Home News One type of home loan has become cheaper than others as rates spike. Here’s what it means for Bay Area real estate

One type of home loan has become cheaper than others as rates spike. Here’s what it means for Bay Area real estate

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The recent surge in mortgage rates, as if buying a home wasn’t difficult enough, makes it even more difficult, especially for buyers who need a mortgage that soars faster than this year’s large “jumbo” loan rates. It has become.

Historically guaranteed by Fannie Mae and Freddie Mac, but in most Bay Area counties, interest rates on conforming loans that cannot exceed a certain amount, just below $ 1 million, exceed that limit for jumbo loans. It was about the same as or lower than the interest rate. But over the last few weeks, they have risen with unusually high margins — half to almost 1 percentage point.

The widening gap is a striking example of rising home prices and rising mortgage rates putting pressure on the average homebuyer, especially those entering the market.

Jim Wallberg, Danville’s compass agent, said: Rate hikes “often price them from the market because of monthly costs.”

As of the end of last year, the average interest rates for 30-year fixed rate conforming loans and jumbo loans were almost equal, at 3.33% and 3.31%, respectively. By the week leading up to May 6, the average jumped to 5.53% for fits, but only 5.08% for jumbo, according to the Mortgage Bankers Association.

For a $ 600,000 conforming loan, a difference of 3.33% and 5.53% will add $ 780 to your monthly mortgage payments. A $ 1 million jumbo adds $ 1,032 by a difference of 3.31% and 5.08%.

The recent surge in mortgage rates has become even more difficult for homebuyers, especially those who need a conforming loan that has skyrocketed faster than the interest rates on large “jumbo” loans.

Yaronda M. James / Chronicle 2021

Conformity loans must meet the Federal Underwriting Guidelines of Fannie Mae and Freddie Mac.The standard dollar limit for single-family homes this year is $ 647,200 in most parts of the country, However, it can be up to 50% higher in high cost areas. Up to $ 970,800 in all Bay Area counties except Sonoma ($ 764,750), Napa ($ 897,000), and Solano ($ 647,200).

Jumbo loans go beyond the limits of Fannie Mae / Freddie May. Each lender sets its own rules for jumbo, but usually the borrower needs to have a higher down payment and a stronger financial profile than is required for a conforming loan. According to all purchase and refinancing mortgage rate locks in April, about 17% were for non-conforming loans, primarily jumbo. Black Knight.

Colin Booth and his wife began looking for a home in Contra Costa County in September when they were estimated at a rate of less than 3%. Together with two young boys, they started by targeting a four-bedroom home in Martinez and Pleasant Hill for less than $ 975,000. After hitting highs many times, they made an offer of $ 1.2 million in one home. As home prices and interest rates rose, they changed their search to a three-bedroom home and then to the adjacent Solano County.

They brought it to a four-bedroom home in Benicia, and the owner was willing to sell it for $ 875,000 after a previous deal failed. They borrowed $ 743,750, which is higher than Solano County’s maximum applicable loan amount, but was able to fix it at a jumbo rate of 4.625% in mid-April. Their mortgage brokers said, “Jumbo usually doesn’t work that way, but Jumbo has an advantage,” Booth said. They closed on Friday.

Soaring mortgage rates have led some buyers to look for cheaper homes and neighborhoods, switch from fixed-rate to floating-rate mortgages, and turn to bystanders, according to local real estate and mortgage experts. I’m doing it. “Last week, two clients braked,” said Don Tomas, a compass agent at Los Gatos.

The subset of conforming loans between the county standard and the high cost limits are called high balance conforming loans.Quite common in the Bay Area where there was a median price $ 1.2 million With a house Condo for $ 775,000 March.

High balance conforming loans are still guaranteed by Fannie Mae or Freddie May and must meet those rules. These rates are usually higher than standard compliant loans (up to $ 647,200) but lower than jumbo. Today, they are higher than both, and in some cases nearly 1 percentage point higher.

One of the reasons they are high: earlier this year, Fanny and Freddie began to impose New rates About Second Home Mortgages and Highest Fit Loans. Fees vary, but for most borrowers with a loan-to-value ratio of 80% or higher, Keith Gumbinger, vice president of mortgage tracker HSH.com, is “almost equal” to adding 0.25% to the loan interest rate. Mr. says. ..

On Thursday, four Bay Area mortgage brokers estimated interest rates ranging from 5.125% to 5.375% for standard mortgages, 5.5% to 5.875% for high-balanced mortgages, and 4.75% to 5% for jumbo loans. I did. (These were the highest rates for loans with 20% down and no points, a type of loan formation fee. Rates change frequently and house types, uses and locations, points, down payments, and borrowers. It depends on the profile.)

Bay Area borrowers who need a high-end 6-digit loan can save a little money by getting a jumbo instead of a high-value conforming loan, but only if they can meet the more stringent jumbo requirements. Limited.

These rules vary, but for the best jumbo loans, you usually get at least 20% down, 6-12 months of reserve (cash or investment) payments, at least 680-700 credit scores, and total debt. I need an forehead. -The income ratio is 43% or 45% or less.

