For those in the market for a jumbo
mortgage, beware: New federal guidelines defining what a "safe"
mortgage is could change the landscape for those seeking large home loans.
The underwriting guidelines,
issued by the Consumer Financial Protection Bureau and implemented on Jan. 10,
are designed to protect consumers from irresponsible lending practices.
Under the guidelines, a
mortgage generally won't be defined as "qualified," or safe, if the
borrower's monthly debt-to-income ratio is above a certain level or the loan
includes certain features such as interest-only payments.
Because some of those
features are now more commonly found in larger home loans, some experts say
that could mean fewer choices for some consumers seeking jumbo mortgages,
defined as those in excess of $417,000, or $625,000 in pricier areas of the
Lenders can still issue
mortgages that don't meet the new standard—and some say they will to attract
well-heeled borrowers. But until the legal risk attached to issuing mortgages
that don't meet the new standard becomes clearer, the market likely will be in
a state of flux.
"We'll need more
time to see the longer term impact of the new rules," says Erin Lantz,
vice president of mortgages at Zillow.
With that in mind, here
are four things to consider when shopping for a jumbo mortgage:
Watch the Debt
Under the new guidelines,
a safe mortgage is generally defined as one where the borrower's total monthly
debt payments, including the new mortgage, don't exceed 43% of the borrower's
gross monthly income.
Before the rule took
effect, the federal government didn't have any broad guidelines about
Mortgages with certain
flexible repayment options also don't meet the new standard, meaning some
lenders may scale back on jumbos that include those options or require
borrowers to jump through hoops to get them.
Specifically, a safe
mortgage can't be an interest-only loan, which allows the borrower to skip
principal payments for a period. In most cases, it also can't be one offering
smaller monthly payments and a large "balloon" payment at the end. Some
wealthy jumbo borrowers favor these repayment options because they can then
redirect the cash they would be putting into their homes into high-returning investments.
"These products are now a lot harder to come by," says Ms. Lantz.
Gather the Paperwork
A low document or
no-document loan also isn't considered safe under the new rules, so the days of
getting a jumbo mortgage without a lot of paperwork are probably over.
"The process is more
rigorous versus pre-crisis levels," says Michael Rogan, head of mortgages
at Morgan Stanley Private Bank.
Many banks are still
refining lending policies for jumbo mortgages, and they aren't overtly
advertising their mortgage offerings. So, borrowers shouldn't give up if they
strike out at one lender, experts say.
Some banks may court
professionals like doctors, who have a high monthly debt-to-income ratio, but
have a promising future income stream. "I always recommend shopping
around," says Ms. Lantz.
for the original article in the Wall Street Journal.