Looking to purchase a new luxury home this year in the Twin Cities? Most likely, you will be using what’s called a Jumbo Loan to help finance the purchase.
What you need to know is that the rules have changed, thanks to the Consumer Financial Protection Bureau. Effective January 10, 2014, the rules for the jumbo-mortgage market are changing. According to the Wall Street Journal’s Market Watch, here are five changes to expect in 2014:
Fewer types of Jumbo Loans – interest only loans and those with balloon payments will be hard to find, and will most likely result in a higher down payment requirement.
Lower Down Payments – the good news is that many banks are dropping the 20% down requirement on large loans, some down to 10-15%. But this might mean private mortgage insurance will come back, an added expense for borrowers.
New Rules for “non-qualified” loans – Loans that meet the new “qualified” requirements must have no higher than a 43% debt to income ratio. For banks wishing to offer jumbo loans above this mark, they will most likely require higher down payments, and proof of large cash reserves.
Banks will Push for ARMs – rates on 30 year fixed-rate Jumbo Loans will increase over time, thus causing some banks to promote ARMs (adjustable rate mortgages), allowing them to make more money on higher interest rates once a borrower’s rates reset
Rate Changes – new rules created by Dodd-Frank will cause investors to pay more for loans sold to them, passing this cost down to borrowers utilizing Jumbo Loans
The video below is a quick snapshot about how the new Mortgage rules will affect the real estate industry this year.
A few months ago I reported that financing for the upper bracket home market in Minneapolis and St. Paul was having some difficulties. Banks were being very cautious for million dollar loan requests, and the new norm for down payment was at least 30%. The word of the day was “documentation”, and banks required a ton of it. Now it looks like banks might be easing up on luxury home buyers…well, maybe just a little bit.
According to Lisa Wells of Residential Mortgage Group, the luxury real estate market is getting a little easier to finance, but still remains cautious. She says, “Loan amounts for 1 million or less are pretty decent for interest rates and the underwriting process, but buyers still need 2 years of solid income and at least a 700 credit score rating.” It appears that a down payment of 20% is also OK, but if you want a better interest rate, than banks would like to see at least 25% down.
If you require a loan amount of over $ 1 Million, things will be a little bit different. Now two appraisals are required by the bank, with the lower of the two used for the loan. The borrower must have at least 12 months of payments in the bank in a liquid reserve and ideally more, and of course a high credit score. Ms. Wells says she has found that final loan approval in the million dollar plus market, even if the buyer meets all the requirements and guidelines, “is still left to the discretion of the Underwriter, and that she should have a very, very strong borrower with 35%-40% down. The thought out there is the upper bracket market still might have some downward pressure, and therefore, anything with loan amounts of $1.5 Million or more is just hard”.
Home owners looking to sell this year should realize that there is a real obstacle with million dollar home financing, as buyers must be able to come up with the dough. Price is not always the reason for why your luxury home hasn’t sold – it could be the lack of qualified buyers. With the tougher rules in place for loan approval, sellers should require that all buyers be pre-approved. In this way, Twin Cities home owners can have a little bit of comfort that a financial capable borrower is knocking on their door.
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