Jumbo loans are an important resource for many homebuyers across the country. While conventional, FHA, VA, and other government-supported loans have limits on their total amounts, jumbo loans can provide millions of dollars in financing.
For high-income, high-net-worth borrowers, jumbo loans are often the financing option of choice.
But with the current health crisis gripping the national and global economy, jumbo loans are not being offered. To reduce risk, lenders are slamming the brakes on jumbo loans, leaving many high-end homeowners unable to purchase the house they want. When lenders step on the jumbo-loan throttle has yet to be seen.
The lack of jumbo loans has also left owners of expensive properties unable to refinance, which would have allowed them to take advantage of historically-low interest rates. (Which can mean big savings on a high-dollar loan!)
Fortunately, there are solutions. High-balance second mortgages are one option that could allow you to purchase a multimillion-dollar home in this topsy-turvy market.
High-Balance Second: The Solution for a Market with No Jumbo Loans
Why No Jumbo Loans?
First, let’s focus on why jumbo loans have temporarily disappeared from the market. As we all know, the coronavirus and COVID-19 have created significant declines in the economy. To control the spread, businesses have slowed down or entirely stopped operations, which has led to a large increase in unemployment claims and furloughed employees. With money resources dwindling, homeowners with mortgages are often looking for a temporary delay in house payments.
Basically, as more and more homeowners are seeking forbearance (a temporary halt on payments without penalty) from their mortgages, lenders and investors are looking to decrease risk. Investors who purchase bundles of jumbo loans are seeing that more people need forbearance, so they are refusing to purchase bundles of jumbo loans until the market comes back to normal.
Without investors to buy the loans, lenders are not willing to write the loans. Without lenders to write the loans, borrowers are unable to secure jumbo financing. (The overall process may be more complex, but this is the situation in a nutshell.)
Fortunately, there are solutions. High-balance second mortgages are one option that could help you purchase a home even in this unique market situation.
High Balance Second Mortgage: The Jumbo Loan Alternative
This type of mortgage will use a strategy sometimes referred to as “seller carry” or “seller carry second” to provide the financing you need. Essentially, if a homeowner is having trouble finding a buyer, they can carry the loan on their home. In this case, the buyer will promise (in legal documents) to pay the seller a specific amount over a given period, often with interest. It’s like a mortgage, but the buyer makes payments to the owner instead of a bank or credit union. The seller gives possession of the property to the buyer, but can reclaim the house if payments are not made.
It does not alway cover the entirety of the home’s value. Usually, the seller carry is for a portion of the purchase price, which helps the buyer get approved. Combined with the financing and
downpayment, the seller carry second can allow for the full purchase.
High Balance Second in Action: An Example
Let’s break it down with a simplified example to help you understand high balance second. Suppose you are buying a home in San Diego County for a total purchase price of $1 million. You have a downpayment of $100,000 that you can use towards the home, which means you need financing for $900,0000.
Under “normal” circumstances, you could use a jumbo loan to fund this purchase (assuming you qualify), but with the current market situation, jumbo loans are unavailable. And with conventional loans, the 2020 limit for San Diego is $701,500, leaving you short by almost $200,000.
What to do?
Add a seller carry high balance second to the loan. For simplicity, let’s say you finance $700,000 through a conventional loan, bring a down payment of $100,000, and add $200,000 in a seller carry second. Just like that, you have $1 million for the purchase!
Rules for High Balance Second Loans as an Alternative to Jumbo Loans
Different lending organizations will have different rules for using these loan products. Understanding the requirements will help you use these loans quickly and efficiently.
Conventional Loans (Fannie Mae)
The most notable requirement for a high balance second on a conventional loan is that the seller carry must have a term of five years or more. Basically, they want the seller carry payments to be spread over a longer period, increasing the total number of payments and reducing the monthly payment amount. So if you were to place $200,000 on seller carry, you couldn’t do so on a four-year period, but you could do it on a five-, six-, or seven-year period. (Or ten or fifteen; as long as it’s five years or longer.)
There is also a requirement that if the first mortgage is subject to subordinate financing, the lender will have to calculate LTV and other factors when processing the loan. There are also rules that impact how much the seller can charges in interest.
Can You Use FHA Loans for the Same Purpose?
Unfortunately, no. FHA loans have requirements that the combined loans cannot exceed the loan limits. Basically the FHA loan and the seller carry cannot exceed the mortgage limits that are usually used. So for all intents and purposes, this will not function as an alternative to jumbo loans during the COVID-19 crisis, as you are restricted to the same limits.
Dedicated Support for Your High-Value Purchase
If you are hoping to purchase a high-value home above the limits of conventional loans, but are having trouble finding enough financing, contact our team today to learn more about seller carry and high balance second loans.
No matter what the current market is doing, we’ll put our experience and dedication to work so you can secure the perfect financing for your specific needs.