Buying a luxury home is more complex than buying a standard property for many reasons. One of the nuances you have to deal with is finding the right financing.
Many luxury home buyers pay for their purchase in cash. If you intend to get financing for your new home, however, these are some of your best options:
- Jumbo loans
The prices of luxury homes normally fall beyond the conforming loan limits set by Freddie Mac and Fannie Mae, the government-backed home mortgage companies. As a result, high end home buyers often secure a jumbo loan, which has fewer restrictions when it comes to loan limits.
However, because they don’t have the federal backing of a conforming loan, jumbo loans expose lenders to a higher risk. To offset this risk, more stringent requirements are adopted in qualifying loan applicants.
Typically, you will need a credit score of at least 680, but some lenders may look for an even higher minimum credit score. Larger down payments and cash reserves may also be required. Some jumbo loans come with a higher interest rate, but you can avoid this if you have an excellent credit history and a good relationship with the lender.
The stricter qualifying standards mean the process also typically takes longer, so it’s best to prepare as early as possible. Here are some of the things you can do:
- Know your credit score. If it falls below 680, get a copy of your credit report and improve on the items that may be pulling your score down
- Review your Debt-to-Income ratio, another figure lenders look at closely, and try to get it below 43%
- Make sure to have adequate cash reserves and not too much debt
- To get the best possible terms, prepare for a down payment of at least 20%
- Prepare proofs of income, particularly copies of pay stubs covering the last 60 days, and your W2 forms for the last two years. If you’re self-employed, prepare copies of your federal income tax returns in the last two years.
- Super jumbo loan
As the name implies, a super jumbo loan is similar to a jumbo loan, but with an even higher loan limit. In Orange County, California, any home loan above $765,600, the conforming limit for 2020, is considered a jumbo loan. However, many lenders classify a mortgage greater than $2 million as a super jumbo loan, with some lenders setting the threshold at $3 million or $4 million.
To qualify for a super jumbo loan, you need to meet even more stringent standards than a regular jumbo loan. Different lenders may have different standards, but in general, to qualify for a super jumbo loan, your credit score should be at least 740. The loan may also come with a higher down payment and higher interest rates, but it all depends on your creditworthiness. The more favorable your credit history, the less stringent the loan terms you can obtain.
- Asset financing
Asset financing is a good option for buyers who may not have a stellar credit history or the right amount of cash reserves, but have assets of considerable value. They can put up these assets as collateral for a home loan. Examples of such assets are a valuable art collection, a vintage luxury car, jewelry and watches, a commercial property, and so on.
The asset financing process is also faster, giving you an advantage over other buyers who may have to go through a lengthy bank loan process. You may not even have to be subject to a credit check, and the transaction will likely not show up on your credit report.
- Bank statement loan or self-employed mortgage
Also known as self-employed mortgage, a bank statement loan is granted to self-employed individuals whose creditworthiness is reviewed based on their average monthly bank deposits instead of their tax returns. In many cases, self-employed borrowers find it difficult to qualify for a traditional mortgage because it’s harder to document the income they actually make. By using bank statements as proof of income, this barrier is effectively lifted.
Lenders will look at your bank deposit statements in the last 12 to 24 months and determine your average monthly income based on this. They will then review this along with your credit score, DTI ratio, and other information, to decide if you qualify for a loan, and on what terms and conditions.
Interest rates for bank statement loans are generally just slightly higher than conventional rates. Down payment requirements can be as low as 10%. Depending on your other financial data and credit history, you may qualify even with a high DTI ratio of 50% or a low credit score.
Learn more about luxury homes for sale in Orange County, CA with the Cordova Real Estate Group
Leveraging our extensive experience and network, we can help you in all aspects of buying a home, including finding the best financing option for you. Call us today at 949.858.0405, or send an email to marianncordova(at)gmail(dotted)com.