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    The LA Homebuyer’s Guide to The Mortgage Loan Process

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    Overview of LA luxury homes and mortgage products

    Living room inside a luxury homes in Los Angeles Los Angeles is one of the most in-demand luxury real estate markets in the world. As the pandemic swept through the metro area, buyers’ tastes and preferences began to change. Realtors are seeing an increasingly discerning clientele move away from the ostentatious mansions of old and onto modern homes with value and substance. As the market develops, luxury builders are rising to meet changing demands and preferences, with a focus on curated living spaces with quality build, high-end finishes, and carefully chosen pieces of furniture. Top-tier buyers have also had a change in perspective as the pandemic upended lives in 2020. With a greater need for space and privacy in a vast metro area, luxury buyers are now looking for even larger properties to serve as their primary residences and vacation homes. Layouts that offer room for both self-isolation and social gatherings have become more desirable. Several amenities, such as highly connected home offices, private gyms, screening rooms, and larger outdoor spaces are in high demand. Although LA has always been sought for outdoor attractions like its iconic beaches, the pandemic has only given luxury buyers a stronger desire to be outside, with walkable beach communities and areas with larger land lots seeing increased interest. Most buyers pay cash for luxury properties priced at $15 million and up. But there are other ways to finance a luxury home purchase. If you’re entering the market for a luxury property that meets your needs, here are some of your financing options. .

    Types of mortgages for luxury real estate

    A calculator, a key, and a miniature house on top of a paper with inscription 'Mortgage' When buying a luxury home in LA, some of your financing options include: . Jumbo mortgage. This mortgage product is ideal for luxury home purchases because it exceeds the loan limits set by the federal government for conventional mortgages. The maximum conforming loan limit for most markets in the U.S. is $548,250 as of June 2021. However, since most housing markets in California are considered high-cost areas, conforming loan limits can go as high as $822,375. Any loan that goes above that limit is considered a jumbo loan. If you’re in the market for your first luxury home, it’s worth looking into this type of financing. Jumbo mortgages don’t have the same guarantees as conventional loans, which is why borrowers must meet stringent requirements and face greater scrutiny over their finances. These loans may also entail higher borrowing costs. Generally speaking, jumbo mortgages have much larger down payments, higher interest rates, and additional fees, processes, and requirements. To qualify for a jumbo loan, borrowers must have a higher credit score and more cash reserves than average. . Super Jumbo Mortgage. A super jumbo mortgage exceeds current jumbo loan limits. Only a limited number of lenders offer super jumbo loans in the U.S. While most lenders define super jumbo loans as loans that exceed $2,000,000, others set the threshold much higher at $3 to 4 million, which is more likely to be the case with markets like Los Angeles, where median home prices are higher than the national average. A super-jumbo loan will have even more rigid requirements compared to a standard jumbo loan since there isn’t a robust secondary market in which lenders can offload both loan types. This means that the lender assumes the risk of approving your loan application. With lenders setting their own internal guidelines for super jumbo loans, borrowers are expected to make an even bigger down payment (some lenders require 10% to 20% of the sales price). They should have higher or near-perfect credit scores of at least 740. Lenders typically require an appraisal at or above the property’s purchase price. Interest rates for super jumbo loans are also slightly higher compared to other loan products depending on the lender issuing the guidelines. Generally speaking, you can expect the rate to be about 1% higher than jumbo or conventional loans. Jumbo and Super Jumbo loans can be divided into the following sub-categories:
    • Prime Jumbo loans usually have the best rates and terms available for jumbo and super jumbo loans. However, these loans often have very stringent underwriting rules. Borrowers must have an excellent credit score and debt-to-income ratio, which should be verified by taxes, cash reserves and income stability.
    • Subprime Jumbo loans are typically more forgiving when it comes to credit score requirements as long as the loan-to-value (LTV) is low and your income can be verified. However, rates and terms are not as favorable as with Prime Jumbo loans.
    • Alt Docs Jumbo loans are aimed at self-employed borrowers who can prove that they have strong and stable income flow. Unlike Subprime Jumbo loans however, Alt Doc Jumbo loans do require excellent credit scores, 12 to 24 verified bank statements and evidence of adequate cash reserves in the bank.
    • Hard Money Jumbo loans are ideal for borrowers with low credit scores though rates are typically much higher compared to Prime Jumbo loans. Borrowers can qualify if LTV is low and they can have cash reserves verified.
    . Bank Statement Loan. While most lenders approve loan applications based on traditionally-documentable income, a bank statement loan requires borrowers to provide bank statements from the 12 months instead of the usual tax returns. Lenders will then calculate a percentage of the borrower’s average monthly deposits to determine their monthly income for the loan application. This mortgage product is ideal for self-employed borrowers who need to secure a very high loan amount. However not all lenders offer bank statement loans. It can also be more difficult to secure a bank statement loan with a lower mortgage rate. . Non-Qualified Mortgage. Also known as a non-QM mortgage, this loan type is offered by subprime lenders. This gives borrowers access to loan amounts that are large enough to finance a luxury property based on alternative qualifying methods. Instead of presenting proof of traditional income, borrowers will be required to produce bank statements or use their assets as collateral. Since the qualification requirements are more flexible, Non-QM loans open up the luxury real estate market to a larger group of buyers. As an alternative to qualified mortgage (QM) loans, Non-QM loans are not expected to meet the federal government’s guidelines for conventional mortgages. Generally speaking, Non-QM mortgage rates are higher than traditional or conventional loans. However, private mortgage insurance (PMI) is typically not required on Non-QM Loans. More importantly, there are no maximum loan limits. Non-QM loans can be used to finance both primary residences and investment properties. .

