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Bigger loans mean tougher requirements

Posted by: kateg 7 years, 3 months ago


Jumbo loans often come in three sizes: small, medium, and large. The bigger the loan size, the tougher the lending requirements.

The post sub-prime mortgage market led to extremely tight lending requirements.  Home Buyers obtaining a loan over the past 3 years would likely all agree the process was less than easy! As we climb out of the biggest real estate recession in recent history, lenders are slowly expanding their loan programs, but that doesn't mean that the lending industry has eased up at all. 

Across the lending industry, lenders are re-introducing jumbo loans to the market but we're seeing increased down payment and increased reserves for jumbo loans.  For example, at national lender EverBank, a jumbo loan up to $1.5 million requires a 20% down payment and 12 months of reserves, or enough money in liquid accounts to pay the mortgage for a year if something happened to the borrower's cash flow. For a loan of $1.5 million to $2.5 million, buyers are required to make a 30% down payment and have 18 months of cash reserves. Anything above $2.5 million will see thresholds climb to 35% down, with two years of cash reserves.

Lenders are looking beyond the Buyer's ability to re-pay the loan.  They want to minimize their risk in the event the property goes in to foreclosure.  With jumbo loans, the risk is far higher.  In addition to the obvious increased risk of the higher mortgage, properties with jumbo loans are often more personalized, and buyers are more picky. 

Despite the tougher guidelines, it's important to remember that banks can be flexible.  Most banks will look at mitigating circumstances.  For example, if a buyer is looking for a higher loan-to-down payment ratio, a bank may consider that with higher reserves.

Some factors to consider:

• Leverage a relationship. Lenders with tier requirements are more likely to loosen requirements for longtime clients. They can even offer a mortgage-point discount to reduce the loan's interest rate. "We do a lot of loans for customers with strong banking relationships with us," Mr. Blackwell with Wells Fargo said. "But that's not to say that we don't do a lot of loans with a strong borrower who doesn't have a strong past relationship with Wells Fargo."

• Identify liquid assets. If a borrower doesn't have sufficient cash reserves to meet tier requirements, sometimes a lender will accept an asset such as stocks that can be liquidated easily.

• You may want to shop sooner, rather than later. New Consumer Financial Protection Bureau rules will go into effect in early 2014. While unlikely to affect tier requirements, they will tighten standards for verification of borrower income or assets and make interest-only loans difficult or maybe even impossible for many borrowers to obtain, said Mr. Wind with EverBank. However, if the borrower's financial profile is secure, private banks may offer other options to wealthy clients, Mr. McPartland with City Private Bank said.

To read the full story, visit the WSJ.




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