.-based Lender Processing Services.
In the first five months of this year, an average of 4.3 percent of new mortgages in Nassau County and 5 percent of mortgages in Suffolk County were jumbos, according to Santa Ana, Calif.-based CoreLogic. That's up from about 4.1 percent in Nassau and 4 percent in Suffolk for the same period last year. It's a bigger jump from the beginning of 2009, in the wake of the housing and credit crisis, when about 2 percent of mortgages taken out in Nassau and about 1.2 percent in Suffolk were jumbos.
Frank says lenders are realizing that jumbo borrowers present less of a risk. Because of stiff requirements, jumbo borrowers put more money down.
"With more equity in the property, they're less likely to walk away from it," Frank says.
The biggest change is that the difference in rates between jumbo mortgages and lower, so-called conforming mortgages, has shrunk, says Larry Weinstein, a home-lending specialist at Citibank who works with Long Island home buyers. Jumbo loans that were in the 6 percent range in 2005, because banks were lending such high amounts, are now hovering around a historically low 4 fixed mortgage range from 3.5 to 4 percent.
"The differences now have contracted so that you can get a $2 million mortgage for under 4 percent," he says.
With stock portfolios doing better than they were a few years ago, even wealthy buyers are borrowing money. "A lot of clients, who certainly have the cash to go out and buy a . . . $5 million property with no financing, are taking advantage of the low rates because they feel they can invest their money and do better," he adds.
Interest on first and second mortgages is also tax deductible up to $1 million, so buyers can take advantage of that perk as well.
That doesn't mean it's easy money. Lenders are much stricter than they were before the housing bubble burst. Most require a high amount of reserves -- Citibank wants a minimum of six months of housing payments in the bank. They request extensive income documentation, including two months' worth of bank statements and explanations for large deposits, Weinstein says.
That's on top of a down payment of at least 20 percent and a credit score of at least 680 for those looking to take out a jumbo loan.
"They have to be very well qualified," says Maria Siringo, a broker with Woodbury-based Shawn Elliott Luxury Homes & Estates. "I know that the mortgage companies today are definitely doing their due diligence."
Banks also are doing adjustable-rate jumbo mortgages. "You need to feel comfortable that you're going to get rid of that mortgage before the rate adjusts," Weinstein says. "Beyond that, most people go for a 30-year fixed."
While jumbo buyers run the gamut, agents say a good fit is a current homeowner looking to trade up to something bigger. "The one that it works the best for is a person who has sold a house and is moving up, or the first-time buyer that has a lot of assets and good credit," says Fern Karhu, executive vice president of Realty Connect USA in Woodbury. "Credit is critical in this market."
Maria Lanzisero, a broker with Signature Premier Properties in Huntington, says many customers taking out jumbo mortgages are buyers moving from houses worth $300,000 to $500,000 to homes in the $800,000-to-$1 million range. "When the housing market started to fall apart . . . you saw a lot of first-time homeowners take advantage," Lanzisero says. "Now we're seeing people moving up. at least a third of my business."
The loans don't come without challenges. The appraisal process can be especially tricky in the luxury home market, where sales are slow and appraisers struggle to find comparable properties that have recently sold. If the appraisal comes in at less than what the buyer is offering, banks are often not willing to lend -- especially when they're lending a lot of money.
Connie Liappas, an agent with Prudential Douglas Elliman Real Estate's Manhasset office, had a deal go sour when a home she listed went into contract for $1.625 million and the bank's appraiser said it was worth $100,000 less. Within a month, the house resold for $1.565 million and was appraised at $1.6 million.
"If the bank doesn't feel it's worth it, then it's not going to" lend, she says.
It's not unusual for banks to require two or even three appraisals for a jumbo purchase, says Robert Olita, manager of Prudential Douglas Elliman's Locust Valley office. "They are sensitive," Olita says of lenders.
DO YOU QUALIFY?
Different lenders have their own guidelines for jumbo borrowers, says Gregory Frank, manager of Garden City mortgage company Guaranteed Rate, but there are some rules of thumb:
* A credit score above 680
* Three to four months' worth of home payments in a bank account. If a borrower puts 25 percent down on a $1 million home with an interest rate of 4.125 percent, monthly payments would be roughly $3,600, plus property taxes.
* A six-figure income. Frank says $192,000 is a good amount for someone borrowing $750,000.
* No more than a 40 percent debt-to-income ratio.