Tips for Structuring Your Luxury Home Mortgage

A luxury home mortgage and a conventional home mortgage have several key differences that buyers should understand before going through with the sale. These differences shape how a lender views the applicant, how long it takes to approve the loan, and what options a buyer should consider. Learn more about how to structure a luxury home mortgage before finalizing the numbers.

Insurance Facts

Before structuring a luxury home mortgage, it helps for the buyer to think like the lender. Government programs that insure mortgages will only do so for loans up to a certain amount. Anything over the conforming limit of $424,100 is considered a jumbo mortgage, and generally carries increased interest rates for the buyer. Buyers should be prepared for more paperwork and scrutiny as to their ability to pay. Lenders may insist on several underwriting reviews, so they can triple check all relevant details.

The best way to structure a luxury home mortgage is to stretch the down payment as high as humanly possible and to ensure that the debt-to-income ratio is as attractive as possible. In other words, buyers should be earning far more than their mortgage payment. Buyers should also avoid adjustable-rate mortgages whenever possible. Luxury homeowners especially are liable to see huge rate increases, depending on where they live. Instead, opt for a 15- or 20- year fixed mortgage to build equity as quickly as possible.

Getting Started

The definition of luxury homes varies depending on where the home is purchased. A $500,000 home in Cleveland will certainly be considered a luxury home while the home of the same price may be considered standard in Southern California. This can affect how lenders see an applicant, though there are still some standards buyers should expect across the board. They will generally need at least a 680 credit score or higher to receive a loan, plus liquid assets to prove they can still pay the loan in case they lose their primary source of income.

Lenders will need to see thorough documentation of all accumulated wealth before approving the loan. The terms of each loan are different for each lender because there are no standards for jumbo home mortgages, regardless of if you want to buy a home in Victory Ranch or elsewhere. Buyers may be able to obtain a loan for as low as a 5 percent down payment and no mortgage insurance (though this is not recommended.) Some lenders will place additional restrictions on how the buyer pays for the home (e.g., the buyer cannot accept funds from relatives, etc.)

Additional Risk Reduction

A lender is going to exercise a lot of caution before parting with hundreds of thousands of dollars, and they'll do so by examining the home as much as they examine the buyer. A conventional home mortgage usually requires one appraisal before the bank will approve the loan, but a luxury home will typically require several different independent appraisals. Appraisals that are lower than the purchase price will usually result in the buyer having to make up the difference (either in part or in whole) with cash. In addition, lenders will often put a hard limit on how much they'll give to a new homeowner.

These limits can either apply to how much money they'll loan (e.g., up to $1 million) or to how much property the luxury home will entail (e.g., up to 12 acres.) Jumbo loans typically take care longer to be approved than conventional home mortgages, meaning buyers should be approved for a closing period of up to two months.