Jumbo 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.