Jumbo loans are similar to other loans, but there are some important differences that you should know about before buying a home.
Jumbo Loans Are Portfolio Loans
First let’s get one concept down: Jumbo loans are Portfolio Loans. Portfolio loans are not backed by Fannie Mae or Freddie Mac. Fannie and Freddie are government sponsored enterprises where lenders can send their loans. Instead of sending Jumbo Loans to Fannie or Freddie, lenders and investors hold, or portfolio, these loans. When lenders and investors hold the loans on their own books they also will write their own guidelines. It’s a classic matter of “he who has the gold makes the rules”.
Here are some of the rules.
Didn’t expect this one did you? Rates on Jumbo Loans compare more favorably to conventional loans than at any time in history. Why? Because all loans backed by Fannie Mae and Freddie Mac have built-in “loan level” price adjustments. These are basically fees that get captured in the interest rates of conforming loans. Because Jumbo Loans are not conforming loans, they don’t have the extra fees “baked” into the interest rates.
Jumbo Loans usually require a minimum 15%-20% down payment. Investors consider properties with Jumbo loans to be luxury properties. Luxury properties can take longer and be harder to sell in a situation where a homeowner defaults on their loan. For this reason investors and banks required a greater down payment on Jumbo Loans than on conforming Loans.
Higher Appraisal Standards
Jumbo loans typically require a high level review of the appraisal. Conventional loan appraisals can be reviewed in a few minutes whereas a Jumbo Loan appraisal review might take a day or two. Why is this? Let me give you one example. An appraiser in Aspen was at a home that had what was basically a full “Bat Cave”. It was a huge underground basement / garage with an elevator to store exotic cars, snowplows, toys and the rest. Of course there were no other comparable sales the appraiser could use to determine the value of this bat cave. There literally is no way to establish the value of this space-even though we know it has value. This is not uncommon with luxury homes. It is very common to have unique properties and unique situations. In these cases appraisals will get a thorough look so that the lender can determine a legitimate market value of a home.
Final take-away: You’ll want to allow a little more time between your appraisal deadline and your appraisal objection deadline with a Jumbo Loan. Usually two days-three days to be safe.
Higher Reserve Requirements
Borrower reserves are defined as: Extra money, or savings, a buyer has in addition to funds needed to the down payment. For Jumbo loans a borrower typically will need to have 6-12 months of savings in order to qualify for the loan. If your new payment is $3,500 per month, you might need to document an additional $42,000 in savings. The lender wants to make sure that if you lose your source of income right after buying the home you still have enough cushion to make your payments.
Specifically, you want to be aware of reserves that cannot be documented or used. This may take the form of non-vested stock options, retirement accounts with an early withdrawal penalty, or pensions that do not allow early withdrawal. It is not uncommon for high net-worth individuals to use financial tools that may not be acceptable for loan reserves.
Take-away: Plan ahead of time with your lender to make sure your funds are acceptable forms for reserves.
Tracking the Movement of Money
Jumbo loans will require 60 days’ worth of statements from any accounts that will be used for the down payment or for reserves. Many Jumbo loan clients move substantial sums of money from account to account depending on the return on investment or other considerations. These movements will need to be tracked for at least 60 days priot to your closing. This might mean lots of paperwork and letters from your financial team. The best practice for securing a Jumbo Loan is to plan ahead to try to limit complicated movement of funds while you look for your home and close your loan.
While Jumbo Loans have some unique characteristics they just require a common-sense approach to financing.
- Be prepared: Get going early. Reach out to your lender early in the process to make sure you have all your bases covered.
- Be Cool: You know you have plenty of available funds, but it needs to be in the right kind of account. Be happy with the money market account until you close.
- Don’t take it personally: I’ll be honest; many of my Jumbo Loan clients intimidate the heck out of me when we first talk. Who am I to tell you that I need another print-out of that statement from last August? But over time I’ve learned it’s not personal and that no one gets a free pass. Lender guidelines are just hoops to jump through; let’s jump through them and move on!
Good luck with your Jumbo Loan financing, please let us know if we can help or if you have any other questions.