Financing

In the days before the housing crisis it was easier to leverage a first home purchase to finance a second home purchase. These days, lenders are more conservative when deciding whether to issue loans for second homes.

There are a myriad of factors to assess in determining whether and how to finance a purchase.  The good news is that interest on a primary home and second home mortgage is tax-deductible.  However, there are limitations.

Moreover, you’ll have to choose your payment plan wisely.  With current interest rates, a strong case can be made for a 30 year amortization or payment plan.  However, you’ll pay more interest than with a shorter mortgage period.

If your mortgage will exceed $417,000.00 along the Sunset Coast, it will be considered a Jumbo Mortgage, inasmuch as it simply won’t conform to the guidelines of Fannie Mae or Freddie Mac, which were supposedly designed to promote stability and affordability to the mortgage market..  Because of the associated risks, jumbo mortgage loans tend to carry slightly higher mortgage rates, although not necessarily by that much. The difference may only be .25% – .50% higher. 

Generally speaking, getting a Jumbo Loan is easier than one might think.  Jumbo mortgages have the same overall qualifying methodology as a conforming loan. Lenders will look at credit score, down payment size, total monthly debt obligations relative to income (called your debt-to-income ratio), and money left over after closing.

Credit score requirements are about the same for conforming and jumbo: a credit score down to 680 generally gets you most available loan options, albeit with a higher rate than you’d get with a top-tier credit score of 780 or greater.

 Typically jumbo lenders want to see 12 months of reserves after the close, half liquid (in a checking or savings account), and half calculated from retirement assets. Conforming  loan reserve requirements range from 0 to 12 months).

On the other hand, jumbo loan approvals have some flexibility that conforming loans don’t have:

  • Higher debt-to-income ratio. For most conforming loans with 20 percent down or greater, lenders will usually require that your total monthly housing payment plus all other monthly bills doesn’t exceed 43 percent of your income. But there can be some flexibility on Jumbo Loans.
  •  Flexible income calculations. Jumbo income calculations can be more logical than conforming. For example, if you were in the same industry for 15 years and recently started your own business in that industry, a conforming loan would require you to show two years of filed self-employed tax returns. A jumbo loan might only require one year of filed returns if you could document that the business was stable or growing.
  • Less than 20 percent down with no mortgage insurance. Down payments on jumbo loans can be as little as 10 percent for loan amounts of $1 million and sometimes higher, translating into a $1.1 million purchase price or higher. Unlike conforming loans, these low-down jumbo programs don’t always require mortgage insurance. The tradeoff for this flexibility is that most lenders will offer a rate that’s about .25 percent higher and require 30- to 36-percent debt-to-income ratios for these low-down jumbos.