The real estate market really heated up over the summer, and as we head into the slower season real estate brokers are still staying busy with buyers and sellers. The Federal Reserve in the USA has indicated that it will keep rates steady and low, for now, but still buyers are not going to wait around for the historically low mortgage rates to slip away.
Meanwhile sellers are feeling more confident as consumer sentiment increases, the unemployment numbers continue to be optimistic, and housing prices across the board rise. Those increases in home values are most noticeable in some of the pricier markets and regions, which is where the ability to match buyers with appropriate loans become critical.
The Challenge of the Jumbo Loan
But putting a buyer into a higher priced home, despite the rewards of higher commissions, can be complicated. That’s because once the price of the property hits a certain level conventional loans, like those backed by Fannie Mae, are no longer applicable. The borrower needs to use a so-called “jumbo loan,” and that generally means paying significantly higher rates and fees because of the additional risk those large loans represent.
2014 Definitions for Jumbos
Prospective home buyers shopping around for conforming, conventional and FHA loans in 2014 need to know that the maximum amount allowable is set each year. For this year, the conforming or conventional limit for a single family home is $417,000, except in some rare cases where the property is located in an especially pricey area. There are exceptions made, for example, in places like Hawaii that have higher limits or what is known as “super conforming loans.”
Ways to Avoid Jumbo Mortgages
If the buyer can afford it and qualify, despite the larger monthly payments that can result from steeper interest rates, a jumbo is no problem. But oftentimes that will not be the case, and it could make the critical difference between qualifying for the mortgage loan or being rejected. In order to save the transaction, Realtors need to know what kinds of creative options are available. That is, of course, where the help of an experienced mortgage loan officer can be invaluable. But real estate agents should have some strategies at this disposal.
One way to avoid a jumbo in favor of sticking with a conventional conforming loan is to have the buyer make a larger down payment. Say, for example, that the sales price is $550,000. If the buyer makes a 20% down payment equal to $110,000 that leaves a mortgage of $440,000. But if the buyer can scrape up another $23,000 to add to that down payment then they can bring the total loan amount down to $417,000.
In some cases the buyer may also be able to take out a separate additional loan in order to combine two loans – one that is conforming plus that extra loan – and still cover the purchase price. If the mortgage winds up being $425,000, for instance, then the buyer should look for other sources of loan money worth at least $8,000 that can be added into the formula to lower the total amount of the primary loan to $417,000.
Although the interest rate on the smaller loan will likely be steeper, it can help your buyer qualify for a significantly lower conforming rate on the primary loan. That will save them tens of thousands of dollars over the lifetime of the jumbo, and if they adopt an aggressive repayment strategy they can probably repay the entire smaller loan fast, eliminating it completely.