Because the No. 1 barrier to homeownership is coming up with the down payment, lenders have spent plenty of time creating programs that allow home buyers to purchase a house with little or no money out of their pockets. These are higher-risk loans because the buyers don’t have as much financial risk in the loan as the lender.
But what about borrowers who don’t have a cash problem or are purchasing a higher-priced house than the majority of buyers? In other words, what about well-to-do buyers the ones who were able to cash in on the stock market during the 1990s, use an inheritance or use the equity from one house to buy another?
Those with cash to purchase houses above the conventional loan ceiling find themselves using jumbo loan programs. Because we’re talking higher-priced houses and therefore higher-income purchasers, these programs provide different benefits than conventional programs.
Mortgages for $252,700 and less are considered conventional or conforming loans. Loans above that figure are jumbo or nonconforming loans. The federal government sets the limits on conforming loans, which are determined by Fannie Mae, one of the two government-sponsored enterprises established years ago to promote homeownership across the country. (The promotions have been quite successful, I might add; the national ownership rate stands at 67 percent.)
Unfortunately, there’s not one location on the Internet that has all the information needed to make a decision on a jumbo loan. I was, however, able to find a few spots with good enough information to get one started.
The site of the National Association of Realtors (www.realtor.com) and the site of the Mortgage Bankers Association of America (www.mbaa.org) both have extensive glossaries. Yet the only information available on jumbo loans was a definition. You would think these two sites would have more information on how the programs work, consumer options and any pitfalls to look out for, but I couldn’t find any.
Otherwise, information on jumbo loans comes from the originators themselves (which kind of takes away the independent research cushion). Nevertheless, here’s some useful information on programs for buyers with plenty of cash.
One of the ways buyers with plenty of cash purchase houses with nonconforming loans is to use a no-income-verification loan. The name says it all. MortgageConsultant.net (www.mortgageconsultant.net) reports this loan is designed for self-employed borrowers who, after taking all their deductions, may not show enough net income to qualify for a mortgage.
A no-income-verification loan allows the lender not to use a borrower’s income on the loan application. In addition, it allows the lender to eliminate the use of tax returns, W-2s or pay stubs. Interest rates and down payments vary for this kind of loan program. (Usually a down payment of more than 20 percent is required.) The borrower must show an excellent credit history because his or her income will not be verified.
One of the best explanations of how low-documentation, no-documentation loan programs work comes from Mortgage-X.com (www.mortgage-x.com/articles/ no_doc.htm).
Because of the risk associated with low- or no-documentation loans, the loan-to-value (LTV) ratio on these loans usually is limited to 70 percent to 75 percent, though some lenders allow a 90 percent LTV.
“Credit standards are generally a little higher for easy/no-doc loans,” according to the group’s site. “Borrowers must have maintained a good repayment history within the last two years. Additionally, some lenders will require borrowers to maintain higher bank balances than typical applicants usually must have.”
In addition, borrowers using these products probably will be assessed higher interest rates and fees on loans.
Expect the interest rate to be about one-half [percent] to 1 percent more than the rates on a fully documented loan.
Consequently, easy and no-documentation loans should be used only when necessary, not simply to avoid the paperwork requirements of a full-documentation loan.
Interest rates are higher for jumbo loans. According to www.jumboloansnationwide.com, the following are last week’s interest rates:
A 30-year loan for $241,000 to $650,000 8.375 percent.
A 30-year loan for $651,000 to $999,000 8.625 percent.
A 30-year loan for $1 million to $1.5 million 8.750 percent.
A 30-year loan for $1.5 million to $2.5 million 9.250 percent.
A 15-year loan for $241,000 to $650,000 8.125 percent.
A 15-year loan for $651,000 to $999,000 8.250 percent.
The average interest rate for conforming loans during the same period was 7.750 percent. As you can see, interest rates for the higher-priced loans run from .50 to 1.50 basis points higher than the average conforming loan rate.
M. Anthony Carr has written about real estate issues for 11 years. Direct your comments to 8411 Arlington Blvd., Fairfax Va. 22031; or send e-mail to firstname.lastname@example.org.