Making a Luxury Home More Than a Dream
Buying a luxury home is an important decision and goes beyond the cost to purchase it. This may also be the forever home for your family. Now that you have made the decision to purchase, let’s try to make the process satisfying and as uncomplicated as possible by laying out the basics of the homeownership process.
Regardless of the price of your home these basics will apply to your purchase transaction. If you happen to be paying all cash for the home, you may only want to casually review the Down Payment and Mortgage Financing sections of the guide.
Since getting competent advice when purchasing a home is so important you will need the guidance of a trusted professional that will represent your best interest. Please refer to the section on interviewing a REALTOR®. Once you sign a representation agreement with a REALTOR® they are ethically and legally bound to put your best interest ahead of all others.
Throughout your purchase transaction you will hear and read real estate terminology that you may not understand. Terms such as Private Mortgage Insurance (PMI), Mortgage Insurance Premium (MIP), Annual Percentage Rate (APR), and Closing Disclosure (CD), are just a few. For your convenience a glossary of real estate and mortgage related terms are listed below for your reference. Should you have questions or need additional information, click here to contact me directly.
Interviewing and Finding a Luxury REALTOR®
It is important to select a REALTOR® that is someone you feel comfortable working with. They should have a strong reputation, be very experienced, and knowledgeable about your luxury home market. They should have the formal training and verifiable credentials to offer sound advice to you throughout your homebuying experience. This is especially true with the luxury home market because it is so specialized and often goes beyond the norms of traditional home buying.
There is a difference between a REALTOR® and a licensed real estate agent:
- Both can represent you for a home purchase.
- Only REALTORS® are member of the National Association of Realtors and their state Association of REALTORS®
- Only members must adhere to a strict Code of Ethics, which requires REALTORS® to cooperate with each other and further the best interest of the consumer’s best interests.
There are literally thousands of real estate agents in most major cities; so how to you find the best REALTOR®? Start by asking your family and friends for recommendations. You can also search online for local agents and narrow your search by studying their profiles, online reviews and testimonials.
After you have a list of Luxury Certified REALTORS® to interview, plan on meeting with them and use the following questions to guide the conversation.
- Who will be the point of contact for communications, the agent or a dedicated team member?
- How long has the REALTOR® been working in luxury residential real estate?
- Is the REALTOR’s® specialty working with buyers or sellers?
- What is a real life example of their negotiating skills with a luxury home buyer or seller?
- What special training, certifications, and designations has the agent obtained for handling luxury homes?
- What resources do they have to separate themselves from other competitive luxury REALTORS®?
- Do they have an established relationship with mortgage lenders that specialize in working with Jumbo loans over a million dollars?
Answers to these questions should give you a feel for the agent’s willingness and ability to work for your best interest. How they answer will give you an idea of their patience and personality. You will spend a lot of time working with your REALTOR. Take the necessary time to learn as much about them as possible.
Let’s Talk Down Payment
One of the greatest decisions for luxury homebuyers is deciding on a downpayment. Should you pay all cash or are there advantages to leveraging your money by financing the purchase with a mortgage? Either way there may be tax advantages or consequences so you should seek the advice from your accountant or tax professionals before deciding.
If you do decide to finance your purchase with a mortgage the amount of down payment may depend on the mortgage lender’s requirements.
Larger loan amounts often require a larger down payment. For example, a $1 million jumbo loan may require a 30% downpayment versus a $600,000 loan that requires only 5% downpayment. Speak to your mortgage lender about your down payment options. Together you can decide on an option that is best for your circumstances.
You should know that the Veterans Administration removed loan limits on a VA loan and they do not require a down payment at all. There are other advantages for the veteran if they are disabled, such as partial or full waiver of property taxes, no mortgage insurance or VA funding fees. These loan programs have special eligibility requirements and lenders may put caps on their maximum loans which can be explained in detail by mortgage loan officer that specialize in VA financing.
Mortgage lenders look at a buyer who has savings and other liquid assets such as 401K, IRAs, and retirement accounts, more favorably than a buyer who does not. This is because they have reserves to fall back on should they run into financial difficulty. Click here for more information from the Consumer Protection Bureau on building savings.
The amount of your down payment should match your financial position. A larger down payment will lower your loan amount and monthly payment. A small down payment option still gives a buyer the opportunity to build equity when buying a home.
Your REALTOR®, mortgage lender, and tax professional/accountant are excellent sources for advice to identify your financing options and all of them have a vested interest to help you. You can click here for additional information from the Consumer Protection Bureau regarding down payments.
What are closing cost and how much are they? These are common questions that I often receive from home buyers. Having saved for a down payment, it is often surprising that there may be additional cost beyond the down payment amount.
