Buying a home is always a unique experience, and when luxury homes are on the table, the stakes get higher. In many cases, buyers of high end properties pay in cash. This is considered the ideal payment method as it is quick and doesn’t come with a lot of requirements.
However, if a cash purchase is not the right option for you, you can consider getting a luxury home loan instead. Here’s what you should know about this type of mortgage.
MORTGAGES FOR LUXURY HOMES
Luxury homes are typically defined as properties priced at the top 10% of homes for sale in any market. This means that most high end properties cannot be financed with a conforming or conventional home loan, which has a ceiling determined by the average home price in the area. As luxury homes are far from average, the ideal financing for one is typically a noncorforming or jumbo loan.
What is a nonconforming loan?
Nonconforming loans allow you to borrow more than the conforming loan limits or conventional loan ceilings set by Freddie Mac and Frannie Mae. In Orange County, the conforming loan limit for 2023 is $1,089,300, so if you’re buying a home priced higher than this, consider securing a jumbo or nonconforming loan instead.
Unlike conventional or conforming loans, nonconforming loans are not limited by a government mandated ceiling. The bank or lender has the sole discretion on the loan amount to grant you. But with such high stakes, lenders also have more strict qualifying requirements for a jumbo loan, so expect higher than usual interest rates, a longer approval period, and more documents and paperwork required.
These are some of the typical requirements in a jumbo loan application.
- Down payment
Lenders usually approve luxury home mortgages with a 5-10% down payment, but this can go as high as 20% or 30%. The down payment that may be required largely depends on the lender’s underwriting standards, so it’s best to shop around to find the right mortgage package for you.
- Credit Score
Whether it is a luxury or non-luxury home, credit scores always play an important role in determining the terms and interests you may obtain. With luxury home loans, a minimum credit score of 680 is the norm but lenders might require a higher score for a larger – and therefore riskier – loan.
- Debt to Income Ratio
As a rule, lenders look for a low DTI for any type of mortgage, but even more so for a jumbo loan. To secure the best mortgage, it’s ideal to have a low DTI, preferably no more than 38% to 43%. However, even with a high DTI, a lender might consider granting you a jumbo loan if you have a high credit score and are willing to put down a sizable down payment.
Live the luxury life you’ve always wanted! Find the perfect home in the luxury OC real estate market with the guidance of an experienced Realtor. With more than 30 years of experience, a widespread network, and expertise on upscale SoCal real estate, I can provide you with the expert guidance you need in all aspects of the homebuying process, including financing. Give me a call at 949.295.5676 or drop me an email today.