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Plenty of lenders offer jumbo mortgages now, although the requirements are stricter than they used to be.

Jumbo mortgages are home loans that are bigger than normal. They exceed the “conforming limit” — the maximum loan amount that Fannie Mae and Freddie Mac will buy.

The conforming limit varies by location. In most housing markets, it’s $417,000, and any mortgage more than that is a jumbo. In the most expensive housing markets, such as Los Angeles, any home loan of more than $729,750 is a jumbo. A few places are in between. For example, Seattle’s conforming limit is $567,500; a short ferry ride away in Port Orchard, Wash., it’s $475,000.

In the go-go years, around 2003 to the middle of 2007, lenders steadily relaxed their standards on jumbo loans to compete for customers. Borrowers easily got jumbo mortgages without having to verify the income stated on their loan applications. Many lenders gave jumbo loans to homebuyers putting just 5 percent down — for example, buying a half-million-dollar house with $25,000 down, and borrowing the remaining $475,000.

Beginning in August 2007, a credit squeeze scared lenders away from the jumbo market. Jumbos gradually returned, but with tougher requirements. To qualify for a jumbo mortgage today, you should expect:

  • To make a down payment of at least 20 percent for a purchase (or have at least 20 percent equity in a refinance).
  • To document your income.
  • To get an adjustable-rate loan, because fixed-rate jumbos are relatively rare.
  • For your monthly mortgage payment to be no more than 38 percent of your income before taxes.

Borrowers who meet those qualifications find that today’s rates are attractive. “Yesterday I quoted a $900,000, five-year ARM at 4.25 percent,” says Dan Green, loan officer for Waterstone Mortgage in Cincinnati. That loan quote was for a condominium with a down payment of 25 percent.

It pays to shop around for a jumbo mortgage because these loans aren’t commodities. Most jumbos nowadays come from big banks that keep the loans on their books instead of selling them. These so-called “portfolio loans” exemplify old-fashioned lending, in which the bank makes money by charging higher interest rates on mortgages than they pay on their customers’ deposits.

Interest rates on deposits are low nowadays, so banks can profit on jumbo mortgages even when they offer them at low rates. But rates paid on deposits will rise someday. So banks push jumbo ARMs whose rates will rise when rates paid on deposits go up. The most popular jumbos are 5/1 ARMs, which have an introductory rate that lasts five years, then adjusts annually thereafter. Another popular option is the 7/1 ARM. When the adjustment period comes, most of today’s jumbo ARMs will move in relation to the 1-year Libor, although some are indexed to the one-year Treasury.

Lenders say that some of the biggest names in the jumbo market are Bank of America, ING, U.S. Bank, GMAC Mortgage and MetLife Bank. Other household-name banks are active in the jumbo market, too.

In the last two years, the biggest change in jumbo lending has involved down payments. It’s difficult to find any bank that will approve a jumbo loan with less than 20 percent down payment or equity.

“We are pretty much in a back-to-basics mode,” says Joe Michalak, vice president and chief credit officer for MetLife Bank. “Generally, our requirements are for 80 percent loan-to-value — that is, a 20 percent down payment. Traditional underwriting parameters.”

Jumbo lending requirements

Here’s an example of a typical bank’s lending requirements on jumbo mortgages. In this case, the bank is Chase. Some banks have higher maximum loan amounts; still others allow jumbo loans on vacation and investment properties. Some banks require down payments of more than 20 percent on investment properties or loans of more than $1.5 million.

Available for: Primary homes only; not available for secondary/vacation homes or investment properties.
Maximum loan amounts:
  • 1-2 units: $2 million;
  • 3-4 units: $1.5 million.
Down payment: Depends on loan amount, transaction type, property type and location, but minimum down payment is 20 percent and in some cases, exceeds 30 percent.
Loan types:
  • Fixed-rate amortizing.
  • Fixed-rate interest-only.
  • Amortizing ARMs: 1/1, 3/1, 5/1, 7/1, 10/1.
  • Interest-only ARMs: 5/1, 7/1, 10/1.
ARM index: 1-year Libor.
Credit score: Minimum score depends on type of dwelling and loan amount.
Tie-ins: Chase jumbo borrowers who have house payments automatically deducted from Chase checking accounts can earn $500 a year through the Mortgage Cash Back program.

With banks going back to basics, homeowners are finding themselves ineligible to refinance their jumbo loans because they have less than 20 percent equity due to falling home values. There is little that these borrowers can do unless they can free up enough cash to refinance at 80 percent loan to value.

A self-reinforcing downward cycle is at work, says John Walsh, president of Total Mortgage Services, a mortgage bank based in Milford, Conn., that lends in more than 20 states. "Tight guidelines are making property values decrease, and decreasing property values are making less people have the ability to qualify for a mortgage now, because the loan-to-value requirements require a higher equity position,” Walsh says. “So it’s an interesting time in the jumbo side of things.”

Falling property values are lenders’ biggest concern when deciding whether to grant jumbo mortgages. “You’re taking a greater risk on home price volatility with these higher-priced properties,” says Michael Fratantoni, vice president for single-family research and policy development for the Mortgage Bankers Association.

Fratantoni cites recent housing data out of California. In that state, there was a three-month supply of houses worth less than $300,000. For houses priced at more than $1 million, there was a 13-month supply. That’s a sign that prices for the most expensive homes still have room to fall. And such houses will be difficult to sell after foreclosure.

With few exceptions, jumbo borrowers have to furnish financial records documenting that they earn what they say they earn. Bank of America requires borrowers to fully document two years of income history, says Vijay Lala, first mortgage product executive for BofA.

With virtually no exceptions, jumbo lenders require borrowers to have credit scores of 720 or higher. Some banks boast that their average jumbo customer has a credit score in the 760s.

And lenders are strict about the debt-to-income ratio, or DTI. It will be difficult, if not impossible, to get a jumbo loan nowadays at a DTI of more than 38 percent, meaning that the monthly house payment can’t be more than 38 percent of pretax income.

“By far, the ability to afford the monthly payment is key in this segment,” Lala says.

Although most banks share the basic lending requirements for jumbo loans, there are some variations, mainly having to do with the type of dwelling and whether it’s a primary home. Some lenders have different requirements for condominiums than for houses. Other lenders won’t touch short sales or foreclosed homes. And some lenders will approve jumbo loans only for primary residences, while others will grant jumbos for vacation homes and investment properties. That’s why it’s necessary to shop around.