Jumbo loans are mortgages that exceed the current conforming loan amounts established by mortgage giants Fannie Mae and Freddie Mac. Just recently, they announced the conforming loan limit increase from $424,100 to $484,350 throughout most of Missouri.
Fannie and Freddie by far make up the bulk of all mortgage loans approved today and as such offer competitive interest rates and loan options for a primary residence as well as rental properties. But again, the loan amount is limited to $484,350 in most parts of the country and higher in certain areas deemed ‘high cost.” If a loan amount is greater than these limits it falls into the jumbo category and underwritten to guidelines established by individual lenders who either approve loans on their own or set lending guidelines others can use to later sell in the secondary market.
Jumbo loans typically have slightly higher interest rates than conforming loans anywhere from 0.375% to 0.50% more. And while a jumbo loan can be used to finance both a primary residence as well as vacation homes, jumbo loans can also ask for a down payment much greater than a 5% down found on most conforming low-down payment loans. For buyers who are in the luxury home markets around St. Louis, they can expect a down payment to be at least 20% of the sales price with most banks and lenders.
If a home is listed for $1.5 million and the jumbo loan requires 20% down, that’s $300,000 the buyers must come up with in addition to the funds needed for closing costs. However, when buyers pull $300,000 from their cash accounts and use the funds as a down payment that same $300,000 is suddenly not as liquid as cash. If a jumbo borrower withdraws $300,000 from a bank or investment account there will be no interest accrued on the savings and the funds are no longer working for the investor. That’s why some jumbo borrowers in Missouri are taking advantage of the 5% down jumbo loan program.
How It Works
The 5% down jumbo loan is actually two loans. The first loan is at 80% of the sales price, the same amount as if the buyers made a 20% down payment. There is also a second loan that is the difference between 20% down and the 5% down payment, or 15% of the sales price. This is known as an 80-15-5 piggyback loan.
Let’s look at a Jumbo purchase for $850,000. The buyers make a down payment of just 5% or $42,500 in this example. There is a new first mortgage at $484,350 (the max conforming loan limit) and the second lien at $354,400. The buyers can now finance their luxury home with a jumbo mortgage and a 5% down payment, saving a significant amount of cash at the closing table. The main advantage to breaking this up into two separate loans is the avoidance of mortgage insurance costs – PMI. It will also ensure the 1st mortgage stays at the conforming loan limit which often results in lower interest rates.
There are multiple options when financing higher end homes. There may not be as many choices compared to conventional loans, but there are more than you might realize and the 5% down purchase loan is one of them. If buying a luxury home with as little cash to close as possible is your goal, this might be your best choice.
This same principle can be applied to 10% down Jumbo loans with an 80-10-10 structure. In addition, certain states are eligible for single standalone 95% or 90% loans while still avoiding PMI costs. Learn more about all the Jumbo Mortgage Basics here. Please call ph: 800-840-6449 with any questions about requirements.
Serving home buyers across Missouri including STL, Kansas City, Springfield, Independence, Columbia, Lee’s Summit, O’Fallon, St. Joseph, St. Charles, St. Peters, Blue Springs, Florissant, Joplin, Chesterfield, Jefferson City, Town & Country, Ladue and Frontenac, Clayton