We’ve been talking a lot on the Transparent Mortgage Blog about how the COVID-19 situation has affected the economy as a whole—and especially the mortgage market. We are in interesting times with home prices continuing to surge because of low inventory while mortgage rates remain historically low. However, the challenge that many home buyers are facing is qualifying for any mortgage loan, let alone a jumbo loan. Getting approved for a mortgage not as easy as it was a year ago.
Stricter Loan Qualification Standards
Lenders are looking to take as few risks as possible, which makes lending standards for all mortgage loans much stricter. Borrowers with good credit and applying for “conforming” traditional loans are able to take advantage of today’s low rates. Borrowers who are after any loan considered “non-conforming” will find things more difficult right now, and will probably be facing an uphill battle throughout the rest of 2020.
The Risks of Jumbo Loans
In this article, we want to focus primarily on “jumbo” loans which do not conform to standard lending limits that are set by Fannie Mae and Freddie Mac. Jumbo loan limits will vary from region to region. As you might expect, California will have much higher limits than Nebraska, for example. Our homes are way more expensive on average. When you get into a high-cost metro market like San Diego, then the numbers go up even more.
Jumbo loans are naturally harder for lenders to resell on the secondary investor market. This means lenders are assuming more risk when they take on these larger loan amounts.
“There are fewer investors interested in buying those loans,” says Mike Frantantoni with the Mortgage Bankers Association (MBA). “There are a lot of competing demands for bank portfolios. Households have maxed out their lines of credit and banks have less space for jumbo loans.”
Other Factors Affecting Lenders
Other factors like the Paycheck Protection Program (PPP loans) to help small businesses and mortgage forbearance options for homeowners in financial distress have banks and lenders stretched thin. Yet, there is very high demand for both new mortgage loans and home refinances because of the low rates.
Jumbo loan borrowers can qualify for these larger mortgage loans. It’s just going to be more challenging. Consumers will encounter tougher credit score requirements. Borrowers with higher cash reserves and who are willing to pay larger down payments will be considered less risky than other candidates.
Another issue facing jumbo loan borrowers (and non-conforming loans of any type) is inconsistency. We are in a time where it really pays to shop around. Jumbo loan applicants could see a wide variety of interest rates depending on which bank they deal with and when they apply. Some lenders are taking more risks than others.
Frantantoni notes that there isn’t a lot of disparity in rates on conforming loans because there is plenty of competition. The jumbo loan market is a big contrast, with rates anywhere from a quarter-point to a half-point different depending on the lender. The larger the loan, the more the interest rates discrepancies will impact the borrower.
“That’s an enormous difference for jumbos,” he says.
Working with an Independent Mortgage Broker
This is when it can be advantageous to work with an independent mortgage broker like Transparent Mortgage. We work with many different lenders to get our clients the best interest rates and terms. The qualification process will still be strict—especially on jumbo loans—but you will be able to explore more options and find a loan that makes the most sense.
If you are looking to apply for a jumbo mortgage loan or any type of home loan or refinance, call Transparent Mortgage today at (619) 701-3906. Let us help you through the qualification process and get you the best possible mortgage rate.