Borrowers in high-cost markets won't be able to get FHA mortgages for more than $625,500 after the new limits go into effect. Currently, those borrowers could qualify for an FHA loan of up to $729,750 with 3.5 percent down or with little equity in their homes. Beginning Oct. 1, they will have to apply for nonconforming jumbo loans and unless they meet the strict underwriting requirements, the chances of getting approved are slim, says Matt Hackett, underwriting manager at Equity Now.
Jumbo loan requirements
Underwriting requirements for non-conforming jumbo loans vary. Many jumbo lenders want borrowers with a 740 credit score and 20 percent equity or down payment, Carson says. But none of those requirements are written in stone. Some lenders are willing to accept less equity of about 10 percent when borrowers have credit scores of 760 or higher, he says. They are also somewhat flexible on credit scores, but they pay close attention to revolving debt and late payments on your credit history, Hackett says.
Your debt-to-income ratio, which is how lenders measure how much you owe versus how much you earn, usually should not be higher than 36 percent for jumbo loans, but there are also exceptions for that. Carson says he does jumbo loans with DTIs as high as 45 percent in some cases.
The higher the loan amount, the more equity the borrower will be required to have. For loans up to $750,000, most lenders require at least 20 percent equity, Hackett says. For loans up to $2 million, they want 30 percent equity. Anything higher than that requires about 35 percent to 40 percent equity.
Jumbo lending outlook after October
Those who have good credit and enough equity should find plenty of jumbo lenders to choose from even after the lower limits go into effect, says David Adamo, CEO of Luxury Mortgage in Stamford, Conn.
The once-popular jumbo loans nearly came to halt after the housing crash, but they have slowly returned as more lenders are eager to offer them.
"There's sufficient demand in the marketplace right now for jumbo loans," Adamo says. "There won't be a lack of availability of product to fill that gap."
But they'll come at a price.
If you're not able to get a mortgage before the end of September and you have to get a nonconforming jumbo mortgage, expect to pay about half of a percentage point more in interest than you would pay for a mortgage that falls within the Fannie and Freddie limits. Depending on the mortgage amount, that could mean a few hundred dollars per month and a higher down payment.
Unlike in recent years, when 30-year fixed jumbo mortgage became rare, borrowers also will be able to choose from 5/1 ARMs and 30-year fixed jumbo loans.
It's not clear how lenders will react to the higher demand for jumbo loans once the loan limits change. Some mortgage experts say it may cause lenders to raise rates on jumbos. On the other hand, as more lenders jump into the game and the competition increases, they may loosen up their underwriting requirements to accommodate the new jumbo borrowers.
"It may be wishful thinking on my part but you may even see (jumbo) rates get more favorable," says Carson. "But why take a chance if you can act now?"
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