Podcast #10: Luxury (Jumbo) Mortgages Explained
For this podcast about Jumbo Mortgages for purchasing a luxury home I sat down with Walt Wollet of Summit Funding. During our conversation we discussed the jumbo mortgages, the application process, credit score and down payment requirements and more. This podcast is helpful for those wanting to buy a luxury home through the use of jumbo mortgage financing.
I hope you enjoy the podcast and find it informative. Please also consider sharing with those who may find it useful.
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About the author: The above Podcast “Podcast #10 Topic: Luxury (Jumbo) Mortgages Explained” was provided by Paul Sian. Paul can be reached at paul@CinciNKYRealEstate.com or by phone at 513-560-8002. With over 10+ years experience, if you’re thinking of selling or buying, I would love to share my marketing knowledge and expertise.
I service the following Greater Cincinnati, OH and Northern KY areas: Alexandria, Amberly, Amelia, Anderson Township, Cincinnati, Batavia, Blue Ash, Covington, Edgewood, Florence, Fort Mitchell, Fort Thomas, Hebron, Hyde Park, Indian Hill, Kenwood, Madeira, Mariemont, Milford, Montgomery, Mt. Washington, Newport, Newtown, Norwood, Taylor Mill, Terrace Park, Union Township, and Villa Hills.
Paul: Hello, everybody. This is the Cincinnati and Northern Kentucky Real Estate Podcast. Today my guest is Walt Wollet of Summit Funding. We’re going to be talking about mortgages for luxury homes, jumbo loans. So with that, here’s my guest, Walt Wollet. Walt, why don’t you tell us about yourself.
Walt Wollet: Hey, Paul. Thanks for having me. My name is Walt Wollet. I work for Summit Funding. I’ve been working with them for one month, and I’m super excited because we roll out the red carpet for people and we take excellent care of our customers. I work with anyone that needs $1.5 million in a jumbo loan or even down to whatever I can do. I just ask every day, “What can I do to help this person?” whoever it is that I get a chance to talk to.
Paul: Yeah. We’re going to be talking about luxury mortgages, jumbo mortgages today. You do all the mortgages from the first-time homebuyer, basic home, all the way up to sky is the limit type of loan.
Walt Wollet: Yup, and whatever I can do.
Paul: Sounds good. Let’s get into our question and answer session. Technically, there’s no such thing as a luxury mortgage. What is the product actually called? And why do they call it that?
Walt Wollet: They call it a jumbo mortgage. Why they call it that, I imagine, just because jumbo is a metaphor for big. It has more to do with the loan amount. It used to be that the jumbo loan amount or jumbo loan minimum was $417,000, and now it’s $424,000. So just more or less, with jumbo mortgages, obviously, there’s more risk associated with that, so the underwriting is a little bit more strenuous. But it just has to do basically with the loan amount, and the limit is set by the agencies.
Paul: Okay. And you mentioned risk. What sort of risks are there? Can you talk about that a little bit? Why is it priced higher or more stringent requirements due to those risks? What are those risks?
Walt Wollet: I wouldn’t even say it’s stringent requirements. If you think about it, a bank is going to loan someone. If you were a bank, would you rather loan out 10 $100,000 loans or $1 million loan? So if you can spread out the risk between 10 individuals rather than putting it all into one, that’s less risky. I guess that’s the best way I can explain it.
Paul: Okay. And correct me if I’m wrong too. I think with smaller loans, under the $424,000 limit, the government or the government-sponsored agencies like Fannie Mae and Freddie Mac will usually buy those mortgages up to allow the banks to reloan money again. Is that correct?
Walt Wollet: Yeah, yes.
Paul: So with the jumbo, they usually don’t buy jumbos too. That’s part of the risk too that the banks have to keep those loans on their own books as opposed to being able to sell them.
Walt Wollet: Typically, yeah. Well, they’re usually always held by investors. So it could technically that they sell it between investors. It’s just that a government-sponsored enterprise wouldn’t buy it.
Paul: Okay. So usually, those private investors obviously want higher standards basically when they lend that kind of money.
Walt Wollet: Right.
Paul: Okay, that’s good information. You talked about the minimums. $424,000 classifies it as a jumbo mortgage. Are there maximum limits?
Walt Wollet: It just depends on the different programs. So there are all kinds of different jumbo programs, just like you would add different kinds of conventional programs.
Paul: So minimum is $424,000. What are the maximum amounts? You mentioned different types of programs available.
Walt Wollet: There are some programs where they only go up to $625,000. Other programs, they go up to $1.5 million. I think the most I have seen on our overlay matrix just shows would be like $2 million. So there are all these different ranges. And obviously, the biggest thing for the buyer would be having the income to qualify for that.