    The Ultimate Mortgage Loan Process Checklist

    Two hands transferring keys from one to another, a paper and pen on top of the table Before applying for a jumbo mortgage, you must first determine whether you’re qualified. According to The Balance, some basic requirements for a jumbo loan application in 2021 include:
    • 20% down payment or more, though you might get approved with less
    • Excellent credit scores (700 or higher)
    • A spotless credit history
    • Substantial cash reserves (at least six months’ worth of payments)
    • Roughly 43% debt-to-income ratio (DTI)
    • Demonstrated income for monthly payments
    Once you’ve determined whether or not you qualify for a jumbo mortgage, you need to produce certain documents to help the lender verify your qualifications. These include:
    • Credit scores and reports
    • DTI ratio
    • Cash reserve statements
    • Documented proof of income and assets
    • Appraisal confirming the value of the property
    Lenders will also require an appraisal to ensure that the fair market value (FMV) of the property is high enough for either a jumbo or super jumbo loan. They will use the appraisal to calculate the LTV ratio. LTV ratio helps lenders determine whether to offer a jumbo loan, how much to require for the down payment, and how high your interest rate should be. Generally speaking, the lower the LTV ratio, the lower the interest rate. But if the LTV ratio is too high, the lender may rule that the property value is not worth the jumbo loan and refuse to offer financing altogether. Other forms of documentation needed to verify your financial health include:
    • Annual tax returns from the last two years (i.e. W-2s)
    • Recent bank statements from the last 60 days
    • Recent pay stubs from the last 30 days
    • Proof of other income (i.e. commissions, bonuses, investment income and additional deposits)
    • Profit and Loss statements and balance sheets (for business owners and self-employed borrowers)
    Aside from verifying your financial standing, lenders will also consider the impact of the down payment and closing fees on your finances. This means that you must have enough cash reserves to cover the closing costs up front in addition to the down payment and monthly mortgage payments. Since jumbo and super jumbo loans are higher than conventional mortgages, keep in mind that the closing costs are also higher. .

