Non-Qualified Loan

How Big can a Jumbo Loan be?

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One example of a non-qualified mortgage loan is a jumbo loan. It is called a “jumbo” loan because it surpasses the established conforming loan limits.

During the attempt to define what a conforming loan is, one goal was to establish a limit for the loanable amount. This limit was laid down by the Federal National Mortgage Association (FNMA or Fannie Mae) and the Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac).

In 2017, most conventional mortgage loan are very well within the 424,100 limit. There are a few exceptions for high cost areas such as those in Florida and California. These high cost areas have loan limits exceeding $636,150.

How Big is a Jumbo Loan?

Jumbo loans are, more often, more than half a million dollars. It is intended to finance luxury houses. Most of these properties are located in high cost areas where the real estate market competition is really steep.

Huge Money = Stringent Requirements

In conventional loans, there are standard credit requirements a borrower needs to meet in order to qualify for the loan. Since a jumbo loan is considered a nonconforming loan, it is not backed up by the government should a borrower file lawsuit against the lender. Also because of the huge amount of money involved, the lending institution is taking a greater risk on jumbo loans.

If you are trying to apply for this type of loan, expect to be under stringent underwriting, and tighter credit requirements.

Credit Score

Make sure you have a good credit standing with a score of at least 620. This is considered a fair credit score. But to increase your chances of getting approved on a jumbo loan you will  need a score higher than 720.

Documentation

In the years before the U.S. recession happened jumbo loans were approved with less paperwork required. Many can go away with this loan with very little income verification needed. Much has changed in the recent years.

When the ‘Qualified Mortgage’ loan was defined, it increased the need for standard documentation and verification. While jumbo loans can be considered Non-QMs, lenders are now asking borrowers to provide documentation as proof of their income.

Examples of these are Proofs of income and liquid assets, and proofs of ownership for non-liquid assets.

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Down Payment

With a stellar credit, you may find a one that only requires a 10 percent down payment. This may mean lesser money to put upfront. However, a small down payment may increase your monthly interest rate or affect your loan terms.

Make sure you assess your financial situation and you read the loan agreement first before you decide to pay cash up front.

Debt-to-Income Ratio

Not all jumbo loans are non-QM. Those that fall under the qualified mortgage bracket may have standard DTI requirements. Your DTI cannot exceed 43% for qualified jumbo loans.

If your DTI is way over that cap, a non-QM jumbo loan is what you need. It does not mean though that the lender will not perform a verification if you can afford the monthly payables. There will still be a need for verification.

Income

One big factor that comes into play is income. Because of the huge size of the loanable amount, the income is where lenders find security. Your income and other reserves must be able to cover this big debt. For the self-employed, you may need to provide tax returns and bank statements. For traditional borrowers, pay stubs and W2 be asked from you.

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Which Non-QM Loan Product is Best for You

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Which Non-QM Loan Product is Best for You

There are a variety of Non-QM loan products present in the market. Depending on the borrower’s needs and current situation, one product may help you get the needed financing.

Here are some of the loan products under the Non-Qm territory.

“Beyond-30” Mortgage Loans

This is primarily because of how Qualified Mortgage loans are defined. The regulatory reforms do not allow loan terms that go beyond 30 years. However, there are many consumers looking for a loan with a term stretching as far as 40 years.

If you total the payments in the span of 40 years, you may realize that you are paying a huge interest. Although this is such a long stretch, loans of such kind are still available in the market because they make very low monthly payments possible.

Stated Income Loans

Declare your income and they’ll take your word for it. It’s the basic premise of Stated Income Loans. However, it does not necessarily mean though that you do not provide any document to show your income.

In the QM world, your income has to be fully documented. There is a standard verification and underwriting procedure that needs to be done. Many Americans cannot provide all these papers, and so they won’t be eligible for a QM loan. If this is the case, a stated income loan will work best for them.

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Negative Amortization Loans

Amortization is defined as paying off the loan interest and principal through regular payments. Negative amortization is when you do minimum payments that do not pay off the interest. In the end, this interest will continue to add up.

The unpaid interest will be added to your principal. On the next month, the interest rate will then apply not only to your principal but to the unpaid interest as well.

