Purchasing a house can become a bit difficult when the price of the house are in the upper echelon. The majority of houses are purchased by mortgages from a bank that are then purchased by Fannie Mae and Freddie Mac. However, these organizations only purchase mortgages that are below a given value. Currently, the figure is $417,000 however for some high-cost counties the value is a bit higher. If a buyer wants to take a mortgage that is beyond this figure, they will have to go for a jumbo loan.
Ordinarily a jumbo loan costs a bit more than a similar fixed rate conforming loan. The spread between these two is around 25 to 50 basis points (100 basis points is 1%). However during a major crisis this spread can increase dramatically. During the height of the financial crisis, this spread increased to as much as 1.50%. As the entire risk of delinquency falls on the lender, the banks charge a higher percentage for these loans. The requirements for applying to these loans are also much more stringent. A minimum credit score of 720 is required by most of the lenders. The minimum down payment required by most lenders is 20%. In case the mortgage is very high this down payment can exceed to 30% or more.
There are other checks made into the financial capacity of the buyer. Many lenders require a minimum of 10% of borrowed amount in the savings or investment account of the customer. This is done so that the buyer can weather any immediate emergencies without taking recourse to refinancing. Hence for a loan of $900,000 the buyer must have $90,000 in savings, besides paying for the down payment.
For buyers who can afford it these loans might be a life saver. In many high-cost areas of New York and San Francisco, these loans are taken my middle-class professionals also because of the high cost of housing. Those having a steady income with good credit scores can use the jumbo mortgages to get their dream house.
However, adequate homework needs to be done on this before jumping for a jumbo mortgage. The price of these higher end homes is frequently more sensitive to current market trend. Hence, the fall in their value is much more dramatic during a financial downturn.
The difference in the general rate of a jumbo mortgage and the conforming 30 year fixed rate has narrowed down in the past few quarters. However, one can always find a markup in the interest rate by lenders for a jumbo mortgage. This can eventually lead to extra tens of thousands in interest expense. Hence, when applying for a jumbo mortgage, the entire research needs to be minutely done.
One of the major aspects of jumbo mortgage is that the lenders have a greater autonomy on how they evaluate a borrower. This can work to the advantage of many buyers. Those who do not have a high credit score but can show good investments would find favorable responses from many banks. At the same time, there is a possibility on bargaining on the interest rate.
In 2014 many banks are beset with huge deposits that they would like to convert into advances. One of the favorite places for them to give loans is in the Jumbo mortgage market. It gives them a higher interest margin and also helps in limiting their exposure to the type of clients they are looking for.
https://entp.hud.gov/idapp/html/hicostlook.cfm
http://www.consumerfinance.gov/regulations/appraisals-for-higher-priced-mortgage-loans/
http://www.fhfa.gov/DataTools/Downloads/pages/conforming-loan-limits.aspx
http://www.federalreserve.gov/pubs/feds/2008/200801/200801pap.pdf