Closing cost are charges for services rendered in connection with getting your home purchase completed and they are in addition to your down payment. They typically range from 3%-5% of your sales price and can sometimes be negotiated to be shared with the seller.
If the property you are purchasing is new construction, the builder may offer monetary incentives that can be credited toward your closing cost.
Examples of these costs are:
- Appraisal – A state licensed person determines the value of the house you are buying
- Title Insurance – Insurance to make sure you have clear ownership of the property
- Pre-paid Interest – Interest that is paid on your home loan each month
- Survey – Identifies the boundaries and any issues with them on the property you are purchasing
- Document preparation – Fees charged to prepare closing and other legal documents
- Lender Origination – A fee your lender will charge for doing your home loan
- Property Tax and Hazard Insurance Prorations
- HOA Dues – Collected by the subdivision to manage common areas of the community
If you are financing your luxury home you should keep in mind that some closing costs are reoccurring. Examples are Hazard Insurance which covers your home from damage/liability and Property Taxes that are charged by the city and or county. The lender will require you to include one-twelfth of these charges in your monthly mortgage payment if you have less than a 20% down payment or if their jumbo loan requirement mandates it.
When tax and insurance fees are set aside in a non-interest bearing Escrow Impound Account they are referred to as impounding your taxes and insurance. This is also why your full mortgage monthly payment is referred to as principal, interest, taxes, and insurance, or more commonly, PITI. These funds are held by your lender in an impound or escrow account. When the bills for your property taxes and hazard insurance becomes due each year your lender will pay them on your behalf.
The Mortgage Loan Process
If you are luxury homebuyer that is paying all cash for your home the mortgage loan process may be of little interest to you. However, I still recommended that cash homebuyers consult with their tax professional or accountant to make sure you are not missing out on any tax or leveraging strategies that might be financially beneficial.
Getting approved for a mortgage can be complicated if you don’t understand the lender’s objective when reviewing your application. Basically, the lender wants to establish your willingness and ability to repay their loan and that the house has sufficient collateral should you happen to default on it.
Your willingness is based on your credit history and credit scores. Your ability is determined by your income, assets, and on a ratio of your debt to income. The collateral value is determined by a state licensed appraiser. Collectively all these factors will reduce the lender’s risk.
Most lenders use an Automated Underwriting System (AUS) to render a decision about a loan applicant. These AUS models analyze your income assets, credit scores, and debt to income ratios and use a proprietary algorithm to issue a loan decision. The more accurate the input the more accurate the results.
If you have an established relationship with a bank start there as a source for your mortgage loan. Banks tend to give their customers preferential treatment and often reduced fees for using their services. Consult with your REALTOR®. They often have working relationships with various lenders who may specialize with your financial situation. To find out about down payment assistance or first-time home buyer programs ask your REALTOR® for a recommendation.
If you are financing your luxury home purchase you should get pre-qualified for a mortgage before you go on a home tour with your REALTOR®. This can be done initially online without providing any supporting documentation and the lender will use a soft credit pull to review your credit profile and credit risk scores. Once this information is reviewed the lender will issue a pre-qualification letter to outline your loan qualifications.
Having a pre-qualification from your lender serves several purposes. It tells you how much financing you can obtain, and once you present an offer to purchase a home it gives the seller confidence that you are able to obtain financing to purchase their home. If for some reason you cannot qualify the results of your pre-qualification will give you the steps to take to get approved later.
If you will be paying all cash for your purchase, you should be prepared to provide proof of liquid funds to purchase the home. This can be financial documents such as bank or investment statements or even a certified letter of credit from your financial institution.
Finding Your Luxury Home
Just like every other phase of home buying you and your REALTOR® will need to plan for your luxury home tour. The more you can tell them what you want and what your highest priorities are the better they will be able to make this an enjoyable and fun experience.
These are basics to have in mind when you meet with your REALTOR® to plan your home tour.
- A price range that works with your down payment, closing costs, and your lender’s pre-approval.
- The physical makeup of the home, bedrooms, baths, square footage, fenced yard, etc.
- A specific town, subdivision or neighborhood that you prefer.
- Any requirements for schools, medical facilities, public transportation, etc.
- Community amenities including, parks, recreation, entertainment, religious or cultural requirements.
- Commute times to your workplace
- Any special technical necessities such as high-speed internet requirements
If you have other family members that will be living in the home, including children, make this a family discussion and experience. Give everyone a voice. You may not agree totally and that is okay. Let your REALTOR® know where you differ. Often, they can find a compromise or even a property that may address the differences. If your expectations are just not possible this is the perfect time to find out and discuss alternatives. This may include looking in areas that are adjacent areas, new construction versus existing homes, or even a neighborhood with a community pool versus one in your backyard.
