Minnesota home buyers who are in the market for higher-end homes are aware that available jumbo loan programs, while similar, can have slightly higher interest rates compared to conforming loans and can require a down payment of at least 20%.
Historically, jumbo lenders have asked for at least a 20% down payment or even 25% in some cases depending upon the amount borrowed. Minimum down payments can also vary slightly from one lender to another and can be affected by credit scores or the type of property being financed.
For instance, a couple is getting ready to make an offer on a home listed at $1.5 million. Their representative credit score is 750 and their loan officer told them they will need a 20% down payment, which results in a $300,000 cash commitment at the closing table. This, of course, is in addition to the funds needed for associated closing costs and for items such as property taxes, home insurance and prepaid interest.
When buyers come to the settlement table with $300,000+ to finance a $1.5 million dollar home, they recognize they’re turning a liquid asset, or cash, into one that isn’t so liquid. Initial equity in a property in the form of a down payment typically must remain there and can only be tapped into with a home equity loan. Buyers of higher-end homes may want to hold onto their capital to be used for other things such as a retirement fund, stocks or mutual funds.
Such assets are relatively liquid and can be converted into cash rather quickly. For those who want to keep as liquid as possible and put down less at the closing table than say 20 or 30% of the sales price, there is another option that select jumbo lenders have at their disposal.
Let’s say a couple has decided they only want to make a 10% down payment on their new home purchase in Minneapolis. Using this same example, that’s a minimum down payment of $150,000, not $300,000 or $450,000. With this financing option, there really are two loans at work and not just one, a first and a second mortgage.
Lenders typically refer to this option as an 80-10-10 loan or a “piggyback” mortgage. In this example, the 80 represents 80% of the sales price and the 10 equates to 10% of the sales price, with the remaining 10% allotted for the down payment. In this example, the borrowers keep $150,000 and not use those funds for a down payment.
What if a borrower wants to put down even less, are there other options? There is a 95% financing option and it’s designed similarly as the 80-10-10 loan. This option requires a down payment of only 5 % of the sales price and is referred to as an 80-15-5. 80% is the first mortgage, 15% is the second and 5% is the minimum down payment.
And because in both scenarios there is no prepayment penalty on either loan, the second can be paid off entirely over time or with a single payment. Please note, the 95% option is only available up to $2mil loan amounts.
If this program sounds interesting to you, take some time and speak with a loan officer about the details of this structure. You’ll be expected to have at least a 700 minimum credit score and must occupy the property being financed as your primary residence.
Because this program is what is considered a fully documented loan, you’ll be asked to provide recent bank statements, recent paycheck stubs, and W2 forms from the previous two years among other documentation. If you’re self-employed, you’ll be asked to provide copies of your most recently filed federal income tax returns in lieu of check stubs and W2 forms.
If coming to the closing table with the lowest down payment possible is important to you, this mortgage program just might be the solution. These low down payment options are especially good for Minnesota home buyers purchasing in higher cost locations of Minneapolis, St. Paul, Duluth and Rochester.
Learn more about all the Jumbo loan limits and requirements under the Jumbo Loan Page here.
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