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It's a good time to be a jumbo mortgage borrower

Jumbo mortgage lending picked up appreciably in 2012 and is expected to grow even more in 2013, offering better deals for borrowers buying high-end houses. Jumbo lending was up 19.4 percent in 2012, increasing by nearly 6 percent in the fourth quarter alone, according to Inside Mortgage Finance.

Simply put, jumbo mortgages are home loans that exceed Fannie Mae and Freddie Mac's conforming loan limit. In most U.S. locations, that means a loan amount higher than $417,000, or $625,500 in certain high-cost housing markets.

"I don't think that a consumer looking for a jumbo mortgage today would have much trouble finding financing whereas three or five years ago it could have been a real challenge," says Bill Banfield, director of capital markets with Detroit-based Quicken Loans. "I think you are going to see the full gamut of mortgage lenders, everybody from Quicken Loans to brokers to large banks competing in the activity, which again starts to create momentum and helps drive down rates."

A more favorable market

After the financial crisis set in, jumbo loans were basically only available from lenders who were willing to make the loans and keep them on their books, forcing borrowers to pay higher costs to compensate the lenders for the risk of holding onto the loans.

Now, with securitization activity ramping up (securitization is when a lender groups a pool of mortgages together into mortgage-backed securities and sells them off to investors), lenders are less worried about risk and more interested in making loans.

With an increase in activity comes lower interest rates. Keith Gumbinger, vice president of HSH.com, says the rate on a 30-year fixed-rate jumbo mortgage is near record lows, averaging 4.07 percent for the week ending March 15. Currently, the spread between jumbo and conforming rates "is quite close to normal," Gumbinger said in an email, as conforming rates have risen more than jumbo rates as of late.

Qualifying for a jumbo mortgage

Despite recent improvements in the jumbo market, lenders still have strict lending requirements. Julian Hebron, branch manager of RPM Mortgage, a private mortgage bank in San Francisco, says RPM Mortgage requires a credit score of 700 or higher, a down payment of at least 20 percent (depending on your loan size), and financial reserves to cover anywhere from nine to 18 monthly payments. RPM Mortgage credits 401(k) and IRA values towards meeting these reserve requirements, which means you don't have to meet the entire reserve requirements in cash, which is particularly helpful in high-cost markets.

Hebron says you also may need to have as many as three open credit lines with 24 months of credit history on each in order to verify your creditworthiness. Certain non-traditional forms of credit such as rental history or cell phone bills could count for this, according to Hebron, but not utility bills.

Banfield notes, "Jumbo clients who got financing seven or eight years ago may have found the process to be extremely streamlined. The requirements for lending nowadays are a little bit more laborious in the fact that we're going to need to document assets, income and the sources of those."

Lastly, there still remains a gap between what somebody thinks a home is worth and what it appraises for. Given the size of jumbo loans, even a small percentage difference could result in you bringing substantially more cash to the closing table.

Types of jumbo loans

Wells Fargo, the top jumbo lender in 2012 according to Inside Mortgage Finance, offers 15, 20 and 30-year fixed jumbo mortgages, as well as 5, 7 and 10-year adjustable-rate jumbo mortgages. Emmanuel Vuillequez, a jumbo mortgage product manager with the San Francisco-based bank, advises you to choose a product based on your specific needs. "One thing you need to consider is that instead of locking your rate for 30-years, what about locking your rate for 10 years? It's not good for everyone, but a 10/1 ARM has a rate that is significantly lower than a 30-year fixed," says Vuillequez.

According to data from HSH.com, a 10/1 jumbo ARM has an interest rate of 3.31 percent, versus the 30-year fixed jumbo at 4.07 percent. If you're comparing a loan amount of $1 million, over a 10-year period, the 10/1 ARM borrower pays nearly $430 less each month and saved over $72,000 in interest.

In some high-cost markets, FHA-insured loans can go as high as $729,750, offering a financing option for borrowers with smaller down payments and lower credit scores. Banfield says you can apply for an FHA loan with a credit score as low as 580 and a down payment of just 3.5 percent. As well, he says the FHA tends to be "more flexible related to prior derogatory credit such as bankruptcy, foreclosure and short sale."

With the housing recovery picking up along with the demand for high-end homes, experts say that jumbo lending should continue to grow, providing more affordable options for jumbo borrowers.

And for the mortgage market overall, the re-emergence of the jumbo mortgage market is a sign that there is less dependence on Fannie Mae and Freddie Mac, says Hebron. "I don't see them going away ever, but for them to control 90 percent of the market is too high. And we're starting to see that now private investors certainly want to play in U.S. housing."

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