When you are seeking your first home and dealing with the sticker shock of upcoming collective debt, every loan can seem like a "jumbo loan." However, in the mortgage world, a jumbo loan has a very specific meaning. It refers to a loan that is larger than the conforming limit, meaning that it is too large for Fannie Mae and Freddie Mac to purchase the debt from a lender. The general limit is $424,100, but in certain areas with higher real-estate prices, the conforming limit may be higher.
After the housing crisis, jumbo loans became even riskier propositions for both lenders and buyers, and the standard 20% down payment became a necessity for securing a jumbo loan. More traditional loans with government backing were still available at lower down payment levels. This landscape is changing as some lenders are now lowering the threshold down payments for some jumbo loans to 10%, with a few dropping even lower.
Banks are targeting potential homebuyers who still have excellent credit and sufficient assets to cover payments, but do not necessarily have sufficient cash on hand for a 20% down payment. Their assets may be in less liquid forms like retirement accounts, or they may have relatively large incomes but have not had those incomes long enough to save up a full 20% on their desired home. These potential homebuyers are sometimes called Henrys, an acronym for "high earner, not rich yet."
A major factor in risk assessment for any level of loan is the loan-to-value ratio (LTV), which is the percentage of the home's value that is being financed. With no down payment, the LTV is 100%; with a traditional down payment, the LTV is 80%. First-time homebuyers in high-priced markets may find themselves requiring LTV's in the 85-90% range or even higher, because their high rent payments have impeded their ability to gather up a full down payment.
The second major factor is the debt-to-income ratio, and Henrys have two things going for them: their income is large and generally secure, and their lack of available down payment is not usually due to debts or bills but rather in the form of their assets (less in cash). Liquidity is still important — it does not matter how much money you have if you cannot access it to make your mortgage payments — but lenders may be willing to stretch the boundaries of liquidity for Henrys. For example, according to a recent Wall Street Journal article, lenders offering higher-LTV jumbo loans may allow a portion of retirement funds to be considered in the decision-making process as long as the funds can be liquidated in case of an emergency.
No bank wants to increase their risk to the levels of the housing crisis, so a jumbo loan with less than 20% down will come with limitations. Extra restrictions are required since the private mortgage insurance (PMI) that is necessary on Fannie and Freddie mortgage-backed loans with lower than 20% down payments are not mandatory on jumbo loans. It is up to the lenders to protect themselves, and they do through various restrictions.
Qualifications such as credit scores may be set higher, and interest rates will be increased to offset risk — typically anywhere from 0.25% to 1% over traditional loans. A certain amount of reserve payments may also be required. However, those are tradeoffs that both Henrys and their lenders will often be willing to make.
Henrys that are still having trouble meeting the criteria may want to consider an adjustable rate mortgage (ARM) in order to keep payments more manageable — or simply downsize their targeted home or wait to save up a more traditional down payment. In any case, Henrys or similarly qualified homebuyers who want to forge ahead with their home-buying plans will now have more appealing jumbo loan options available to them.
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