If you want to refinance a big mortgage, act quickly. Soon, you may face more expensive jumbo loans that are harder to qualify for.
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That's what mortgage broker Mathew Carson of First Capital Group Inc. tells his clients in San Francisco as he warns them about loan limit changes that will take effect Oct. 1.
The maximum amount for "jumbo-conforming" loans -- which are mortgages that vary between $417,000 and $729,750 and can be sold to Fannie Mae and Freddie Mac -- will drop in many parts of the country. The maximum limit on those loans will be reduced to $625,500. Anyone who wants to refinance or get a purchase mortgage of more than $417,000 but less than $729,750 is likely to be affected.
"There are plenty of people in this range, and when the limit changes they are going to be priced out of the market," says Carson. "We've reached out to all of our clients in that category, and I'm finding that people just don't know about (the upcoming changes). But the ones that do know are taking action."
Why jumbo limits matter and who's impacted
These loan limits are crucial in high-cost areas such as San Francisco, Los Angeles, New York and New Jersey. That's because mortgage loans that go over the threshold set by Fannie and Freddie are considered jumbo mortgages, which generally carry higher interest rates, may require larger down payments and have more stringent underwriting guidelines.
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The decreased jumbo limits will affect more than 200 counties, and about 1.38 million owner-occupied homes would be pushed outside of the jumbo limits allowed by Fannie and Freddie, according to the National Association of Home Builders.
Fannie, Freddie and the Federal Housing Administration temporarily raised their loan limits in 2008. The higher caps have been extended annually since then, but are set to expire Sept. 30. Housing industry lobbyists have asked Congress to extend the current limits for another year or two, but with a few weeks left before the change takes effect, borrowers must play it safe and act soon, Carson says.
Don't Wait Until the Last Minute
Depending on your lender, it may take two to several weeks to close on a mortgage after you apply to refinance. Borrowers must close by Sept. 30 to avoid facing the lower loan limits, says Michael Moskowitz, president of Equity Now, in New York City.
"If you apply by the beginning of September, that should be enough time to close, but it really depends on how long the lender will take," he says.
Lower Limits Could Mean No Mortgages for FHA Borrowers
For some, especially those with less-than-perfect credit and little equity in their homes, missing this deadline could mean not being able to get a mortgage loan at all.
In many counties, the jumbo loan ceiling is the same as the limit imposed on FHA-insured mortgages. FHA limits also vary by county and will be reduced at the same time as jumbo limits.
Borrowers in high-cost markets won't be able to get FHA mortgages for more than $625,500 after the new limits go into effect. Currently, those borrowers could qualify for an FHA loan of up to $729,750 with 3.5% down or with little equity in their homes. Beginning Oct. 1, they will have to apply for nonconforming jumbo loans and unless they meet the strict underwriting requirements, the chances of getting approved are slim, says Matt Hackett, underwriting manager at Equity Now.
Jumbo Loan Requirements
Underwriting requirements for non-conforming jumbo loans vary. Many jumbo lenders want borrowers with a 740 credit score and 20% equity or down payment, Carson says. But none of those requirements are written in stone. Some lenders are willing to accept less equity of about 10% when borrowers have credit scores of 760 or higher, he says. They are also somewhat flexible on credit scores, but they pay close attention to revolving debt and late payments on your credit history, Hackett says.
Your debt-to-income ratio, which is how lenders measure how much you owe versus how much you earn, usually should not be higher than 36% for jumbo loans, but there are also exceptions for that. Carson says he does jumbo loans with DTIs as high as 45% in some cases.
The higher the loan amount, the more equity the borrower will be required to have. For loans up to $750,000, most lenders require at least 20% equity, Hackett says. For loans up to $2 million, they want 30% equity. Anything higher than that requires about 35% to 40% equity.
Jumbo Lending Outlook After October
Those who have good credit and enough equity should find plenty of jumbo lenders to choose from even after the lower limits go into effect, says David Adamo, CEO of Luxury Mortgage in Stamford, Conn.
The once-popular jumbo loans nearly came to halt after the housing crash, but they have slowly returned as more lenders are eager to offer them.
"There's sufficient demand in the marketplace right now for jumbo loans," Adamo says. "There won't be a lack of availability of product to fill that gap."
But they'll come at a price.
If you're not able to get a mortgage before the end of September and you have to get a nonconforming jumbo mortgage, expect to pay about half of a percentage point more in interest than you would pay for a mortgage that falls within the Fannie and Freddie limits. Depending on the mortgage amount, that could mean a few hundred dollars per month and a higher down payment.
Unlike in recent years, when 30-year fixed jumbo mortgage became rare, borrowers also will be able to choose from 5/1 ARMs and 30-year fixed jumbo loans.
It's not clear how lenders will react to the higher demand for jumbo loans once the loan limits change. Some mortgage experts say it may cause lenders to raise rates on jumbos. On the other hand, as more lenders jump into the game and the competition increases, they may loosen up their underwriting requirements to accommodate the new jumbo borrowers.
"It may be wishful thinking on my part but you may even see (jumbo) rates get more favorable," says Carson. "But why take a chance if you can act now?"