Do You Know Your (Loan) Limits When Buying Your Home?
Home Sweet Home
You have worked hard to prepare for the purchase of your new home and are tired of renting. Even with the high cost of rent in California, you have managed to save some money for a down payment and corrected any misinformation within your credit profile and are now ready for the big move.
You have found a home in Upland, Ca. which is perfect. It is a 5 bedroom, 2,300 sq. ft. single-family residence with a swimming pool, located next to highly ranked schools for the kids.
It is listed for $535,000 and you are well prepared to make the required down payment from your savings of $60,000. Your offer to purchase has been accepted and you are ready to go….or are you?
The scenario presented above has to do with county loan limits. Each year, various county loan limits are set through the legislative process of the Housing and Economic Recovery Act (HERA). The limits established through HERA help determine the acceptable loan limits available for delivery to Fannie Mae and Freddie Mac.
Know Your Limit
There are basically three categories for addressing loan balances. Traditional conventional financing allows loan amounts up to $417,000. For certain counties designated as “High-Cost” areas, conventional high-balance loans provide for loan amounts between $417,001 through $625,500.
Any loan amount above the given loan limits for the counties published limits are considered “Jumbo” loans and cannot be delivered to Fannie Mae or Freddie Mac.
Our scenario above is for the purchase price of $535,000 and is well within the high-balance loan limits. The problem here is that Upland, Ca. is located in San Bernardino County which is not considered a High-Cost area. The maximum loan amount eligible for delivery to Fannie Mae and Freddie Mac for San Bernardino County is $417,000.
To use traditional conventional financing eligible for delivery to Fannie Mae and Freddie Mac, the down payment required on this transaction would be $118,000. This amount far exceeds your savings accumulated in preparation for the purchase of your new home.
You have prepared for so long and searched diligently for the perfect home. Now that you have found it, have you now found out that you cannot have it?
Finding Loan Limit Solutions
Fortunately there are potential solutions to this scenario.
Jumbo Financing can provide an option, but underwriting requirements differ from traditional conventional financing. Jumbo financing generally will require at least 10 percent for down payment, but will also require left over reserves of 6 to 12 months of the total proposed mortgage payment.
This means you would need to make a down payment of at least $53,500 and have additional documented assets left over of at least $18,500 in order to complete the purchase of this property in the best of scenarios.
Another option would be to consider using a traditional conventional first mortgage of $417,000 combined with a Home Equity Line of Credit (HELOC) for $63,900 (loan amounts have been rounded down to the nearest $100). This structure of financing would provide for the purchase of this home with as little as 10.1% down payment and would have no additional reserve requirements.
The required down payment in this scenario would be $54,100, well within your planned down payment expectations. As a side benefit, this structure will also remove the specter of Mortgage Insurance. Since the first mortgage is less than 80% of the purchase price, no mortgage insurance will be required.
Now that we have found a solution to this obstacle you can direct your attention to more important matters, like who will be first in the pool!
This scenario is encountered more often than you would think. There are many creative solutions to the obstacles that present themselves during the home buying process. This scenario also helps highlight the importance in choosing the right people with whom you will entrust with you mortgage needs.
An experienced mortgage professional can help avoid this type of oversight to begin with and will also be able to present solutions should other challenges present themselves as you work towards your goal of home ownership.