By comparison, Fanny and Freddie support loans with a debt-to-revenue ratio of just 3% or 5% down to their primary home, a minimum credit score of 620, and a debt-to-earning ratio of up to nearly 50%. They generally do not need a spare.

Conery and Traci Wilbanks were able to buy a home in Auckland’s Maxwell Park district for $ 905,000 in April after hitting highs on eight homes. They dropped 20% and borrowed $ 724,000. Instead of getting a large mortgage loan, their mortgage broker Berkeley’s Guaranteed Rate Affinity Zack Griffin qualified for a jumbo loan. They locked at a rate of 4% in March. At that time, the high balance precision rate was about 4.75%, Griffin said.

Jay Voorhees, owner of Walnut Creek’s JVMlending.com, said that only about half of his Bay Area customers renting between $ 647,200 and $ 970,800 can qualify for a jumbo mortgage. “I can’t do about half because I don’t have cash reserves or down payments or the debt ratio is too high.” His purchase loan volume is 15% to 20% less than last year.

Brett Nicoletti, branch manager of the Academy Mortgages in Los Gatos, said: “There are a lot of Fannie Mae buyers who don’t fit in jumbo slots. If they were looking at a house for $ 800,000, they’re now looking at $ 700,000. Wherever they were pushing the boundaries, now So they are lowering their expectations. “

So why are jumbo cheaper than compatible mortgages? Their rate marches on two different drummers.

Many banks have jumbo in their portfolios and plan to use their cash to raise funds. “This cash comes primarily from (customer’s) deposits, and although it has reportedly risen slightly, interest rates are still very low,” Ganbinger said.

Conformity loans are typically packaged in mortgage-backed securities and sold to investors. Their pricing is based on what’s happening in the bond market, with a 10-year Treasury yield jumping from 1.5% on December 31 to about 3% in early May. “This has led to a rapid increase in mortgage coverage,” said Gambinger.

Andy Walden, vice president of black night data and analytics, said the Federal Reserve is also playing a role.

“In the early stages of the pandemic, banks were hesitant to lend because of the uncertainty of the mortgage market and the uncertainty of the economy as a whole, which caused jumbo lending to recede and interest rates on jumbo lending to rise. Walden said in an email, meanwhile that the Federal Reserve Board lowered long-term interest rates by buying government bonds and securities backed by conforming loans. “This lowers conforming loan interest rates and jumbo. It’s much more attractive than that. “

“In the last few months, the opposite has happened,” he added.The Fed has announced to combat rising inflation May 4th that is Start reducing its possession June financial and mortgage-backed securities. “This has led to a sharp rise in conforming interest rates for 30 years as the largest buyers of conforming mortgage-backed securities withdraw from the market. At the same time, banks have returned to jumbo lending. The “combination” makes jumbo rates more attractive than fit rates.

Joel Kang, an economist at the Mortgage Banking Association, said, “Until the Fed’s plans are implemented and investors and markets understand how their exits will unfold, this extra upward pressure on compliance will be. I think you can see it. “

Westin Miller, branch manager of Novat’s Pinnacle Home Mortgages, said the mortgage rate hike “certainly affects affordability.” But “I have less pushback than I expected. Maybe a quarter of my shopper’s pipeline has dropped out. The other three quarters are still there. The least deterrent. The group is an older buyer. They all say it looks. 5% isn’t a big deal because I bought my first home when the price was 13%. “

Bay Area realtors say the combination of exorbitant prices and rising interest rates has already weakened housing demand.

“The market is showing some softening. The purchasing power of many buyers has dropped dramatically. We had 10 offers 6-7 weeks ago, but every house we listed last month has 2 each. We only had one offer, “said Jason Moon, Keller Williams Agent at Walnut Creek.

Nina Habatney, a compass agent in San Francisco, said: Rising interest rates “haven’t affected them. But we’re certainly seeing it in the $ 2.5 million to $ 4 million range. It’s really dramatic. Finding a home at Inner Sunset There is one buyer who was trying. She gave up and is now trying to rebuild her (current) home. “

Patrick Carlisle, Chief Market Analyst at Compass, looked at year-over-year changes in price cuts in San Francisco’s multi-county metro area by April 23. Although recent data are tentative, “the consistent trend is beginning to develop, the number of price cuts is increasing year by year (certainly from a very low base last year), and the market has been extremely overheated. It’s starting to get cold from the situation, “he said in an email.

DJ Grubb, owner of Oakland’s Grubb Co. and a member of the National Association of Realtors, does not believe it will actually affect home prices until interest rates reach 7%. The bigger problem is “access to capital”. As the stock market continues to fall, many will be reluctant to sell stock to buy a home.

Anyone can guess where the interest rate will go. But it’s hard to see the Fed set back its efforts to fight inflation until prices, including house prices, cool down or the stock market plunges. That said, housing shortages in the Bay Area are serious, and it’s hard to see house prices fall unless the Fed goes too far and causes a serious recession. If that happens, interest rates will fall, homes will be more affordable, and people who borrow mortgages today can refinance at lower interest rates.

Kathleen Pender is a freelance writer and former columnist at the San Francisco Chronicle. twitter: @KathPender

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