Luxury Home Financing Options
Shopping for a luxury home can be very exciting process especially when you think about finding the dream home that could be yours for the rest of your life. Finding the financing needed to purchase your luxury home is equally as important as the home itself.
What is a Luxury Home?
A luxury home is often found in a neighborhood or on a street with similarly priced and appointed homes. They usually have very high-end features with unique qualities that differentiate them from the other homes in the area.
Luxury homes are typically in an area of other high priced luxury homes and are not “cookie cutter” like you will find in a traditional housing development of moderately priced homes. When someone is spending millions of dollars on a luxury home, they are putting their own creativity into the design and features. Therefore, they want their home to stand out from the rest.
Speaking of features, luxury homes usually have grand entrances, expensive kitchens and baths, pools like a resort, theater rooms, and more. These features are not cheap which is why the homes come with a high price tag. Therefore, it is important to find financing for a luxury home before you start shopping for or building the home.
Luxury Home Financing Options
When financing a luxury home, you will have the following options:
- Jumbo Mortgage – A jumbo mortgage is one that is higher than the conforming amount and usually up to a maximum of $2 million.
- Super Jumbo Mortgage – A super jumbo mortgage is typically greater than $2 million and only a select number of lenders offer these.
- Bank Statement Loan – A bank statement loan is offered to self-employed borrowers and can include very high loan amounts. With these loans, you qualify using the average monthly bank deposits rather than supplying tax returns.
- Non-QM Mortgage – A non-QM (non-qualified mortgage) is one that is offered by subprime lenders who also may offer loan amounts large enough to finance a luxury home.
This is just a sampling of the types of mortgage programs that you will likely need to finance a luxury home. They key is going to be the loan limits that each lender will have for these types of mortgages. Some lenders have a $2 million limit. If your luxury home purchase is greater than that, then you will be limited in the number of lenders who will offer these programs.
Luxury Home Mortgage Lenders
The following lenders offer programs to finance to finance luxury homes.
- Axos Bank
- Carrington Mortgage Services
- Northstar Funding
- First National Bank of America
- Citadel Servicing
The programs and guidelines offered by these and other lenders change often. This is just a small sampling of the lender who may be able to finance your luxury home. We suggest contacting us first and we can help identify the best luxury home lender for your specific situation and location.
How to Qualify for a Luxury Home Mortgage
Qualifying for a luxury home mortgage will require the borrower to come to the table with enough income to justify what will likely be an extremely high mortgage payment. Below, we will outline the down payment needed and what interest rates you can expect.
Luxury Home Down Payment Requirements
You may be able to purchase a luxury home with a down payment as small as 5%. However, you should be prepared for an interest rate that is a bit higher than if you put more down on the purchase.
Every lender will have a different down payment minimum. This is why it is important to be flexible and to share what your true needs are with us so we can help determine which lender would be the best fit.
Luxury Home Financing Interest Rates
Interest rates for luxury home mortgages will be slightly higher than what you would expect from a conventional loan. The added risk associated with these large loans is what determines the higher rates.
One of the benefits though is many lenders who offer these programs do not require PMI when the down payment is less than 20%. Therefore, although the interest rate may be a bit higher, your payment could be the same or less than if you were able to lock in at a conforming loan amount rate.
Luxury Home Closing Costs
The mortgage closing costs when you are buying a luxury home will differ slightly than what you would experience with a smaller conforming loan. Here is a list of standard closing costs that you would be familiar with. However, these are the items that could drive up your closing costs
Tax escrows – When purchase a home with a mortgage, you will likely have to escrow your taxes. This means your taxes will be included in your monthly mortgage payment and the lender will pay the taxes for you. The lender will collect 3 months of taxes up front at closing. Luxury homes typically have higher taxes so you should be prepared to pay this at closing.
Homeowners insurance – All mortgages require that you pay a full year’s worth of homeowners’ insurance up front. The insurance premium for a luxury home will likely be much higher than that of a standard home. In addition to paying a full year up front, you may also be required to escrow additional payments with the lender.
Prepaid interest – When you close the loan, you will pre-pay the interest for the remainder of the month at closing. For example, if you close on the 30th of the month, you may only have 1 or 2 days of insurance to pay. However, if you close on the 5th of the month, you will have to pay about 25 days of interest at closing. With a large loan amount, this pre-paid insurance can be significant.
Appraisal – Appraisal costs can range from $300 to $500 for a traditional home. However, luxury home appraisals can cost much more than that. The cost of the appraisal is typically tied to the price of the home plus the difficulty or extensive work needed to perform the appraisal.
For example, years ago we were working with someone who was looking to refinance his luxury home. It was really an estate worth about $5 million. In addition to simply being a large home, it had an extensive heated horse stable and an ice rink. The appraisal cost came in at $2500 for this property.
Loan Origination Fees and Points – Some lenders will charge a loan origination fee or points. This is used to offset their costs and/or in exchange for a lower interest rate. If you are being charged 1% origination or 1 point, that will be 1% of the loan amount. Have a discussion with your lender about these fees before making your final decision.
Top Luxury Home Markets
If you have not decided where to purchase a luxury home yet, you may want to look into these markets. They are considered to be trending as the top luxury home markets in the United States. Of course these are based upon third party surveys and statistics based upon recent home sales.
- Las Vegas Nevada
- Maui Hawaii
- Silicon Valley California
- Palm Beach County Florida
- Bergen County New Jersey
With the exception of Las Vegas, even the cost of a standard or traditionally sized and appointed homes in these areas will cost more than what you may find elsewhere.
Finding luxury home financing is something that requires some research since the lenders who offer these mortgages are not too common. Hopefully, this article has provided you with a good start. Meanwhile, here are some tips if you are selling a luxury home before buying your next luxury home.