How to Structure a Down Payment for a Luxury Home

Posted by Marc Rasmussen on Monday, September 10th, 2018 at 7:48am.

How To Structure a Down PaymentThe majority of luxury properties bought in Sarasota are cash transactions. However, some people prefer to borrow money when purchasing. The key to affording a luxury home in the long-term is wrapped up in how well a buyer can structure their down payment. Find out how the amount of your down payment doesn't only affect the final approval chances of the loan, but also the interest rates, bank fees, and monthly payments.

The Perfect LTV

The loan-to-value (LTV) ratio is the amount of unpaid principal on the home compared to the total cost in value. So if a buyer puts down $100,000 on a $1,000,000 home, they would have 10 percent equity in the home and a 90 percent LTV. Typically, the magic percentage for most lenders is 80 percent, which means that a luxury buyer should have at least 20 percent in cash before buying a luxury home. This not only makes the monthly payments smaller, it also encourages lenders to be more generous with their interest rates. The more equity a homebuyer has for the property, the less likely a lender will lose money on the overall deal.

The Cost of PMI

Private Mortgage Insurance (PMI) is a specific type of policy that buyers need if they're unable to come up with a 20 percent down payment. The exact costs for PMI are determined by the buyer's financial standing and credit score, but usually total between .5 – 1 percent of the purchase price of the home. The regulations when it comes to exactly how much money a buyer needs to put down and whether or not they need to buy PMI will typically vary from lender to lender. However, most experts will tell buyers not to take chances: a small down payment is almost always more financial trouble than its worth.

Think Like a Lender

A luxury home to a lender is very different than a traditional home purchase, and their standards reflect the challenges if a buyer default on the loan. It's one of the reasons why luxury home buyers need to pay more attention to practically every aspect of the home purchase. Lenders may require buyers to put down 30 percent of the home's total value, or they may put the buyer through several underwriting procedures to ensure they've covered all their bases. Buyers will need to have their tax returns, pay stubs, and bank statements ready to prove their worth. Buyers will normally need to show their financial stability over the past few years in order to achieve final loan approval. A large down payment helps lenders relax about their liability.

Final Fees

A loan application is unfortunately not free, especially if it needs to go through several underwriters before the lender reaches their conclusion. In addition to a down payment, Siesta Key buyers should budget for the origination fee to process the application as well. Just like with PMI, these fees can go as high as 1 percent of the purchase price depending on the buyer's financial standing. Buyers may also need to pay for closing costs, as well as appraisal and inspection costs. One potential option that buyers may want to consider is going to the seller for a little extra help during this time. Luxury home sellers will sometimes act as a supplemental lender if the circumstances are right, which will free up finances to be used for the down payment. (Just make sure you have a lawyer set this up.) This option can also save buyers from having to dip into their 401k.

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