What is the #1 reason people seeking homes aren't buying?
They can't find what they want at a price they can afford.
The average list price of a single family Seattle home skyrocketed in 2018. It was $750,000 in February 2019. For most of Washington State, the conventional loan limit is $484,350.
King County buyers have the option of "super-sizing" their conventional mortgage to meet the sky-high housing costs. The jumbo loan limit in Seattle is $726,525. Even with this higher limit, many buyers cannot find a suitable home.
To meet the conforming loan limit, a down payment of 40% or more is needed to bring the loan amount within government guarantee. How do buyers make the purchase without tying up all their cash in an oversized down payment?
Read on to learn more.
High Balance Conforming Loans
All jumbo loans are not created equal. For most of the U.S., mortgages backed by the government are capped at $484,350. For high-cost areas like parts of California, Hawaii, New York, and Washington state the cap is set much higher. In comparison to the lower limit in the rest of the country, the $726,525 loan cap is indeed "jumbo", but it is inadequate for many homes in the high-demand Seattle area.
Government regulation discourages banks from risky loans that encourage buyers to take on homes they cannot afford. However, in white-hot markets like Seattle, conventional conforming loans are at a disadvantage.
High Prices, Big Mortgages
Freddie Mac and Fannie Mae have limits on the amount of mortgage they guarantee to lenders. Even with the higher limits in King County, it's easy to exceed the limit. A modest home in Fremont, for example, exceeds $1,000,000. Put down 20% and the mortgage exceeds the High Balance loan limit in Seattle.
So what can buyers do?
Private lenders offer buyers several creative solutions. Because they do not require Freddie/Fannie backing, the lenders can make their own rules for approval. Every lender has its own goals, so pricing, approval process, and timeline differ wildly.
Compare several lenders' products. Some lenders might specialize in second homes, others might not have favorable pricing. There is a product for almost everyone.
Exceed the High Balance Loan Limit in Seattle
The most desirable neighborhoods in Seattle far exceed the jumbo loan limit. This does not mean that you should give up on seeking homes in your desired neighborhood. What it does mean is that you should prepare for a jumbo loan.
If you have a high-paying job, lots of assets and a great credit rating, you'll have your pick of lenders willing to offer you competitive rates. Even if you lack any of these positive traits, approach your own bank for a pre-approval.
You should also talk with at least two other lenders to compare rates and terms. Different lenders have different incentives. Your bank may offer a better rate but have more stringent documentation, for example. In contrast, an independent mortgage lender that processes and funds its own loans may have a more favorable processing time, easier qualification benchmarks and a stronger rate/fee structure.
Start your search online and by asking your real estate professional for referrals early in your hunt.
Talk About Down Payments (and Other Terms)
The loan to value ratio for a conforming (or even a High Balance conforming) loan can be as much as 97% conforming and 95% for High Balance. Jumbo loans offered by private lenders have their own rules. Mortgage down payments of 20, 25 or 30% or more are common for loans exceeding $1.5 million.
Some major lenders advertise smaller down payments or other favorable terms like lower interest rates. Jumbo loans traditionally paid higher interest rates than conforming loans in the past, but many lenders now fix their rates at or below conventional loans.
Assets can differ from conforming loans too. Typically a Fannie or Freddie loan might not require and extra reserves in the bank after you get the keys. Jumbo loan lenders typically ask for 6 - 12 months; however a 20% down payment could allow for as little as $0 in reserves.
Credit scores for jumbo loan borrowers have to be high. 700 or better is often needed to qualify. The best loan terms are reserved for people with credit scores of 760 or better.
Bigger Mortgage, Smaller DTI
Debt to income ratios must meet the Consumer Financial Protection Bureau standard as a qualifying mortgage. That means a DTI of no more than 43%, with a percentage around 36% being more desirable.
Debt to income (DTI) compares monthly debt service to monthly gross income. Gross income is your pay before taxes and other deductions. Debt includes all monthly payments, whether to credit cards, mortgages, car loans or student loans. They do not consider insurance, cell phone payments, utilities, etc.
