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Hard To Go Jumbo

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Posted On: 01/08/2014

Question:

Is it true that jumbo mortgages will be more difficult to get in 2014? If so, how will this impact real estate in more expensive communities?

Answer:

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Jumbo mortgages are big loans that, because of their size, do not meet conforming loan standards or FHA rules.

There is no jumbo financing shortage, but the type of jumbo loans available in 2014 is expected to change, as will the ability to qualify. These changes will undoubtedly impact some potential borrowers and thus high-cost real estate markets in areas such as California and along the East Coast.

The country is now coming out of a massive foreclosure meltdown that began in 2006 and 2007, the worst since the Great Depression of the 1930s. Nobody wants a repeat of this event and one result is that new lending rules are in effect in 2014.

Under the new guidelines, most new loans will be "qualified mortgages," loans that limit lender liability under Wall Street reform laws. There are a variety of standards used to define what is and what is not a "qualified mortgage," and several impact jumbo financing.

For instance, as much as 43 percent of a borrower's income can generally be devoted to recurring monthly debts such as mortgages, car payments, student debt and credit card bills under the new rules. That's a problem for some jumbo borrowers, because often they have been allowed to devote more than 43 percent of their income to such costs.

Another potential problem is that some jumbo loans start out as interest-only mortgage products, meaning that initial monthly costs are lower than with a self-amortizing loan because only interest is paid. Under qualified mortgage rules, interest-only loans are generally a no-no.

Under the new rules, jumbo loans will still be available in the form of self-amortizing mortgages to well-qualified borrowers. However, some potential borrowers who may have qualified in the past for jumbo financing will now only qualify for smaller loans, something that could mean fewer bidders in high-priced markets.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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