    Improving your credit score

    A couple looking at the tablet while sitting on sofa. On their back is a kitchen with one table and two chairs. There are many ways to increase your chances of getting approved for a jumbo loan, including building your credit score prior to application. Here are some tips for improving your credit score:
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    • Reduce your debt and personal expenses. To build your credit score, you need to pay down as much debt as possible. If you have several sources of debt, such as student and car loans, consider consolidating your debts to make debt repayment more manageable.You also need to reduce your credit card spending and overall personal expenses. This could mean skipping takeout and cooking your own meals, taking fewer vacations, and more.
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    • Follow a strict monthly budget. No matter how much money you’re making, starting a budget and sticking with it will help you keep your spending in check. By focusing on long-term financial goals like buying your first luxury home, you’ll find it easier to reduce your personal expenses.
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    • Save a set amount of money each month. Once you’re able to keep your debt and spending in check, you can start saving money. Commit to saving a set amount of money each month. This will help you build your cash reserves.
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    • Check your credit score. Keep an eye on your credit score while paying down debt and putting money towards savings. This will help you determine whether your methods are working. This also allows you to check your credit report for any errors and inaccuracies.
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    • Mind your credit utilization ratio. This ratio refers to the difference between the amount of credit you have available and the amount you’re using. This is one of the most important factors in credit score calculation. According to Fool, your credit utilization ratio accounts for roughly 30% of your overall FICO score.You can calculate your credit utilization ratio by taking your current balance and dividing it by your credit card limit. As a rule, you should keep your credit utilization ratio below 30% to maintain a high credit score.However, make sure your ratio stays above zero. If you don’t use any credit at all, lenders won’t have any basis for determining how you manage debt and spending. Experts recommend charging small expenses to your credit card each month and paying the amount back in full to demonstrate that you can manage borrowed money.
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    • Apply for a credit limit increase. If you’re having difficulty staying below the recommended 30% credit utilization ratio due to a low or restrictive credit limit, consider applying for a credit limit increase.
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    • Be more strategic about applying for new credit. Starting too many new credit applications can potentially hurt your credit score. Keep track of how often you apply for new credit cards and loans as well as the number of times you get approved or rejected.This is because lenders perform a hard inquiry on your credit report, causing your credit score to drop by a few points whenever you start a new credit card or loan application. If you have a habit of applying for new lines of credit, those hard inquiries can have an impact on your credit score over a certain period of time.
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    • Work with a financial advisor. Assemble a team of financial experts who can provide professional advice and suggest actionable steps towards improving your credit score. They can also make practical suggestions for managing your expenses and building your cash reserves in preparation for the loan application.
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    Mortgage pre-approval: Is it necessary?

    Keys in the door lock Getting pre-approved for a mortgage can give you an advantage in situations where you need to demonstrate your financial readiness to purchase a home. There are two steps to securing financing for a home: Pre-qualifying and pre-approval. Although most buyers use the two terms interchangeably, they are two different steps in the loan application process.
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    • Pre-qualifying is the first step of the loan approval process. This gives borrowers an idea of how much they might qualify for based on their credit score, monthly income and other variables. Pre-qualification is usually quick, taking one to three days, since it doesn’t include a complete analysis of your credit reports or your demonstrated ability to purchase a luxury home.
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    • Pre-approval is the next step of the process. The lender expresses a conditional commitment to granting a loan after verifying the information you’ve provided. The pre-approval letter includes the exact loan amount.To get pre-approved for any mortgage, you must complete an official mortgage application and produce all the necessary documentation. The lender must perform a thorough credit and financial background check before offering pre-approval up to a specified loan amount.
    . Finding the right Realtor Aside from building your credit score and qualifying for a jumbo mortgage, you must also work with the right Realtor when buying a luxury home. An experienced Realtor can offer support and professional guidance while purchasing a home in Los Angeles. Ben Kruger Real Estate has a proven track record in LA’s luxury real estate market. With an illustrious career that spans over the past decade, Ben is a trusted advisor, helping clients meet both their short-term and far-reaching financial goals. If you find yourself competing with cash buyers in the market, Ben will help you navigate the loan application process. As an affiliate of the Hilton & Hyland real estate brand, the leading real estate brokerage in LA, Ben provides access to exclusive private listings in the area. .

    Closing

    Work with a seasoned Realtor who knows the luxury market inside-out. Contact Ben to discuss your financing options for luxury homes in LA. Call 310.600.4500, send an email to Ben(at)HiltonHyland(dotted)com or fill out the form.

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