Philadelphia Main Line Luxury Home Buyers Need a Luxury Mortgage
If you are buying a luxury home on the Philadelphia Main Line and want a mortgage you need a luxury product. Obviously the most obvious choice is a jumbo loan, this is one over and above the limits of a Fannie Mae or Freddie Mac backed loan, in our area this is currently $397,500.
John Meussner of Total Mortgage Services lays out a very good explanation of different options at different price points and how and why these may be cheaper than a straight forward conventional loan.
Luxury Buyers Need a Luxury Mortgage
For the first time since I've been in the mortgage industry, we're seeing investors offer products to luxury home buyers at more competitive interest rates than buyers using conventional loan products. While "luxury" is subjective term (a shack by the sea in many parts of California commands a luxury price tag), for the intents of this blog we can use the term to mean home purchases that command mortgages that exceed the Fannie Mae/Freddie Mac/FHA loan limits. To be clear, I also won't be discussing the 'ultra luxury' market, which typically commands loan amounts in excess of $5 million. Ultra luxury loans are generally better served by investment banking firms that offer ridiculously low adjustable rate loans in exchange for asset deposits and management services.
While luxury and jumbo loans have different (and more stringent) requirements than conventional lending platforms, fixed rate mortgage money has never been cheaper than we're seeing right now for this market segment.
The main difference in the luxury market lies in lender requirements for borrower reserves. Most investors will require a borrower to have asset reserves after settlement. The amount of reserves required generally depends on a combination of loan amount, credit score, and loan to value, but typically ranges from 3 months to 36 months of reserves, and sometimes more (most lenders require borrowers with multiple financed properties to hold 6 months of reserves for each property in addition to standard reserve requirements).
Luxury and jumbo loans traditionally work on a more "common sense" theme of underwriting than loans packaged & sold to Fannie Mae & Freddie Mac through conventional channels. For example, some jumbo & luxury investors allow debt to income ratios upwards of 50% (meaning 50% of a borrowers gross monthly income can be dedicated to debt payments). High debt/income ratios can be offset with a high residual monthly income & reserves, and jumbo lenders know this. For buyers that want as many luxury/jumbo options as possible, it's best to keep debt/income ratios below 43%, though, as many investors cap their programs at that limit.
Here are some examples of current Jumbo/Luxury mortgage programs that are being offered with rates even better than conventional loans:
20-25% down payment, loan amounts up to $2 million with a 740+ FICO and 12 months reserves
40% down payment, loan amounts up to $5 million with a 760+ FICO and 36 months reserves
20% down payment, loan amounts up to $1 million with a 700+ FICO and 6 months reserves
These examples show themes consistent with all jumbo/luxury lending. The larger the loan amount, the larger the down payment requirement. The larger the loan amount, the higher the reserve requirement. The larger the loan amount (and the higher the LTV), the higher the minimum FICO score. Investors are hedging their risk on jumbo loans with reserve requirements and by only lending to those with good credit (at least those investors with favorable terms for borrowers). In most cases, luxury and jumbo mortgages with favorable terms are unavailable to borrowers with FICO scores below 680.
So how, with so much money at risk to a lender, can they offer terms better than conventional lending terms? Lenders and banks are all seeking additional revenue streams, and are banking on the fact that once a wealthy individual is a mortgage customer, they can market other financial products to them as well, such as investment options, insurances, and other loans. This tactic may pay off if banks can get borrowers to park their assets into the same institution, but whether a borrower plans on moving money around or not, one thing is for certain - it's an excellent time to take out a jumbo loan.
Looking for a jumbo loan with favorable financing terms? Give me a call at 484.680.4852 or bring your questions directly to an expert for an instant answer.
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