First and Second Mortgage vs Jumbo: California Loan Strategies

California home buyers who are purchasing a higher-priced home often end up using what’s referred to as a jumbo loan. This means that the amount being borrowed exceeds the conforming loan limit for the county where the house is located.

One alternative is to use a first and second mortgage loan that, when combined, would add up to the total amount needed for the purchase. There are some potential advantages to using a first and second mortgage in California, compared to a jumbo loan. So let’s talk about the upside.

Using a First and Second Mortgage to Buy a Home in California

The introduction of this article includes quite a bit of terminology. So before we go any further, let’s define a few of these important terms.

• Jumbo loan: As mentioned above, a jumbo loan is one that exceeds the conforming limit used by Freddie Mac and Fannie Mae (the government-controlled corporations that purchase loans from lenders). These limits vary by county and are based on median home prices. Jumbo loans sometimes have additional requirements due to the larger amount being borrowed.
• First and second mortgage: This is a financing strategy where the borrower combines two different mortgage loans to account for the purchase price (minus any down payment). Combining a first and second mortgage to buy a home in California is one alternative to using a single jumbo loan.

There are some benefits to the first and second mortgage strategy:

1. Avoiding mortgage insurance

Jumbo loans often require mortgage insurance, which is an extra cost for the borrower. That’s because the loan-to-value (LTV) ratio can rise above 80%. And that’s the LTV threshold that makes private mortgage insurance necessary. On the other hand, borrowers who combine a first and second mortgage loan can borrow a higher amount without having the loan-to-value ratio rise above 80%. So mortgage insurance might not be necessary.

2. Cash-reserve requirements

Jumbo loans typically have cash-reserve requirements. This means the borrower must have enough money in the bank to cover the initial monthly payments, for a certain number of months. Some jumbo loans have up to 12 months of cash-reserve requirements. The California first and second mortgage strategy is a good alternative because it can eliminate the cash-reserve requirements entirely, in some cases.

3. Second mortgage up to $500,000

How much can I borrow when using a first and second mortgage loan? That’s the million-dollar question (sometimes literally). In most cases, borrowers who use this financing strategy can obtain up to $500,000 on the second mortgage loan. The limit for the first loan would depend on where the home is located, since conforming loan limits vary by county. In California, these limits range from $453,100 to $679,65, for calendar year 2018.

The key takeaway here is that the mortgage industry has become more flexible and diverse over the last few years. There are many different loan products available today, and they all have their pros and cons. California home buyers who are considering a jumbo mortgage loan might want to look at the first and second mortgage strategy as well.