Mortgage Loans Of Up To $1 Million with 3% Down Payment Would Soon be Available To Homebuyers

Starting in 2023, the down payment on a home could be as low as 3%. Currently, buyers must make a down payment of about 20% to qualify for a $1 million mortgage.

The Federal Housing Finance Agency reported that starting in 2023, in expensive markets like NY and LA, the limits for loans backed by Fannie Mae and Freddie Mac go up to $1,089,300. With a higher limit, borrowers can access larger loans without needing giant mortgages, which are not backed by the federal government, stricter income, credit and down payment requirements.

The FHFA mentioned that for the rest of the country, the mortgage limits backed by the federal government will go from a maximum of $647,200 to $726,200 in the next year. The limits are calculated taking into account median home prices, which have been rising. The federal government guarantees most home loans.

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Data from Realtor.com showed us last October that more than 12% of homes for sale were priced at $1 million or more.

In a recent statement from Daryl Fairweather, chief economist at real estate company Redfin Corp., he told us that the new limits would give more options to those looking to buy a home. “For buyers, the new limit opens up a new set of homes to consider. That may have previously exceeded your budget for a monthly mortgage payment.”

A smaller down payment for a more expensive home could somewhat offset soaring home prices, said a housing and mortgage specialist at NerdWallet. Potential buyers continue to face problems other than home prices, a lack of inventory and fears of a possible recession.

“It’s still not a bargain, but saving $30,000 instead of $200,000 down could make a $1 million or so home more affordable,” said the NerdWallet specialist.

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Affordability is the key difference between jumbo mortgages and federally backed loans.

Down payment requirements vary by lender. Jeff Ostrowski, a Bankrate mortgage analyst, said jumbo mortgage lenders generally want borrowers to have a credit score of 740 or higher and a debt-to-income ratio in the 36% to 43% range.

The debt-to-income ratio can be as high as 50% for federally backed loans, and the credit score is usually at least 620.

After the pandemic, home prices rose along with the median down payment. Loans with down payments below 20% generally require private mortgage insurance.

Obtaining a large mortgage with a small down payment comes with the disadvantage of high monthly fees and having to pay for private mortgage insurance. In the best case scenario, a borrower with a $1 million mortgage and good finances, after a 3% private insurance payment, could add up to $500 to their monthly payment.

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During the pandemic, the Cares Act offered forbearance options to households with federally backed mortgages because the government can set policy for mortgages backed by Fannie Mae and Freddie Mac, said Danielle Hale, a chief economist at Realtor.com. (News Corp, which owns The Wall Street Journal, also operates Realtor.com under license from the National Association of Realtors.)

For some buyers who qualify for jumbo loans, it is better to stick with that option, historically, these have been more expensive, but recently they have maintained a lower interest rate.

According to a November 22 survey of lenders by Bankrate, the national average mortgage rate for 30-year loans was 6.81%, while the average jumbo rate was 6.43%.

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