Prepare to Document All
To qualify for a jumbo loan, you’ll need a good credit score, evidence of a sufficient and stable income, and a significant reserve fund. Documentation is the most difficult task for many borrowers.
Most lenders need you to prove you have sufficient income and assets to afford the property you want to purchase. Jumbo loans aren't designed to let unqualified buyers get more house than they can afford. Lenders are looking for financially responsible people who happen to be living and working in an expensive market.
W-2 forms, check stubs, investment statements and bank statements are typical requests. Lenders are looking for consistent income. If you are self-employed, expect to provide your tax documents and detailed information about your business. If you have large assets available, you may be able to count earnings from the assets as income.
Due diligence on the property is also required. Expect a lender to ask for up to two appraisals.
Jumbo Mortgage Loan Competition
Compare different lenders' products. Unlike conventional conforming loans, jumbo mortgage lenders can adjust interest rates, required down payments or ratios to earn your business. In general, you will pay a higher interest rate for more risky loans.
However, many times, the interest on a jumbo mortgage can be the same or less than the rates on Freddie or Fannie conforming mortgages. Additionally, lenders can waive fees, closing costs or appraisals to gain your business. Many lenders skip Private Mortgage Insurance for these types of loans as well.
Because jumbo borrowers are very desirable (and profitable) high net worth customers. With the thorough vetting and documentation required, many jumbo borrowers are lower risk than conforming loan holders. The result is that lenders reduce the interest rates and or fees.
Are Jumbo Loan Terms Different From Conforming Loans?
Seattle Jumbo loans are available with either a fixed or adjustable interest rates. They come with a variety of terms. Loan terms of 10, 15, 20, 25 or even 30 years are common. 15 and 30-year mortgages are the most common.
Think ahead when comparing mortgages. If your income is consistent and you plan on being in your house for a long time, a 30-year fixed mortgage might be the right choice. However, if your income varies wildly, you expect to relocate or your family is changing size, you may want more flexibility.
Hybrid loans with a short fixed rate term and then an adjustable rate might offer better payment terms. Or there may be a unique product suited to your situation and property.
Jumbo Loan Alternatives
Sometimes the best alternative is to adjust the amount you borrow to reach the jumbo loan limit in Seattle. Maybe you want to take advantage of the reduced documentation or more lenient appraisal process.
To avoid a jumbo mortgage loan, super-size your down payment to reduce the loan amount to $726,525 or less. This can be impractical for homes that cost more than $1.5 million.
You can also use a bundle of several smaller loans. This arrangement is called a piggyback loan. Government regulation requires that you have sufficient assets and income to repay each loan individually so this tends to be a paperwork intensive process.
80/20 Piggyback Loan
This type of loan has a primary mortgage of 80% of the property’s purchase price. The secondary mortgage covers the remaining 20% of the purchase price.
80/10/10 Piggyback Loan
With this loan approach, the primary mortgage is again 80% of the property value. The second mortgage covers 10%. You contribute a 10% down payment.
More than a few piggyback arrangements use balloon loans with 3 or 10-year terms so you need to be prepared to pay extra towards those loans, otherwise you will need to refinance or sell before the balloon payment becomes due. You might have to pay off one or both loans or refinance in a short amount of time.
Piggyback loans will not solve the problems of poor documentation, poor credit or other obstacles to a jumbo mortgage, and are often viewed as more risky to lenders. Interest rates on second mortgages and lower down payments are higher than rates on first mortgages.
Given the very large loans you must take out for a higher priced home, your total borrowing costs are also higher.
Get Some Answers From Our Experts
The experienced staff at Seattle’s Mortgage Broker can help you navigate the loan process. We know the jumbo loan limit in Seattle and all of the best loan products to get you into the home you want. As a top mortgage broker, we originate and process loan products quickly and efficiently.
All of our products benefit the Puget Sound community and are locally focused. Every new mortgage we originate generates a $300 donation to benefit a local charity.
Ready to get started? Get a Washington home loan quote today!