Jumbo loans - high dollar loans typically starting at $417,000 in most areas or as high as $625,501 in higher-cost markets - will see a lot of changes in 2014.
In response to the housing crisis, the Consumer Financial Protection Bureau, acting under the Dodd-Frank financial reform bill, now requires the majority of mortgages to be "qualified" by specific standards. If you're in the market for a jumbo loan, these new rules could affect your mortgage options, the type of mortgage you get, and the amount of paperwork you'll need to get approved.
Certain types of jumbo loans that were common in the past will be harder to find.
Under the Dodd-Frank bill, a mortgage must meet certain terms to be considered a qualified mortgage. Jumbo loans that have smaller monthly payments and a large balloon payment at the end of the loan are not qualified mortgages. Interest-only jumbo loans, which have several months of interest-only payments, also do not qualify under the new mortgage standards.
While not all mortgages must be "qualified," lenders of non-qualified mortgages run a higher risk as borrowers could contest a foreclosure by saying the lender didn't assess their financial standing and the risk of the loan. To reduce risk, lenders may require the majority of their jumbo loans to be QMs. Expect to see fewer options and a greater push to "qualified" jumbo loans.
Jumbo loans with low documentation requirements won't be possible under the new rules.
For QMs, a borrower's debt ratio cannot exceed 43 percent of their monthly pre-tax income, including all major debts such as mortgage payments and car loans. To prove a borrower qualifies, lenders must dig deeper into the borrower's financial statements. If a lender decides to offer a non-QM jumbo loan, the debt ratio can be higher than 43 percent, but the same scrutiny rules apply and lenders must be able to verify your ability to repay the loan.
Regardless of the debt limit, you'll need to prove your assets and income through pay stubs, tax returns and bank statements. According to The Wall Street Journal, if you can't provide enough documentation to prove you can repay, you won't qualify for the loan, even in the private market.
Higher Down Payments
In recent years, some lenders have offered jumbo loans with a lower down payment so wealthy borrowers could invest their income in other sources, but that will change in 2014. According to the Wall Street Journal, "Most lenders will continue to require down payments of at least 30 percent on private mortgages." It also warns, "That threshold could rise as more rules are announced."
Changes to Terms
In the coming months, jumbo loan lenders are likely to push for more adjustable-rate mortgages. However, they may go about it in indirect ways.
Tom Wind, executive vice president of home lending at EverBank told MarketWatch that lenders will slowly increase their interest rates for 30-year jumbo loans. As a result, borrowers are likely to go for an ARM, which has a lower introductory interest rate and can seem more appealing at closing. Since the interest rate in an ARM can jump after the introductory period, lenders stand to make more money in interest from these loans and a borrower may do better overall by starting with a higher interest rate in a fixed rate mortgage.
MarketWatch also reported that lenders have been contacting private insurers about reintroducing private mortgage insurance. That could mean more jumbo loans will start to carry PMI in the near future.