Paul: Okay. So in Summit Funding’s case, it’s $2 million, the maximum limit you’ll lend to, correct?
Walt Wollet: I believe so, yes. It might be only $1.5 million though. That would be something that they’d have to check with depending on if the buyer wanted that type of loan.
Paul: And what sort of down payment requirements are there? Is it a hard-and-fast 20 percent or 30 percent, 50 percent? What is it?
Walt Wollet: That’s the great thing about summit funding, actually. We have a program that is 5 percent down jumbo loans. So if you think about it, a $700,000 house, someone $20,000 or 20 percent down, they’d have to put $145,000 down. And if you look at people making 12 percent in the stock market, 14-15 percent in the stock market, with index funds between 2002 and 2012 at around 7 percent appreciation, it doesn’t really make sense to put all this money down. So if you can put 35,000 down rather than 145,000, that’s a better deal. So that’s one of the big things we’ve been pushing with that category of buyers. It’s just we can keep money where it’s earning a better return for you rather than putting it some place where it’s not going to appreciate at that as far as where the equity markets are going.
Paul: True. That’s also probably helpful for some small business owners who have a lot of their assets and cash tied up in their business. But that doesn’t mean they’re not making enough money or not worth enough money. But put down a smaller amount, they don’t have to liquidate assets or liquidate business in order to buy home. They can go buy the nice home that they want.
Walt Wollet: Yeah, definitely. It makes all the difference in the world because a lot of people, like you said, they can qualify with their income and they’re fine with the payment. But it’s just that down payment, putting 20 percent down. If that’s taken away from someone’s rainy day fund or it’s taking money out of the market where they’re earning a better interest rate than 4-5 percent, yeah, it doesn’t great question. It really just depends on and it’s not in other programs, which is kind of different and weird. The way to think about it is that if you’re not paying mortgage insurance, more than likely, you would end up with a higher interest rate.
Paul: Makes sense.
Walt Wollet: So it really just depends on the program. It’s kind of interesting that everyone… all the small loan amounts have to pay mortgage insurance and the big ones don’t. But then again, you have to look at the programs and run numbers for all the different possible scenarios for a person.
Paul: Is the mortgage insurance going to be like a percentage of the loan? Or is it a percentage of the monthly amount? How does that work?
Walt Wollet: It would be based on loan amounts. It’s based off of percentage. When you price mortgage insurance, you get like a monthly rate. That rate is obviously connected to loan amounts. So it’s tiered in as far as the interest rates for a mortgage. It’s tiered in the same way. So if you have a 740 credit score, you’re going to have a better mortgage insurance rate than someone with a 690 credit score, as an example.
Paul: Okay, that’s a good point. It brings us into the next question about credit score requirements. Are they usual minimum credit score requirements? And how does the credit score work in terms of the interest rate as well?
Walt Wollet: To kind of work backwards, interest rates work in tiers, and they go up in terms of 20s. So if you have a 700, you’re not going to get as good of an interest rate as if you had a 720. 740 would be better than a 720. So it works in that regard. Now as far as credit score minimum requirements, a lot of them are 700. We can actually go down to… I’ve seen 660 and also 680 credit scores. But someone purchasing a home like that, they would definitely want to make sure that they put the time in way before they were looking to do this to make sure that they were up at that higher tier, so they had better pricing.
Paul: Yeah, that’s true. And not to toot my own horn, but I’ve got a podcast in the past and a blog article about boosting one’s credit score. Let’s move on to the next question. How long does it take to get approved for a jumbo mortgage from the start, from the instant, “Okay, we decide we’re going to buy a luxury home.” And I come and sit down with Walt and say, “Okay, I want to get a luxury home. Can you help me out?” How long does it take?
Walt Wollet: Usually, I would tell people with anything else, at summit funding, we can get stuff done in 30 days or less. Now when it comes to jumbo loans, we ask for more time. So it just depends on how much… If we have all the documentation ready, if we’re ready to move forward. But I would ask for a COE of 45 days into the future.
Paul: COE is closing of escrow. So you said normally 45 days it would take for them to close the loan, assuming all the paperwork is there and everything is coming in a timely fashion.
Walt Wollet: Right. The thing to remember too is it’s always best with the contract to give yourself enough time to get everything together. So obviously, with Summit, if we can close in 30 days, we’re going to close it as soon as we can close it, as soon as the customer wants it closed. As soon as we can make it happen, it’s going to happen. But we like to have 45 days in that kind of case so that we can make sure that we cross all the t’s and dot all the i’s, if you will.
