The Qualified Residential Mortgage (QRM) rules introduced over the past few weeks and planned to go into effect in January 2014 are expected to change the lending process and, ultimately, prevent borrowers from ending up with loans they cannot afford. Qualifications for Adjustable Rate Mortgages (ARMs) will require lenders to determine if a borrower can pay both the initial and fully-indexed rates. Low-documentation loans, as well, will be considered a greater liability for lenders.
In some cases, jumbo mortgages fall into this latter standard. While borrowers of these mortgages may be more likely to make payments without financial issues, the new standards require far more paperwork. Not providing sufficient documentation may prevent borrowers from qualifying, even for private loans.
Another factor eating into the jumbo mortgage market are restrictions on interest-only loans. Combining this factor with the amount of paperwork needed, lenders could cut the jumbo loan programs offered to meet the new qualified mortgage requirements and, ultimately, to reduce their liabilities.
If you can recall, one standard introduced with QRM is legal protection for borrowers. Mortgages that are not “qualified” are poorly underwritten and do not meet an exact set of features.
Jumbo loans pertain to mortgages over a specific dollar amount set by Fannie Mae and Freddie Mac; this could be as low as $417,000 in some markets and as high as $625,500 in others. Qualification guidelines are stricter, but even though these loans are associated with luxury homes, even middle-income and first-time homebuyers with the right credit score meet requirements. Stricter standards include higher down payments (25 to as high as 40 percent) and a 36- to 45-percent debt-to-income ratio.
Nevertheless, even in current market conditions, jumbo loans are a greater risk for lenders. Specifically, the mortgages fluctuate more, go toward difficult-to-sell homes if the borrower defaults, and require two appraisals.