If you’re shopping for a luxury home, what can you do if you are self-employed or highly leveraged and won’t qualify for, or don’t want, a traditional mortgage?
Many buyers simply pay cash for their homes. According to ATTOM, a property-data provider, 33.12% of all sales nationally of single-family homes over $1 million in the second quarter of 2023 were cash deals.
But there are other ways to pay for a luxury home when a traditional mortgage product isn’t a good fit. Here are some creative alternatives to consider.
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Collateralize your investment portfolio.
These loans, known as investment credit lines, asset-based loans or margin loans, allow you to borrow against the securities you already hold in your brokerage account, whether they are stocks, bonds or alternative investments. The advantages, according to Michael Silver, a certified financial planner in Boca Raton, Fla., are that they have no application fees or closing costs, no financial documentation is required and your credit score and debt-to-income ratio aren’t considered. “It’s strictly based on your assets,” he said. “So, if somebody is highly leveraged or if they’re high-net worth but have bad credit, none of that matters.”
The interest rate on a margin loan fluctuates, however, and rising rates or declining asset values can result in the institution requiring the borrower to come up with additional assets to secure the loan. Silver said the interest rates on margin loans are typically 1% to 2% over the federal-funds rate (which was between 5.25% to 5.5% on Oct. 6) and that most institutions will fund about 60% to 70% of the value of the pledged assets. These loans are beneficial for home buyers who don’t want to sell their assets to avoid paying capital-gains taxes, and borrowers who are self-employed or lack sufficient documentation to qualify for a mortgage. “I also recommend margin loans for people who want to buy a house and come in aggressively with cash, but they need to sell their current house,” Silver said. “If they got a bridge loan, they would have to go through the bank application process, but you can get a margin loan in a week.”
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Consider a cross-collateral loan.
Cross-collateralization can be used to purchase a primary home, a second home or an investment property. It simply means that multiple assets are used as security for a loan. For example, if you’re buying a $1 million house, and you apply for a traditional mortgage at an 80% loan-to-value ratio to avoid paying for private mortgage insurance, you would qualify for an $800,000 mortgage and have to come up with $200,000 in cash. If you own another home free and clear, by using a cross-collateral loan, the lender would combine the appraised values of both homes and finance up to 70%, the maximum loan-to-value ratio typically used by lenders who offer cross-collateral loans, according to Sarah Alvarez, vice president of mortgage banking for William Raveis Mortgage. So if your other home is worth $500,000, you would qualify for a $1,050,000 loan (70% x $1.5 million). “That allows you to get 100% financing for the million-dollar purchase, and private mortgage insurance is not required,” Alvarez said. The lender will mortgage both properties to secure the loan. The interest rate charged on a cross-collateral loan depends on a number of factors but is usually comparable to a traditional mortgage, Alvarez said.
Liquidate assets.
Another alternative financing method is to liquidate assets. In tight markets, offering to pay cash and close quickly can give buyers a competitive advantage. This strategy is usually best for home buyers who have substantial assets that can be liquidated quickly and easily, such as a stock portfolio, rather than real estate, which is a nonliquid asset that can take months to convert to cash. Bear in mind that liquidating assets can be a taxable event that triggers capital-gains taxes. Be wary of cashing out your 401(k) or other retirement account for cash. You’ll have to pay income tax on the money you withdraw from a 401(k), plus if you’re under age 59½, the Internal Revenue Service will assess a 10% penalty, although there are some exceptions to the penalty such as for total and permanent disability.
Source: mansionglobal.com