A down payment for a luxury home can be daunting, even to those who consider themselves to financially comfortable. However, planning ahead when it comes to the down payment is the best way for a buyer to save money on their investment, so keep these tips in mind before deciding on how much the down payment should be.
The standard rule for down payments is 20 percent of the home's total value. Even though there are plenty of chances for buyers to pay as low as 3–5 percent, it's still not recommended if the goal is to pay as little as possible for the home. Private Mortgage Insurance (PMI) is typically required by the lender should the buyer fail to produce 20 percent of the home's value, and the cost of the insurance can put a homeowner underwater quickly when it comes to monthly payments. PMI is usually calculated at 0.5–1 percent of the purchase price on top of monthly payments, which could be an extra $10,000 or more for a luxury home. (Once buyers reach 20 percent equity on their mortgage payments, they will no longer have to pay PMI.)
Master DTI and LTV
Debt-to-income and loan-to-value are two ratios buyers should understand before calculating how much to put down on their luxury home. Loan-to-value tells a lender just how much unpaid principal will be left over after the down payment, and a high enough ratio can make a lender nervous. Debt-to-income is a similar proportion that tells a lender what percentage of monthly income is being spent on housing. A higher down payment means lower monthly payments and higher chances of loan approval.
Prepare for Additional Costs
When calculating how much a buyer can afford on the down payment, they should also account for additional costs. The origination fee is the lender's cost of processing a loan application, and it can climb as high as 1 percent of the home's purchase price. While this number is negotiable to a certain extent (based on the buyer's financial standing), it can be a major addition on top of the down payment. Buyers may also have to pay for the appraisal, inspection, and closing costs.
Ace the Underwriting Process
Most homeowners go through a single underwriting on their loan application, but a luxury homeowner may need to go through several different underwriters before being approved. For better interest rates, buyers will need to everything in their power to show their financial stability. This may include several months of bank statements, several years of tax returns, on top of a substantial down payment. Lenders are understandably nervous to have so much money tied up in one asset, so they may even ask for a down payment as high as 30 percent. Or they may limit the amount of money they'll give out to one buyer. It's important for buyers to conduct research first, or to ask their real estate agent.
Consider Alternative Financing
It may sound odd, but some Park Meadows luxury home sellers are willing to finance part of the buyer's home loan, which can help a buyer come up with more money for the down payment. This usually only happens if the seller is extremely eager to sell, or if the home's appraisal price falls short of the asking price. Essentially, the seller of the home acts as a bank, earning interest on monthly payments as the buyer pares down their debt.