Paul: Yeah. That gets built into the offer, and that’s from the real estate agent’s side, just making sure that they’re coordinating with you as the loan officer, that they’re also getting money for the luxury mortgage, for jumbo mortgage, and you need to put the appropriate amount of time there in the offer to make sure that 30-day closing is probably not going to happen. So you’re looking at 45 to 60 days depending on the mortgage process.
So how best can luxury home buyer prepare for the mortgage application process? What do they need to do beforehand?
Walt Wollet: Well, I would say the most important thing is to talk to a loan officer. So get all your paperwork together. Write everything on your taxes, all your schedule C’s. And you need to go and talk to a loan officer. And then if you’re self-employed, you’d also want to obviously talk to an accountant so that you were able to display and show the income to get what you wanted, so that they will look at 1040’s they’re going to look at what was written off, and if you lost money in a business, how did that happen. So the best thing to do is six months to a year, before you’re ready to make that sort of commitment, you need to start meeting with the right people.
Paul: How many years of 1040’s do they want to look at?
Walt Wollet: Typically, two in most cases. That’s same for both self-employed versus employed with a government employer.
Paul: Yeah, okay, I would think. Tell us about the pre-approval letter. Many people might not know what it is. Tell us what it is. And why is it a benefit to buyer?
Walt Wollet: You absolutely have to make sure that you’re pre-approved before you do anything. So before you start spending money on appraisals and home inspections, you really want to make sure that everything is taken care of. So real pre-approval would mean that you have all of your documents with the loan officer. They run automated underwriting. They have underwriters, even in the case of jumbo loans, to look at it. And they know that this is going to work and they can get it done within the allotted time frame. So pre-approval letters more or less show that hey, this buyer is serious. So giving a listing agent a pre-approval letter, having your agent give that to another agent shows, “Hey, this person, they’ve gotten set up. They’ve done their homework ahead of time. They have the credit, the income, and the assets to afford this property, and they want it. So more or less, it’s a way of showing people that you’re serious and that you intend to proceed with the purchase. And it’s always a good idea, whether you’re looking at a $50,000 house or a $5 million house, that you always sit down with the loan officer and make sure you can afford it before you put an offer in.
Paul: Okay. Some people heard the term pre-qualification letter for mortgages. Is that better or worse than pre-approval letter?
Walt Wollet: A pre-qualification just means it’s not as airtight as a pre-approval. So pre-qualified would mean that they more or less ran your credit. And the way I would interpret is they’ve taken verbal income and assets. So it’s like you’re pre-qualified. You can make the purchase. But you’re not pre-approved because we haven’t had underwriting eyes on it technically, right? We haven’t had… There are still documents maybe that we need to make sure that they say what you told us they said. So that I would say is the difference between a pre-qual and a pre-approval.
Paul: So from a home seller’s perspective, it sounds like the pre-approval is going to the better document to have versus from a buyer versus a pre-qualification letter.
Walt Wollet: Right.
Paul: Okay. Last question here. Why don’t we talk about how the appraisal process works with jumbo mortgages. Any time the money is being borrowed to buy a home and appraiser has to come up and value the home, is it different for luxury home?
Walt Wollet: It can be. There are different investor programs that, for example, might require multiple appraisals. Now keep in mind that appraisals range in value from $300 to $750. And you have to pay more if it’s an investment property and all these kind of things. How appraisals would work with the luxury home would be the same as any other home. They would go out and they would more or less map everything and take a look at everything and try to determine what is it worth based on what the comparables in the neighborhood are sold for in the past. Or recent listings, they might even include those. So it’s way more elastic for them to say this collateral, this $1.5 million is worth $1.5 million. And then the bank will say, “Okay, we have an independent person that has given an opinion of value.” And sometimes we’ll need two of them.
Paul: Two different people.
Walt Wollet: Absolutely, two different, completely independent of each other. And they’ll say, “It’s worth this much.” And that’ll more or less get the bank to give the okay.
Paul: Okay. That also accounts for some of the extra time that is needed too. Like you mentioned before, at least 45 days.
Walt Wollet: Right. And it’s important to make sure you sit down with the loan officer and you know what the program is going to be ahead of time and you know what the cost are going to be ahead of time.
Paul: Yeah, that’s definitely… what charges you’re facing up front to get that loan. That’s all the questions I have for you today, Walt. Did you have any final thoughts you wanted to share?
Walt Wollet: No, just hey, make it a great 2017. Get out there. If you’re looking to buy a home, make it happen. Interest rates are rising. And I hope you make it a great year. And thanks for having me on, Paul.
Paul: Thank you, Walt.