22 October 2018

New Rules Mean Some Jumbo Mortgages May Be Harder to Get

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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 country.

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 debt-to-income ratios.

Hard-to-Find Features

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.

Shop Around

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.

Click here for the original article in the Wall Street Journal.

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