Click here and request customized Home Buyer’s Consultation. Even if you are not ready to immediately take this step this will outline a very specific path for you to take to successfully close your home purchase.
Stay positive and keep an open mind! You may not immediately find the home of your dreams, but it is out there, we’ll just have to find it.
APR-Annual Percentage Rate
This refers to the interest rate that reflects the actual cost of a mortgage as a yearly rate. Because APR includes points and other costs associated with the mortgage it’s usually higher than the advertised interest rate. The APR more accurately reflects what you will be paying and is a way to compare mortgages offerings based on actual costs.
Appraisal
An estimate of the dollar value of a home made by a professional appraiser and based on their knowledge, experience, and analysis of the property and comparable properties nearby. The maximum amount of the mortgage is usually based on the appraisal.
Assumption
The process of taking over (assuming) the mortgage obligation of another individual with the approval of the lender that holds the note of the obligation.
Closing
The conclusion or consummation of a transaction. In real estate, closing includes the delivery of a deed, the signing of notes and security instruments, and the disbursement of funds necessary to the sale or loan transaction. Also referred to as settlement.
Closing Costs
Various expenses (over and above the price of the property) incurred by buyers and sellers in transferring ownership of a property. Closing costs normally include items such as commissions, discount points, origination fees, attorney’s fees, taxes, title insurance premiums, escrow agent fees, and charges for obtaining appraisals, inspections and surveys. Lenders will itemize these costs on the Closing Disclosure or CD to show them as a buyer’s cost or as a seller’s cost.
Discount Points
(Discount Points, Loan Origination Points) – Points are prepaid interest on your mortgage. A one-time fee charged by the lender at the time of closing for originating a loan or to lower the interest on the loan. Each point is 1% of the loan amount – that is, 2 points on a $100,000 mortgage would be $2,000. Amounts will be paid to the lender at origination.
Escrow
In real estate the term escrow may have several meanings. It’s commonly a neutral third-party such as a title company or escrow company whose role is to carry out the instructions of the buyer and seller. An escrow account is an account managed by the lender in which a portion of your monthly payments are held to pay for taxes and insurance when they become due. This is also called an impound account.
Homeowners’ Association – HOA
A nonprofit association that manages the common areas of a planned unit development (PUD) or condominium project. In a condominium project, it has no ownership interest in the common elements. In a PUD project, it holds title to the common elements. See also master association.
Jumbo Loan
A loan that exceeds the maximum limits set by Fannie Mae, Freddie Mac and their regulator, the Federal Housing Finance Agency. In 2022 that amount is $647,200, and as high as $970,800 in designated high cost areas of the country such as Hawaii and Alaska.
Loan-To-Value Ratio
The ratio of the total amount borrowed on a mortgage against a property’s appraised value. For example, if there is an $80,000 mortgage on a home with an appraised value of $100,000, the LTV is 80% ($80,000 / $100,000 = 80%).
Mortgage Insurance
An insurance paid by the borrower that partially insures a lender against loss caused by a borrower’s default on a mortgage. Also known as PMI for Private Mortgage Insurance if issued by a private company or MIP for Mortgage Insurance Premium if issued by the Federal Housing Administration (FHA).
Option Period
The Option Period in Texas is a specified number of days set forth in a real estate contract which allows the buyer to terminate the contract for any reason. This option, when written into a real estate contract, creates the right to terminate the contract within a certain number of days for a specified price without risking the earnest money deposit.
PITI
An abbreviation for the parts of a typical monthly mortgage payment. It stands for Principal, Interest, Taxes, and Insurance. This is your entire monthly payment, excluding your Homeowners Association (HOA) monthly assessments. These assessments may be collected annually, monthly, or quarterly.
Pre-Approval
A lender’s conditional agreement to lend a specific amount on specific terms to a homebuyer. These conditions are typically, a satisfactory appraisal, a clear title report and no change in a borrower’s financial or credit condition.
Title Commitment
The title company's promise to issue an insurance policy for the property that protects the lender (Lenders Policy) or the buyer (Buyer’s Policy) after closing against loss arising from disputes over ownership of a property, boundary disputes, etc. The title commitment contains the same terms, conditions, and exclusions that will be in the actual insurance policy.
Underwriting/Underwriter
The process and or person that evaluates risk, the determination of the appropriate loan amount, and the setting of loan terms and conditions for lending. This is based on the borrower’s willingness and ability to repay the loan and the value of the real property that will secure the loan. The person performing this task is an Underwriter.
Additional Resources:
Buyingatexashome.com
Consumer Protection Finance Bureau - Mortgages
Texas Real Estate Commission -TREC