Since January 2008, the minimum down payment of 20% was the mortgage industry norm for mortgages over the conforming limit of $484,350, also known as jumbo mortgages. In modern times, though, lenders are loosening up the underwriting guideline on jumbos for the 20% down payment – particularly for those known as HENRYs (“High Earners, Not Rich Yet”). HENRY’s are usually young professionals with high incomes and excellent credit, however have not saved much cash.
Strong Income but Little Down Payment Savings
The term “HENRY” refers to a group of individuals or families who have incomes somewhere between $250,000 and $500,000 annually. Bloomberg has them generally earning between $100,000 and $250,000 each year. Their savings aren’t much as they only tend to save about 8.5 percent of their disposable personal income.
As a result of having little cash in the bank saved for a down payment, 20% for a luxury home selling for $1.2 million is $250,000, is what could prevent them from being approved for the mortgage they need to buy that particular home.
Lenders Searching Further Than Down Payment
A growing number of jumbo lenders are prepared to approve borrowers who have 10% down – or lower, in some cases – if the borrower has sufficient assets, income, and a high credit score. Some great examples of people who would fit perfectly into this loan are those in late 20s to 30s, have a stable well-paying job, earning $200k or more, have 760 + credit scores, yet only saved enough for a ten-percent down payment on a $1.5 million home but have another 5-10% in a retirement account. Despite having a small down payment, the borrower can still get approved for a loan due to their strong income and assets.
What’s the Heck is a Loan-to-Value Ratio?
The LTV is calculated by dividing the loan amount by the lesser of the purchase price or the home’s appraised value. The lower the down payment, the higher the LTV (and vice versa).
Recap In a Nutshell
Newer loan products from traditional lenders, like banks, as well as mortgage brokers are offering jumbo mortgages with high LTVs up to 90%, which is the ideal scenario for young high income earning people. While it is a great product for a segment of the population, it does have a risk which is why borrowers typically end up with a higher interest rate than a borrower who puts 20% down. The interest rate difference may be around .25 to .375 more for a lower down payment of 10% vs. a 20% down payment.
The higher LTV jumbo loans comes with risk to lenders so 12 months of reserves or more is typically a requirement. Moreover, qualifying retirement accounts may be utilized to help with the reserve requirement.