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Sometimes, a property catches your eye, but it costs a lot more than a traditional mortgage allows. That’s because standard mortgages come with borrowing limits set by Federal Housing Finance Agency (FHFA).
Jumbo mortgages allow you to borrow amounts that exceed those limits. A jumbo loan can be useful for anyone in the market for a more expensive property.
While a jumbo loan may be a path to homeownership, borrowing more can come with additional legal concerns. Let’s look at the legal considerations that go into a jumbo loan.
Compliance with lending regulations
Like most loans, jumbo loans come with regulations to safeguard the borrower and lender. The Truth in Lending Act, or TILA, was passed in 1968 to require disclosure information about financial products and services, and any attached fees or charges. Also known as Regulation Z, TILA helps consumers make informed decisions and shop for loans on equal footing in the marketplace without worrying about hidden fees later. TILA can also help you get out of some unfavorable loan agreements if they run afoul of the law.
Similarly, another protection called Dodd-Frank, formally known as the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, was passed in response to the financial crisis of 2008 with the goal of safeguarding the financial system for borrowers and lenders. The act created more government oversight of lenders, established the Consumer Financial Protection Bureau, and expanded a whistleblower program, among other changes.
Jumbo loans can sometimes involve millions of dollars in loans and payments, so it’s important to avoid potential financial and legal pitfalls.
Documentation and due diligence
Keeping your documents in order and doing your due diligence at every step of the process can ensure that your jumbo loan application goes as smoothly as possible. Documentation helps ensure your financial standing is accurately recorded and is crucial for helping lenders decide whether you qualify for a jumbo loan.
Large loans come with higher risk, so documentation mitigates risk by helping lenders spot red flags early on. The mortgage industry is full of regulations that require strict compliance and violating these rules can lead to penalties down the line for borrowers or lenders. So, it’s important that both parties make sure everything is in compliance.
Lenders will tell you which documents you need. You will typically need income verification, which may include W-2 forms and tax returns, pay stubs, or profit-and-loss statements. You may also need asset statements to show your total net worth, which can include bank statements and investment account documentation. You typically must have property appraisals completed by licensed professionals that the lender chooses, which helps the lender know the market value of the home and determine if the mortgage is a good investment. Buyers should also get their title report ready, to ensure there are no legal issues with the property that would hold up a sale. Making sure to collect these documents carefully and accurately may help protect you from legal risks.
Contractual obligations and terms
A mortgage is a legally binding contract to pay back the loan amount over a certain time frame. Knowing the obligations and terms involved ahead of time is important. Here are some key ones to remember:
Repayment terms
Terms explain how much and how often you are expected to pay your mortgage. They will usually include the amount of the principal and the interest rate on the loan, along with the payment schedule, payment penalties, property taxes, insurance requirements, and other stipulations that apply to the length of the loan.
Upkeep and maintenance terms
Some contracts include conditions for upkeep and maintenance of the property that the buyer must adhere to.
Legal fees and other costs
The contract will usually list who is responsible for the legal fees and other costs associated with the sale. Often these are the borrower’s responsibility.
Interest Rates
A fixed interest rate stays stable during the entire loan term, while a variable or adjustable interest rate can change based on the market’s movement. For an adjustable-rate mortgage, a contract typically lists how the rate can change over time and what data are used for calculating the new rate.
Repayment schedule
In the loan agreement, the amortization schedule will include a breakdown of each payment, including how much goes to the principal and how much goes to interest. The monthly payment schedule will list the amount due and the due date every month.
Penalties
Penalties can be applied to any payments made after the listed due date, and consistent late payments can lead to defaulting on the loan, or foreclosure on the property. On the other hand, the loan can also include prepayment penalties, which are fees charged for paying off the loan early. Penalty amounts are typically listed in the contract as well.
Escrow payments
The loan often stipulates how much of the monthly payments are allocated to an escrow account for taxes and insurance. Contracts often require borrowers to create an escrow account to ensure the taxes and insurance are automatically accounted for as part of the monthly payments.
Property title and ownership issues
Borrowers should do their research carefully when it comes to property ownership itself. A title search is usually required to make sure there are no liens or encumbrances on the property that would affect the sale. Obtaining title insurance can protect against any losses if problems do arise with the title down the line. Property surveys can also help identify issues with ownership before a mortgage contract is signed.
Liability and default consequences
Defaulting on a jumbo mortgage can result in severe legal and financial consequences. These can include foreclosure, which is what a lender uses to try to recover the balance owed on the mortgage if the owner fails to make payments. A deficiency judgment can happen when the sale price of the foreclosed property isn’t enough to cover the amount owed on the loan. In this case, the lender can end up taking the borrower to court to recover the remaining balance, such as through garnishing wages or taking money from a bank account, if the court rules in favor of the lender. But keep in mind that some states don’t allow deficiency judgments on foreclosures, and mortgages are usually designed to prevent this outcome (because the borrower makes a down payment on the appraised value, the lender typically takes on less risk than the home is worth).
Defaulting on a loan can also affect your credit score, which can make it more difficult to borrow in the future.
Borrowers have some options in these situations, though, including loss mitigation options such as loan modifications, forbearance, and repayment plans. Borrowers also have access to counseling services from the federal government and other non-profits that can help guide them out of a difficult situation.
Lenders also must give notice of default before foreclosure proceedings begin, to allow homeowners a chance to fix the situation or seek alternatives to foreclosure.
Legal considerations for non-traditional borrowers
Non-traditional borrowers face different hurdles, so it’s important to be prepared. Self-employed borrowers should be ready to come with income verification, and they may require much more paperwork than traditionally employed borrowers.
Non-citizens looking for a loan should be ready to prove residency status through visas or other documentation.
Anyone with a complex financial portfolio will need asset documentation for all their properties and investments. Some non-traditional borrowers seek out specialized lenders who can help in these specific fields or consult lending professionals for advice.
Regulatory changes and market trends
The landscape for jumbo loans has changed with various regulations that protect borrowers. The Dodd-Frank Act and Qualified Mortgage rule tightened up underwriting standards and set new rules that ensure borrowers’ ability to pay loans back, while also limiting access to some jumbo loans.
Market forces are at work too, with shifts in interest rates set by the Federal Reserve directly affecting jumbo mortgage rates. As those rates go up, market demand can go down, cooling off a hot market.
Government policies that reform the lending industry can affect the appeal of jumbo loans in high-cost areas. It’s important for borrowers to stay informed about the changing industry and to seek professional advice to ensure their mortgage strategy is in tune with current legal and financial requirements.
Disclaimer: Article content is intended for information only. It may not reflect the publisher nor employees’ views. Consult a mortgage professional before making financial decisions. Publishers or platforms may be compensated for access to third party websites.