If you’re interested in buying a luxury home, you’ll need to take a different approach than when you buy a traditional single-family home. Unless you’re paying for much of the purchase price in cash, chances are good you’ll need a jumbo loan. Here’s what you need to qualify for a luxury home mortgage – and what you should expect along the way.
When You’ll Need a Jumbo Loan
When you need a luxury home mortgage that’s valued at more than $424,100, you’ll need to apply for a jumbo loan. It’s called a jumbo loan because it’s larger than a traditional mortgage, and anything exceeding $424,100 will not be backed by Fannie May or Freddie Mac. This makes a luxury home mortgage riskier for lenders, and because of this, the qualifications are quite strict. Even if you have outstanding credit, you should expect higher interest rates than with a traditional 30-year fixed loan.
If you’re interested in a luxury home mortgage, there are a few guidelines that tend to fit all lenders.
- A credit score of at least 680. Not all lenders will give you a luxury home mortgage with a credit score of 680, and it’s always a good idea to raise your credit score as high as possible before settling into your mortgage. The lower your credit score, the higher your interest rate. With a jumbo loan, that could mean hundreds of thousands of dollars over the life of your loan.
- A down payment. You may be able to obtain a luxury home mortgage without mortgage insurance requirements for as little as 5% to 10% down, but for the absolute best results and the lowest interest rates, aim to pay between 15% and 20% of the home value as your down payment.
- A good debt-income ratio. On average, you’ll need to debt-to-income ratio of 43% or less to secure a jumbo loan. This means that your debt should not exceed 43% of your monthly income.
- A savings account. Due to the risks involved for lenders, many lenders want to see proof that you have between six and 12 months’ worth of income available to you in savings, bonds, or other assets.
What to Expect
Traditional home loans take about 30 days to close thanks to the simple underwriting process. However, when it comes to a luxury home mortgage, underwriting is far more complex. In fact, your application may be subject to more than one underwriting review, and this is especially true if your lender will have outside investors help them fund your loan. Prepare for multiple underwriting reviews, and expect the process to take up to 60 days rather than 30. With that in mind, it’s important that you seek your prequalification early if you’re interested in taking out a jumbo loan.
Although many of the same guidelines and rules apply to both a traditional and a luxury home mortgage, there are stricter guidelines and more underwriting involved with obtaining a jumbo loan. Remember to shop around since different lenders have different requirements, too.