Hurdles For Jumbo Borrowers

If you’re shopping for a new home and plan on taking out a big mortgage to pay for, it there are a few things you should know.

Damian Dovarganes / AP A house for sale in California.

For starters, if you're looking in certain high-cost metropolitan areas such as New York, Los Angeles, Boston or San Francisco, you may want to sit tight for a few weeks.

That’s because a measure in the fiscal stimulus package recently signed into law by President Bush that will temporarily change the guidelines on what constitutes a jumbo mortgage. 

As it stands, mortgages above $417,000 on single-family homes are considered “jumbo” , or non-conforming, in that they are not backed by federal morrtgage entities, and carry higher rates than conforming mortgages which are below $417,000.

The new bill, however, allows that amount to be bumped up -- in some areas to as much as about $729,750. The actual guidelines were set March 6 by the Department of Housing and Urban Development.

“It makes huge sense to wait [for the guidelines to be determined] said Fenton Soliz, president and chief executive of Mortgage Experts. “You might qualify for substantially more money at a lower rate,” he said.

The current average for a 30-year fixed mortgage is 5.90 percent, compared to 6.88 percent for a 30-year fixed jumbo mortgage.

Even if you expect your mortgage will still exceed the conforming limits, don’t fear. There are a few things you can do to help qualify for the loan and potentially get a better rate, including sprucing up your credit score.

Credit Moves

According to Soliz, for jumbos you typically need a minimum FICO score of 680 but some lenders require a score of 700. While there isn’t much you can do to drastically affect your credit in the short term, if you are on the border you might be able to boost your score by 5 to 12 points within 90 days by paying down revolving debt. You can do this, for instance, by reducing balances by about 50% on credit cards that are maxed out.

Perhaps as important as boosting your score, though, is not doing anything to damage it in the short term.

Greg McBride, a senior financial analyst with Bankrate.com agrees. “There is a lot you can do to hurt your credit score in the short term.”

If you are going to try to qualify for a mortgage, McBride warns “do not open up new lines of credit or close out any unused cards, particularly ones that you’ve had for a very long period of time.”

In other words, it's not a good time to take on a new car loan..

Meanwhile, Dick Lepre, senior loan officer with Residential Pacific Mortgage adds that medical collections can often hurt people’s credit scores without them knowing it.  Because medical bills often don’t come until long after the service was rendered these bills are often unresolved.

“So many people have spotless credit except for medical collections,” said Lepre, adding, that’s why it is important to check your credit as soon as possible. That will also allow you to see if there are any errors on your report that may also be affecting your score.

In addition, if you have made past mistakes that have hurt your credit such as submitting late credit card payments, Lepre recommends calling the company to try and have it removed from the record.

“”Lenders are less likely to do that than they were in the past, [but] it still makes sense to try,” he said.

Down Payment

Your down payment will also affect your chances of qualifying for a mortgage as well as your rate.

The amount required for a down payment may vary, but a 20 percent down payment is still standard in many markets.

According to Bankrate.com’s McBride, your down payment depends a lot on where you’re buying. Putting down 5% is still viable in certain areas, but not as much in markets that are falling rapidly such as Florida, California and Nevada. 

A 20 percent down payment is still required in many markets. (In New York City, for instance, coop buildings typically require a minimum of 20-25 percent to purchase an apartment.) But if you can’t afford that there are still some options. One is to take out a second mortgage.

For example, if you’re in a market where the conforming limit is going to remain at $417,000 but you need a mortgage that is greater than that, you might want to consider doing an 80-10-10, or piggyback second mortgage. With this, you can take out a first mortgage for 80% of the price, on which you pay the conforming rate and then take out a second mortgage for another 10%. The remaining 10% is your down payment.

Mortgage Expert’s Soliz said, “A lot of high-income wage earners love doing that because they’re going to pay off that 10% second mortgage with their bonus money.”

By taking out private mortgage insurance you may also be able to secure a mortgage for more than 80%. However, that may not be as easy as it sounds.

“Mortgage insurance is a separate entity which is sometimes harder to get than the mortgage itself,” said Lepre of Residential Pacific Mortgage. 

Even if you do qualify for a big mortgage, experts say one of the most important things to keep in mind is to not overextend your balamce sheet. Before committing to anything, take into account all of your assets and liabilities to ensure you will be able to afford your payments for as long as you plan on owning your home -- or may even a bit longer. As the current downturn has shown, selling a property can take longer than expected, meaning you might be in your home longer than you originally thought.