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Borrowers Who Make Less Money Are Now Getting Jumbo Home Loans

Even as sales of luxury homes slow in some markets, jumbo lending has picked up. That’s because looser underwriting rules—especially income requirements—have enabled more people to qualify for credit.

Milford, Conn.-based Total Mortgage Services saw jumbo-loan originations increase from 19 in January to 54 in August this year. Another change: The January borrowers had an average monthly income of $25,059, compared with $18,567 in August.

“A lot of move-up buyers are finally willing to make that move into the jumbo space,” says John Walsh, Total’s chief executive officer. “There’s also more access to jumbo lenders, because the guidelines are loosening a bit, giving access to a wider range of people.”

Foothill Ranch, Calif.-based loanDepot.com has seen its jumbo-loan volume increase by 17% for the first six months of 2016, compared with the first six months of 2015, while the median income of its borrowers declined by 4%. Over that same period, the company eased its debt-to-income ratio requirement, which reflects the borrower’s monthly debt as a percentage of monthly income.

“Pricing on jumbo products is very aggressive,” says David Norris, loanDepot’s chief revenue officer. “There are more niche players in the jumbo space.” Earlier this month, the firm began offering 40-year jumbo loans with interest-only payments for the first 10 years.

Jumbo-loan originators fall into two categories—those that hold loans in their portfolio and those that sell the loans they originate to investors on the secondary market. So-called portfolio lenders often have more flexibility in the terms they offer borrowers because they don’t have to comply with guidelines set by the firms that purchase the loans.

But even the investors that purchase loans have loosened standards recently in an attempt to snap up more jumbo loans. That’s because jumbo loans, once considered risky investments due to their size, are now perceived as safe due to the strong credit of the borrowers. That has created competition among both originators and investors for jumbo loans.

Redwood Trust, a real-estate investment trust in Mill Valley, Calif., that invests in mortgage loans, recently launched Redwood Choice, an expanded loan-purchase program that stretches the limits allowed for borrower FICO scores and loan-to-value ratios.

“In the past, the underwriting was very, very tight,” says Christopher J. Abate, Redwood’s president. “But today, the most well-qualified jumbo borrowers can obtain a mortgage rate similar to a conforming-mortgage rate. One of the reasons is that the credit performance of jumbo mortgages has been excellent. We’ve yet to incur a credit loss on any jumbo mortgage we’ve owned since the crisis,” he adds.

In the past, Redwood would purchase loans where the borrower’s credit score was at least 720, but more often above 750, Mr. Abate said. Under the new Choice program, Redwood will purchase loans by borrowers with FICO scores as low as 661. Similarly, in the past, borrowers needed down payments of at least 20%. Today, however, Redwood will purchase jumbos with 90% loan-to-value ratios, or where the borrower put down just 10%.

“Jumbos are now viewed as the safest loans because the borrowers have strong income, excellent credit, and plenty of assets, so competition has heated up,” says Jeff Taylor, managing partner at mortgage-consulting firm Digital Risk. “Big banks want these loans on their books because of strong performance.”

Competition for jumbo borrowers has driven rates down—and credit availability up. According to the Mortgage Bankers Association, the average interest rate for a jumbo loan on Oct. 12 was 3.67%, up from 3.60% a week earlier—but lower than the 3.68% average rate for a conforming 30-year fixed-rate loan.

Jumbo Jungle Tips

Here are a few things to consider before applying for a jumbo loan:

• Second chances. Borrowers who had been rejected for a jumbo loan in the past may qualify under looser rules today. Some experts suggest sticking with a bank where you already have a relationship.

• Don’t pull out of investments. If you can afford higher monthly payments, consider a lower down payment to keep your portfolio intact. Some lenders now offer loans with just 10% down.

• Look for a portfolio lender. Jumbo originators that hold loans on their books have more discretion to bend underwriting guidelines. That could be helpful in cases where the borrower doesn’t have super-prime credit or can afford only a minimum down payment.

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