Stated-Income

Jumbo Loans Get Redefined as Conforming Loan Limits Increase in 2018

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Jumbo loans just got bigger. Beginning 2018, the conforming loan limit on a one-unit home in most parts of the U.S. will increase to $453,100 from $424,100. In high-cost counties, the standard loan limit will also increase to $679,650.

Those borrowing money higher than the standard conforming loan limits belong to the jumbo loan club. Qualifying for jumbo loans is tougher than on traditional loans because of inherent market risks and individual lender standards.

Do you qualify for a jumbo loan? Ask a lender today.

Conforming Loan Limits Boost Jumbo Loans

The Federal Housing Finance Agency who regulates Fannie Mae and Freddie Mac has raised the conforming loan limits to reflect a 6.8% increase of home prices in the U.S. based on the seasonally-adjusted expanded-data House Price Index (HPI).

Consequently, the 2018 conforming loan limit is $453,100 and it can reach $679,650 at most to account for one-unit homes in expensive counties in the U.S.

A list of 2018 conforming loan limits is accessible here.

Fannie Mae and Freddie Mac purchase loans within those loan limits, thereby known as conforming loans. The GSE loan limits also affect other government loan programs.

For example, VA loans match GSE loan limits to calculate the amount of VA guaranty. FHA loan limits in high-cost areas are based on Fannie/Freddie loan limits.

Because jumbo loans fall outside of standards set by the GSEs and relevant government agencies, they are underwritten by individual lenders.

Qualifying for Jumbo Loans

The territory of jumbo loans is vast. These loans for bigger homes for property flippers, investors and more are offered at varying terms and conditions.

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In terms of process, applying for a jumbo loan is no different from the usual standard loan because lenders will still weigh these qualifications:

  • Credit scores on jumbo loans may be higher or at par with conforming loans. There might be some wiggle room for borrowers with less-than-perfect scores but they’ll get higher rates than those with excellent credit.
  • Debt-to-income ratio is ideally 43% and below. But ample cash reserves of at least six to 12 months can possibly make up for an above 43% DTI or a low credit score for that matter.
  • Down payments are usually higher on jumbo loans. They can be at least 10% up to 30% of the purchase price, depending on the lender.

Documenting income is tricky for self-employed borrowers taking out traditional loans. For jumbo loans, lenders might require just one year of tax returns filed with the IRS to document income from a stable or growing business.

To be fair, Fannie Mae has eased its guidelines in documenting self-employment income, requiring only one year of filed tax returns to qualify for a conforming loan.

Rates on jumbo loans are higher than on conforming loans because they carry the risk of not being eligible for purchase by Fannie Mae or Freddie Mac.

If you’re buying a home in a high-cost area, your loan might still be within conforming standards. Ask lenders about this and other loan matters.

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Is Now the Time for Stated Income Loans?

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Is Now the Time for Stated Income Loans?

The higher mortgage rates, coupled with a tighter lending environment courtesy of Dodd-Frank, seem to act as a backdrop for stated income loans to stage a full comeback. Consumers may have been hoping for more variety in mortgages with less stringent guidelines. Liar loans, low doc loans, however they were called back then, stated income loans have quietly returned and served that purpose for a niche group of borrowers.

What’s in a stated income loan for you?»

Less Risky Stated Income Loans

Pre-mortgage crisis stated income loans lived up to their name. Borrowers state (overstate) their income and lenders skip the verification part. Nowadays, the lender has to verify the employment and assets of a stated income borrower.

One lender, for example, will review the pay stubs and tax returns for salaried employees and business and personal tax returns for the self-employed. Similar to stated income loans, bank statement loans usually require a year’s worth of bank account transactions to see if the borrower is generating positive cash flows.

These measures serve to lessen risky lending practices. For the lenders, they have to make legal representations about the loan and could face a lawsuit if they have not done the appropriate due diligence.

Lenders also have more advanced automated systems to help them underwrite loans, checking if the loan application makes sense and complies with existing regulations.

A Return to ARMs?

The problem of the past stated income loans was their features that only added risks to an overstated income. Most of them had variable rates, which would be difficult to grasp with their caps, limits, margin, etc.

Some stated income loans were option ARMs under which the borrower can pick how he/she will pay back the loan in interest-only payments, minimum payments, 30- or 40-year amortizing payments, or 15-year amortizing payments.

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The first four options called for really low monthly payments so less equity was built into the loan at the onset. Some of these loans didn’t even have down payments. This negative equity and falling home prices led to widespread foreclosures.

Stated income loans nowadays are still offered in variable rates but they also come in fixed rates. Fixed-rate mortgages offer stability and are easier to manage.

Interestingly, the current state of mortgage rates has made ARMs appealing because they offer lower rates than FRMs. They start with fixed rates until they adjust once a year. They’ve been an option for those who plan to move out or sell the home once the fixed rate period is over.

Stated Income Loans Serve a Niche

The Dodd-Frank Act ensures that the subprime mortgage crisis won’t happen again. But it has made access to mortgage credit even tighter for those who have trouble verifying their true income. These same people often apply for bigger loans.

Thus, the self-employed and the affluent turn to stated income loans as a specialized loan product for them. Alternative documents may be presented for employment verification; but higher down payments, better credit scores, and lower DTI ratios are required for stated income loans.

Speak with a lender today!»