Although this is not a popular choice for many, there is still a market for this kind of loan.

Jumbo Loans

There are individuals who need extremely large financing. Conforming loans have limits to the amount a borrower can borrow. But because there are some who need and can very well afford to pay such a large amount, jumbo loans are originated by lenders.

It is designed to provide financing for high luxury properties. Because jumbo loans exceed conforming loan limits, they cannot be purchased, securitized or guaranteed by Freddie Mac or Fannie Mae. And because of the huge money involved, there are special underwriting procedures and requirements. Tax implications are also different for this loan product.

Interest-Only Loans

One of the most popular Non-QMs is the Interest-Only loan. Simply put, you pay only the interest in the given term which is usually 4 to 7 years. After this term, you will start paying the principal.

The borrower can then choose to pay off the principal, pay a lump sum, or refinance the loan.

There are many loan products under the Non-Qualified Mortgage bandwagon. What is important is to study your situation and your repayment ability and find the right product for you. Speaking with a lender will help make the search faster.

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Buying Big With Jumbo Loans

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Buying Big With Jumbo Loans

They are not your typical mortgage with the usual limit. Jumbo loans are used to buy homes, may be larger or pricier, beyond the conforming loan limits set by the FHFA. As expected of a larger loan, higher standards for qualification, e.g. financial capital, credit and equity do apply but you can always shop around.

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Why Jumbo Loans?

They are for homebuyers who can afford homes with price tags exceeding their county’s conforming loan limits. The conforming loan limit for a one-unit home in most parts of the U.S. is $424,100. This baseline limit for a single-family home is higher in expensive real estate markets like Suffolk, NY whose maximum loan limit is $636,150.

While the FHA is not related with the FHFA, the former’s conforming loan limits are used by the FHA to determine its own loan limits. For example, FHA loans on a single-family home are generally capped at $275,665. For a one-unit home located in a high-cost area, an FHA loan of up to $636,150 is permissible.

Highlights

Limits. Jumbo loans easily exceed the conforming loan limits. Without a threshold to constrain them, house hunters can freely bid for homes beyond $424,100.

Rates. Jumbo loan rates are higher than those of conforming and FHA loan rates. But if seen in a historical perspective, the jumbo rates of today are lower than they were in the past. Their interest rate can also be fixed or variable in varying lengths of repayment.

Downpayment. Jumbo mortgages are known for their 20% down payments. That holds true for some lenders, one lender accepts 5% of the purchase price as down payments. There are also many ways to work your way around the higher down payment standard:

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  1. Piggybacking. Subject to your lender’s approval, you may take out a first and second mortgage at once; the first mortgage will cover the 80% of the purchase price and the second mortgage, either a home equity loan or a home equity line of credit, will take care of the 10%. A down payment of 10% will finish off the transaction.
  2. FHA loans. The FHA insures jumbo loans meant for buying homes in high-cost areas, exceeding its standard $271,050. With an FHA jumbo loan, the down payment could be as low as 3.5%. In exchange for the low down payment, you will pay mortgage insurance premiums.
  3. VA loans. Interestingly, the VA loan limits are based on conforming loan limits. The VA also backs jumbo loans for purchases beyond $424,100 and the down payment could be little to zero.

Requirements

Your eligibility for a jumbo loan would largely depend on your credit history. Lenders typically require a base credit score of 700, although some could go lower to 680. Still, rates are in your favor if you have a good credit score.

Your debt-to-income ratio should not be a hurdle if you keep it low at 43% or 45% at most. This metric will tell the lender if you can comfortably take on the mortgage and able to repay.

Lenders will scrutinize your financial capacity for such a loan. You can boost it by showing asset reserves good for several months of mortgage payments.

Indeed, jumbo mortgages are not just for mansions. In expensive housing markets like California with higher median prices, a million-dollar home is the norm. Just consider this: what if the home you’d been eyeing is priced above your county limit of $424,100 or $636,150? A jumbo loan is a possibility, right?

