Luxury properties have lots of appeal, especially among the rich and famous, who love to invest in valuable property. Luxury homes or properties have a lot of advantages over traditional homes.
Their pristine location and impeccable amenities, which can’t be found in a traditional home, are some of the things that make them so sought after. Luxury properties are always in demand, and those who purchase these properties will most likely receive massive returns on their investments.
Financing a luxury property is different from financing a traditional/ standard one, so adequate research is needed to understand the procedures.
Tips For Financing a Luxury Property
There are several ways to finance a luxury property. You can pay with your money or apply for a loan. The basic amenities of a luxury home/property don’t come cheap, so finding adequate funding for it is essential before you buy one.
For the sake of this article, we will be focusing on the loan aspect of luxury property/home finance. Below are some of the tips for financing a luxury home
Get A Loan
Loans for luxury real estate are pretty large, and this is because the amount needed in the loan is larger than the stipulated limit of the Federal Housing Finance Agency. There are four types of loans you can use to finance your luxury property
If an individual wants to get a mortgage, but the loan is higher than the limit set by conforming loans, then a jumbo loan is needed. To qualify for a jumbo loan, a large sum of the down payment is required, you need a higher credit score than other loans, and also you must have large cash reserves.
Because of the risk that lenders take when borrowing such large sums of money, they impose a series of rigid requirements and are more strict with your finances. They might even require that you pay Private mortgage insurance to prevent you from fleeing with their money.
Super Jumbo Loan
This type exceeds the limits of a jumbo loan, and it is very rare to find lenders that offer this type of loan. The requirements to qualify for this loan are even more rigid and strict than that of a jumbo loan. Lenders know that they would be taking a greater risk if they approve such loans.
Bank Statement Loan/Mortgage
This type requires that you present 12 months of bank statements before your loan can be approved. The financial institution or lender will then assess your average deposits per month to determine your monthly income for the loan application.
This loan is most ideal for self-employed individuals who require a very high loan amount. Not all financial institutions or lenders offer this type of loan.
Non-Qualified Mortgages give you access to a large enough loan to finance a luxury home based on your bank statements and asset collateral only. Because of this flexibility, most borrowers use this type of loan to finance their luxury homes. There is no limit on the loan, and you don’t even need private mortgage insurance.
Avoid Private Mortgage Insurance(PMI)
Jumbo loan or Super Jumbo loan lenders will sometimes ask you to pay for private mortgage insurance. This is because they must have observed that your loan to value ratio is very high, and if this occurs, there is a probability that you won’t pay back their loan.
So they decide to protect themselves by getting a PMI. But private mortgage insurances are ridiculously high, and they don’t benefit the lender at all. So to reduce the amount you need to finance your property, you need to avoid PMI. Below are some ways to achieve that
Avoiding or Removing PMI by Reducing Loan to Value Ratio
You can avoid PMI when your loan to value ratio reduces to at least 75%. and this can be achieved when your property value increases, which can be due to the rise in home value in the location of your property or if you renovate the property and its market value increase.
Avoiding PMI by Paying Down Your Loan
If your home equity is 20%, you can petition to have your private mortgage insurance canceled by your lender. Also, if you are diligent with your monthly payments and your payment history is strong, then you can get PMI canceled.
Get Your Mortgage Preapproval
Getting your pre-approval can be advantageous to you when you have to show the lender that you are financially ready to purchase a luxury home. There are two steps involved in the pre-approval; you check if you are qualified for the loan(pre-qualification), and then the lender assesses your disqualification letter or form and decides to give you the loan.
Hire a Seasoned Real Estate Agent
You need someone that knows the luxury property market inside and out and one that would be ready to negotiate on your behalf with sellers when the time comes.
Tips To Get Approved For a Jumbo Loan
20% Down Payment
You need to be able to pay at least a 20% down payment. This is the minimum required down payment when applying for a jumbo loan.
High Credit Score
Lenders need to know that you are a financially responsible individual before they loan you a considerable amount of money. So to qualify for a jumbo loan, you need at least a credit score of about 700. The higher the credit score, the higher your rate.
Low Debt to Income Ratio
The debt to income ratio you need to qualify will depend on the lender, but it has to be between 35%-43%. A low debt to income ratio indicates that you owe way less than you earn; now, lenders will be able to trust that you can afford the luxury property you want to buy.
High Cash Reserve
Your ability to make your monthly mortgage payments for at least a year will be beneficial to you, and you’ll need to provide proof of funds to the lenders that show this. You also have to prove that you have enough cash reserves to pay your down payments and closing costs.
Buy Your Luxury Home
Financing a luxury property is not a minor thing; it requires adequate research because there are very few financial institutions/lenders who offer loans for luxury homes/properties. We hope that the few tips given in this article can provide you with an excellent place to start.