Tips on financing the luxury home

The luxury home purchase process is different from buying a conventional or tract home. There’s more money passing hands, so naturally the risk escalates.

The process is slower as well, so if you plan on purchasing a luxury home, and you won’t be paying cash, you’ll most likely need to obtain a jumbo loan.

What is considered a luxury home?

You might be surprised to know that it isn’t merely the price that defines the luxury home. While the concept can best be defined by perception, here are some additional characteristics of luxury homes:

• Desirable location
• Distinctive architecture
• Amenities

Since everything concerning real estate depends on location, a basic defining point of a luxury property is “a home that goes above and beyond what’s typical for the market,” according to Devon Thornsby, real estate editor at U.S. News.

What typically doesn’t differ in the luxury home market is the financing of the home

If you’ll be pursuing a jumbo loan to purchase your luxury home, you’ll need to start the loan process well in advance of shopping for homes.

What’s a jumbo loan?

A jumbo loan, also known as a non-conforming loan, is what you’ll need to purchase a property that is priced higher than Fannie Mae’s and Freddie Mac’s conforming loan limits. For 10 years, the conforming loan limit has stood at $417,000 for a single-family home.

That changed last year, when markets heated up and prices began to soar. The limit is now $424,100 for most regions across the country (it is higher in certain high-cost counties, such as some in California).

Find your county’s loan limit at Bankrate.com. Click on your state and you’ll be taken to a list of counties and their corresponding conforming loan limit.

Qualifying for a jumbo loan

Jumbo loan requirements are more stringent than those of the conventional loan and they vary by lender.

You will usually need a higher credit score (typically 700 or higher). Generally, a 10 percent down payment is required, although borrowers with high credit scores can find mortgages with a 5 percent down payment requirement.

The good news is that, in their pursuit of wealthy clients, some lenders are willing to waive the private mortgage insurance (PMI) requirement on these low-down payment loans.

Like all loans, however, you’ll need to prove that you can make the monthly payment

This means proving:

• A stable employment history – at least two years with your current employer or two years of tax returns to prove self-employment.
• An explanation of what you do for a living if its “value” isn’t as obvious as, for example, a physician or CEO.
• Proof of your income – Lenders want to see not only pay stubs, but bank statements as well (even the blank pages, believe it or not).
• Proof of your down payment funds.

In a nutshell, you will need to be able to document your assets, show a high credit score (the average score for the jumbo loan in the first quarter of 2017 was 771) and show proof of a responsible credit history.

Jumbo loan expenses

As of the first quarter of 2017, jumbo loans were actually cheaper (by 21 basis points) in the long run than conforming loans, according to a report released by Core Logic.

In August of this year, for instance, interest rates on these loans tumbled to where they were “13 basis points lower than the conforming rate, the largest spread between the two since March 2016,” according to CNBC’s Diana Olick.

Be prepared for closing, however

Because there are additional steps in the qualifying process, jumbo loans tend to carry higher closing costs. An example of an extra step is a lender who may require two appraisals of the property.

It may even out in the end, however, with the aforementioned sweetening of the pot to attract wealthy clients.

Not only are some lenders waiving the PMI requirement for low-down payment jumbos, but also accepting borrowers with low credit scores.

If you’re interested in pursuing a jumbo loan, contact us and we will put you in touch with local lenders who can answer all your questions.

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