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Why the Qualified Mortgage Guidelines Make Jumbo Mortgages Less Available

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Why the Qualified Mortgage Guidelines Make Jumbo Mortgages Less Available-NONQUALIFIEDMORTGAGE.COMJumbo mortgages used to be a dime a dozen and you can even find those that did not require income verification, which was a dream come true for wealthy borrowers that did not have a steady income but had plenty of money. Today, however, the times have changed and everything needs to be verified and re-verified. Getting a jumbo loan is not impossible, but it definitely takes more work because of the risk that lenders are taking on – if a borrower were to end up in foreclosure with a jumbo loan, they could sue the lender stating that the lender did not do due diligence when it came to ensuring that the borrower truly could afford the loan. This leaves lenders in the lurches – do they offer jumbo loans or not?

Debt Ratio is the Biggest Hurdle

The debt ratio of a borrower is one of the largest hurdles to jump through with a jumbo loan and it makes sense why. If you are obtaining a loan for $1 million, you are going to have a very large mortgage payment. This in turn means that you need to have a very large income. Chances are you do have that large income because otherwise you would not be looking at such expensive homes, but if your income is not verifiable or not able to be used in the amount you thought it would, it could make your debt ratio much higher than you anticipated. In previous years this would not have mattered – lenders were willing to take the risk. Today, not only are they not willing to take the risk because of the high level of default, but the government is making it so that it works against them if they do take the risk.

The Qualified Mortgage guidelines plainly state that any loan with a debt ratio over 43% is considered a non-Qualified Mortgage. What does that mean for lenders? It opens up the possibility of you suing them should you lose your home. On the other hand, if the debt ratio was 43% or lower, the lender is protected from a consumer lawsuit as long as all of the other QM guidelines are in place. Because the debt ratio is usually the only problem, it has proven to be the number one reason why jumbo loans cannot be provided.

Jumbo Lending Terms are Changing

The terms of jumbo loans are also going through a tremendous change. Prior to the housing meltdown, it was not uncommon to see jumbo mortgages with interest only payments or negative amortization. Today, those terms are not allowed under the Qualified Mortgage guidelines. Again, this means if the lender provides these terms, the loan is not protected under the QM rules. Lenders are forced to provide borrowers with a fully amortizing jumbo loan, which depending on the amount, could mean very large mortgage payments for the next 30 years. There are borrowers out there that can afford these payments, but there are many others that cannot afford them.

The Verification Requirements are Changing

The type of verification allowed for jumbo mortgages is also changing. It was not unheard of to have stated jumbo loans in the early 2000’s, but today that just does not happen. Everything needs to be verified, which can pose to be a serious problem for those borrowers that are self-employed, which most million dollar income earners tend to be. They do not have W-2s and paystubs to show their income. Instead, they have bank statements and tax returns, but even the tax returns might not show as much income as they actually make because of the numerous write offs they can utilize in order to decrease their tax liability. If a borrower cannot supply tax returns supporting his income, or at the very least, bank statements over the last year showing a steady cash flow, chances are the jumbo loan will not be approved today.

Higher Interest Rates

As the mortgage decline gets further and further behind us, lenders are willing to take smaller down payments. The term smaller, however, is rather relative as if you think about it, even a 10% down payment on a $1,000,000 loan is $100,000, which no matter who you are talking to and how much money they have, that is a significant amount of money. The problem here, however, is that banks still see that has a higher risk because a 10% down payment means the loan has a 90% LTV, which in the eyes of the bank is risky. This means they are going to charge you a higher interest rate. Depending on the exact circumstances, that interest rate could be as much as 1% higher than the conforming rates, which on a high loan amount can be a significant amount of money. Now most jumbo borrowers are willing to take that chance in order to invest their assets in other areas rather than in a house that is going to appreciate slowly, so it is a 50/50 gamble for the jumbo borrower.

In the end, jumbo mortgages are becoming more scarce just because of the tighter restrictions being placed on the lenders. The government wants to ensure that another housing crisis does not happen and in the meantime, are making it harder for everyone to get a loan. This does not mean that jumbo mortgages are impossible to get – they are out there and many lenders are just keeping the loans on their own portfolio in order to avoid the QM guidelines, but many banks have to abide by these rules because they don’t have the capital to keep the loans. In the end, just keep shopping if you are in need of a jumbo loan and have the credit and assets to make it work.

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