Finding a Jumbo Mortgage Loan in Texas

By Richard L. Veale

New home buyers contemplating homes that require mortgages above $417,000 should be aware of the many differences that exist in the qualification and underwriting processes for a jumbo loan. Typically, jumbo mortgages are harder to qualify for and demand higher base interest rates. Fannie Mae and Freddie Mac conforming loans are available up to $417,000 in most areas at fixed interest rates averaging roughly 5% for terms of up to 40 years. Jumbo mortgages (those above $417,000) are offered by a diminishing number of lenders with rates generally at or above 6% with maximum terms of 30 years.

A further disparity is the minimum required credit score. Borrowers with credit scores above 680 meet the minimum score qualification for conventional loans originated by most mortgage lenders. Jumbo loan applicants must demonstrate credit scores of at least 720. In addition, traditional underwriting permits at least one 30-day mortgage or rental payment delinquency in the prior 12 months (some lenders even allow for one in the past 6 months). Jumbo applicants can have no 30 day lates over the same period.

Three additional factors providing notable differences are in the areas of required reserves, maximum loan to value, and debt to income ratios. Jumbo loans require that liquid assets equaling 12 months reserves reside in the borrowers financial portfolio and three months of bank statements demonstrating this requirement are mandated. Conventional borrowers are normally required to prove only 2 months of liquid reserves. Conforming loans can be obtained for up to 95% of the value of the home whereas many lenders cap Jumbo loans at a 75-85% loan-to-value. Lastly, the maximum debt to income ratio allowed for a conventional loan is 43% whereas a Jumbo loan applicant must demonstrate a maximum of 40% total combined debt.

Many of the criteria we have discussed so far revolve around underwriting the borrower, howvere there are also notable differences in how the property itself is underwritten. Geography and property designations are the two most notable characteristics illustrating these differences. Conventional loans can finance the purchase of 1-4 unit properties. Whereas Jumbo loans can only be written for properties with no more than 2 units. Conventional loans are available for investment properties but Jumbo loans are strictly reserved for owner-occupants. Along these same lines, the common “1031 exchange” used as a source of down-payment funds by investors is not available for Jumbo transactions.

In view of the current deterioration in localized real estate markets, Jumbo loans are completely unavailable in many states including Florida, Michigan, and Rhode Island. Conventional loans remain available in all 50 states. Furthermore, Jumbo loans are not available to non-permanent resident and resident aliens as are most conventional programs.

Finally, most lending institutions will not allow “cash-out” Jumbo programs which are generally available on a conventional basis, or will limit the amount of cash-out available. Texas law specifically limits cash-out refinancing to 80% of a home's market value regardless of the mortgage size.

A common practice that has evolved from the impact of the factors mentioned above is the rapid rebirth of the subordinated second lien used in combination with a conforming (conventional) first mortgage to create a combo loan program, thus avoiding the Jumbo scenario. This works well for total loan amounts of up to $750,000 which employ a $417,000 first at conventional rates with a $300,000+ second mortgage . This allows for a lower down-payment outlay, avoids any private mortgage insurance premiums, lengthens terms and requires smaller reserves etc. to qualify.

Rick Veale is a licensed Texas Mortgage Broker and Partner with Home Loan Specialists, Inc. Rick specializes in the jumbo mortgage loan market in Texas and offers a wide range of low rate financing options for luxury home buyers and homeowners refinancing to a lower rate. Rick can be reach at Rick@HLTSX.com