Borrowers will pay the price for low down payments

by MPA23 Jan 2015
Home buyers who want to put down less than 20% for jumbo mortgages backed by Fannie Mae and Freddie Mac are being asked to buy private mortgage insurance (PMI) by some lenders.

The Federal Housing Finance Agency (FHFA) set the maximum conforming loan limits for mortgages acquired by Fannie Mae and Freddie Mac at $417,000 for one-unit properties in most of the country for 2015 and up to $625,500 in some areas.

However, not all lenders require jumbo borrowers to take out PMI, but it doesn't necessarily mean it will save borrowers money, according to the Wall Street Journal. Lenders charge a higher interest rate since it increases their loan-to-value ratio (LTV). “These loans today are priced for risk,” Norman Koenigsberg, president and CEO of Morganville, N.J.-based First Choice Loan Services, told the media outlet.

So why aren't wealthy home buyers just making the larger down payment to avoid the higher interest rates? Because they see a high LTV loan as a money management strategy, not a necessity, Alan Rosenbaum, CEO of New York City-based Guardhill Mortgage, told WSJ. “Many people prefer to put less down and have extra liquidity to invest in the stock market."

Jumbo mortgages are the least risky as they typically have stricter underwriting guidelines than coventional mortgages. For example, jumbo borrowers looking to qualify for Wells Fargo’s 85% loan-to-value ratio product, must have a minimum credit score of at least 740 and a year of reserve funds after closing. Also, their debt-to-income ratio can’t exceed 35%.


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