It is fashionable these days to pay cash for a very-very expensive home and close within a few days. Nice! However, some of us, unfortunate mortals, actually need to get a loan to purchase a multi-million dollar property….. So I thought it might be helpful to write about the various options available today, just in case you are in the mood to buy a luxury home. Of course, since I cannot pretend to be an expert in the field, I chose to speak with one that I know & trust, Valerie Avril, a Mortgage Banker with Western Bancorp. Here is what she told me.
Basically, as all of you know, there are two roads to get you to where you want to go: private banking & traditional lending. Depends who you are and what you want.
Private banking may have the favor of the following buyers:
- Clients who have a pre-existing assets relationship with a bank and may be offered a rate lower than market. Beware of the turnaround time with is consistently worse with larger banks.
- Clients with high liquidity/net worth who have access to financing terms otherwise not available with the traditional lending route
- Foreign Nationals (with high liquidity) who do not have the option of getting jumbo financing the traditional way.
Traditional lending is still the most common way. There is plenty of money available. As a matter of fact, there are more jumbo lenders today than 6 months ago. The catch is that the guidelines to qualify and pay the bills are tighter than before. The dirty name is “reserves”.
The reserves required by most lenders represent somewhat of a hurdle. Some lenders demand from the buyer 6 to 16 months of PITI (principal + interest + insurance + property tax). On a $1,300,000 loan, a 6 months reserve equates to $48,000 of added funds; on 16 months, it represents a reserve of $130,000. Ouch!
80% loan to value ratio up to $2M is available through a few lenders and some will go up to $5M with 30% down and a compelling adjustable rate in the mid 3%.
Each lender has its own niche products, making it advisable to work with a mortgage banker who has the flexibility to work with the wholesale channel and gain access to multiple sources.
Guidelines also differ from lender to lender. Unlike Fannie Mae or Freddie Mac, financing (conforming loans) jumbo mortgages are not confined to the findings of an automated underwriting engine (Desktop Underwriting or Loan Prospector), therefore enabling lenders to morph their jumbo product offering based on their risk assessment strategy.
A few lenders have developed guidelines to allow borrowers to utilize their assets as income, thereby increasing their qualification power, while traditional underwriting standards will only look at income shown on tax returns. There are now programs, such as asset depletion or asset dissipation qualifying that will provide a boost to the income being considered. Good news for high liquidity borrowers with low or fluctuating income.
For many high end buyers for whom cash is no problem, the easiest option widely used at the top end is to make a cash offer to get the edge over contingent offers in a bidding war, and eventually regain a portion, albeit small, of their equity by refinancing immediately after the close.
Oh, by the way, if you can and want to pay cash, you might still consider getting a loan of “only” $1M, which is the ceiling for maximum interest deduction, and bridge the difference with cash. That might not save you a ton in taxes but every penny counts when you are a millionaire!