Buyers who want to purchase a luxury home with a mortgage could expect changes in jumbo lending coming in 2014. Many lenders spent last year wooing jumbo borrowers, or those borrowing more than $417,000 for a Chicago real estate purchase. With banks bringing in high-end lenders with lower rates and flexible repayment plans, the dollar amount that was lent out for jumbo loans was looking to be at its highest since 2007.
This year will likely shape up differently. New regulations from the Consumer Financial Protection Bureau went into effect January 10. Those, along with other expected regulatory changes could decrease borrowing options among jumbo loans and make high-end credit more expensive.
The good news for now, is that lenders still want the business of wealthy buyers, so rates on jumbo loans could still raise slower than traditional mortgage rates. Banks may also require lower down payments to make them more appealing to luxury buyers.
But change is still on the way for those considering purchasing Chicago luxury real estate in the near future. The Wall St. Journal recently covered five things we can expect to see in mortgage lending this year. Here’s a look at what they highlighted:
Less jumbos: While jumbo loans could still be a go-to for high-end borrowers, it’s likely there will be less options as to the type of jumbo loan, such as having a choice of repayment options. For example, an interest-only jumbo mortgage is often appealing to borrowers since it doesn’t require principal payments during the first few years, so borrowers can keep their money in other, better-yielding investments. But mortgages like this now fall outside the new definition of a “qualified mortgage”, so lenders could face greater risk by doling them out.
Lower down payments: Down payment requirements began to decrease last year, with some lenders accepting 15% for jumbo loans. Experts say lenders this year may even lower the requirement to 10%, again to entice wealthy borrowers who could put their cash elsewhere.
More requirements for non-qualified mortgages: Lenders who originate jumbo loans categorized as “non-qualified” are expected to raise the requirements, such as a higher FICO credit score, more documentation or cash reserves and a more stringent policy on those who don’t supply full income documentation. Low- and no-documentation mortgages are prohibited by the CFPB, which could very well make them harder to find, let alone obtain.
Return of the adjustable-rate mortgage: The banks won’t return to the ARMs we saw in the housing boom, but we could expect to see an increase. Banks will likely slowly increase rates on 30-year-fixed loans, which could lead to more borrowers turning to the adjustable-rate loan. Many banks prefer these because, when the rate resets, the bank stands to receive large interest payments. But, unlike ARMs we’ve seen in the past borrowers won’t be able to qualify for these loans based on the introductory rate alone (which shouldn’t affect wealthy buyers with healthy income and assets).
Changes in rates: There are a number of expectations in the rate game. Jumbo loans will remain low compared to conventional loans, with lower rates on adjustable-rate jumbos and a potential bump in fixed-rate jumbos later this year. Additional rules changes in next year could result in rate increases trickled down to customers as well.
If you’re considering a Chicago real estate purchase, I invite you to contact me to learn more details about these changes, can provide answers to your questions or steer you in the right direction so you know what paperwork you should have put together in order to make a purchase as smoothly as possible. Contact me at (312) 498-5080 or email me at [email protected]