APRIL ISSUE Whether you are considering buying or selling a luxury home, it is imperative that you understand the dynamics of financing such a property.
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HOW TO HANDLE FINANCING OF THE LUXURY HOME
Whether you are considering buying or selling a luxury home, it is imperative that you understand the dynamics of financing such a property. Even if you are a seller, your agent will counsel you as to the strength of the offers being presented to you if they are financed. Of course, we all love the cash buyer, but the fact is that many people who can afford to pay cash for a home might be advised by their financial planners to finance. That is why letter of preapproval and proof of funds to close are so important when a financed offer is presented.
Here is what’s happening in the real estate financing market today:
Jumbo rates rising
$1 million-plus mortgages are heavily influenced by the overall global economy. U.S. economic factors include stocks that continue to close at all-time highs. The S&P 500 is at record levels (we are approximately 3% off the all-time high), and the Dow is wavering between 17,500 and 18,000 (as of this writing).
Domestic stocks are expected to continue to grow through 2015, with anticipated corporate growth of 7% to 8% conservatively. The 10-year Treasury has passed 2%,with general expectations to be at 3% by year end. Unemployment continues to improve from 5.6% to 5.4%, also by year end. Our last jobs report was certainly moving upward.
As rates continue to rise, banks are now competing more than ever to earn your business, this will also drive them to continue to ease underwriting guidelines, allowing home mortgage consultants to fund more “make-sense” mortgage transactions.
Beware of online applications
Personally meeting your home mortgage consultant with your appropriate documentation will allow you to set the right budget for your purchase up front vs. applying and obtaining a preapproval online.
In the luxury market, a future homeowner’s income sources have many layers of complexities that might not be able to be reflected correctly with an online application. Having your documentation in the hands of your experienced home mortgage consultant at the time of application will allow you to communicate more effectively the characteristics of your income stream, allowing the consultant to accurately calculate your qualifications up front.
The application you might submit online or by telephone may not be supported by the actual documentation that would be required to be collected; this will make you think that your eligible sales price and loan amount are far higher or lower than what you actually qualify for.
Going into escrow with an incorrect preapproval will cost you countless hours negotiating dollars on inspections on a property you might not be able to purchase.
As rates rise and qualifying for the higher rates becomes more difficult, the pool of eligible customers will continue to narrow, encouraging banks to become more competitive for the available mortgage business. This will also fuel a drive for an increase in more flexible loan standards and more readily available documentation alternatives underwriters can accept.
So again, buyers, please make sure you have preapproval letters and proof of funds available to your agent when you are ready to write an offer. Sellers, please make sure those items are provided to you at time of offer review so you can make a better and safer decision.
Below is an interesting statistic for homes financed in the Rancho Santa Fe/Del Mar/La Jolla/Coronado areas.
Ratio of total purchase transactions closed in the last 12 months to total purchase transactions where buyer financed $500,000 or more:
Rancho Santa Fe 98/182 53%
Santa Luz 34/54 62%
Del Sur 51/77 66%
Fairbanks Ranch 17/23 73%
Carmel Valley 281 /404 69%
Del Mar 89/148 60%
La Jolla 80/145 55%
Coronado 162/289 56%
The above statistics are courtesy of Michael Campos, NMLS 445764, with HomeServices Lending
Branch Manager, Rancho Santa Fe, Fairbanks Ranch, Del Rayo