New Conforming Loan Limit Increase Has Too Many Strings
March 18, 2008
After reviewing Fannie Mae’s and Freddie Mac’s Jumbo Conforming loan guides, it appears that they have come up with an extremely cautious plan to administer the new Jumbo Conforming limit increase. Let’s be clear, this is not what Americans thought it was going to be. (Fannie Mae Guides & Freddie Mac Guides)
The GSE’s have created a new hybrid program for consumers. It is not a Conforming loan. This new program is purely and simply all but a symbolic gesture of help. It is tailored to dissuade refinances through ultra-tight underwriting guidelines while being some-what attractive to new home buyers, assuming you have perfect credit and a 10-25 percent down payment.
Unfortunately, many of the loan origination calls coming into lenders for this new loan product are for refinances. These consumers just cannot qualify. Of course you would assume they do not qualify because of income or debt ratios, but loan originators do not even need to get that far into the loan application process to decline these borrowers. In most cases their first mortgage exceeds 75% of the value of the home. The deal is immediately dead.
As far as rates are concerned, the rates follow closely to the normal conforming products. So a relative thumbs up with respect to rates. The new Jumbo Conforming product is about .125%-.375% higher in rate compared to the old standard conforming loan across different lenders. Below is a quick rate comparison based on today’s rates.
Conforming 30YR Fixed
5.75% / 0 points
Jumbo Conforming 30YR Fixed
6% / 0 points
So if you were applauding this portion of the stimulus package, I would not applaud quite yet. This new hybrid, conforming product may not have the impact on the economy lawmakers may have suggested. Not surprising as we have seen this occur on some of the initial consumer foreclosure bailout policies rolled out early in the credit crunch.
One quick side note: I do want to applaud Freddie Mac for at least offering a refinance cash-out option as Fannie Mae did not. Although the guidelines are tight, they did put it in the guides.
Please feel free to put your loan scenarios in the comments so we can illustrate some of the challenges loan originators face with the new Jumbo Conforming product.
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$719k purchase
10% Down
10% Second Loan
80% First Loan
Wells is pushing away from these new larger conforming standards, and instead wants to do a first at 417k and the balance after down payment on the second. As an update Wells is now saying they will not do the second in house and the Wells banker is going to look around for other banks. Credit score over 800, 200k plus annual income.
What are options in your opinion if the second does not get picked up?
Back end builder credits of $55k on HOA, Upgrades, Closing costs. Should I look elsewhere?
Yes.. there are a few lenders that have not yet embraced the new standards or just or not ready to implement them quite yet.
In this case, I would definitely look elsewhere for a home loan. There are many lenders that could easily handle this transaction. Based on the scenario you presented, your best option would be taking one loan and having PMI. (PMI is not permanent and second mortgage products are not easy to get through underwriting in this market)
At the end of the day. I would much rather have one loan at 6.25% with Mortgage Insurance then 417k first at 5.75 and a 150k second mortgage at 11%+. Lock your interest rate up and take the safe route so you do not lose the house. Based on your credit/income and assuming your are in the 719k zip code, you would be approved easily for that loan.
One word of caution, make sure that this purchase is not in a declining market whereas you will need to put an extra 5% down.