An average American carrying a mortgage would tell you the same story: it’s a tough process. Consider the money you have to save for the down payment, the paperwork that takes forever, and decades of taking majority of your paycheck for your house.
Indeed, the American dream synonymized sacrifice. Pretty sure the wealthier have it easier, right? But is it really the case in the higher tiers of the borrower market?
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Picture a five million dollar estate in the affluent neighborhoods of Los Angeles – considered the fifth most important center of wealth in the world. Replete with all the luxuries of an urban mini-mansion.
Just last year, the city’s luxuryresidential market skyrocketed by 5.3 percent, only second to Seattle’s 9.7 percent as the highest increase in the country.
When compared to the nationwide home price average of $1.6 million, Los Angeles properties tower in comparison, charting an average of $4.1 million per property.
So where do these buyers come from? According to luxury real estatefirm Teles Properties managing director Stan Smith, buyers vary and may come from “everywhere” – most of which are rich, non-famous personalities.
MLS data from the California Association of Realtors also revealed that for homes priced $2 million above, 35 percent were paid in cash. For those who don’t have the liquid assets to pay for the property in cash, jumbo mortgages are often the common choice.
What are jumbo loans?
A jumbo loanis a loan that carries an amount beyond the conforming limit established by government-handled regulations currently set by Government service agencies Freddie Mac and Fannie Mae.
Each county differs in their conforming limitsbut for most counties, the limit currently stands at $424,100 for a single-family home. By comparison, the conforming limit for Los Angeles County sits at $636,150.
After the mortgage crisis in 2008, rates for jumbo mortgages plummeted, attracting many high-end buyers with equally attractive incomes and lines of assets. So even when conforming loansare easier to make, there has been a lot of competition among lenders to offer this type of loan.
Beyond the rules
Experts admit, however, that it’s not that easy in every aspect. It has its own issues. Case in point: the documentation which could be pretty long and sophisticated given most of these buyers’ assets are spread across different ventures, bonds, and investments. It’s a specially daunting process.
Traditional qualification guidelines may not apply and thus require a thorough examination for most. Some of them may have ultra-high bank figures but low credit scores.
The thing is, rules applying to average mortgage products mostly crumble when employed to these massive loans.
Drop Mortgage executive mortgage consultant Brandon Boyd puts an example, “A lot of these borrowers can’t walk into a traditional bank and get a $5-million loan. It’s hard for a bank lender to pull back and understand that income.”
To counter the challenge, most lenders use their own specialized processes to make sure adequate information has been gathered and the loan is disbursed with terms that are proportionate to the determined risk.
Although risks are indeed high for these loans, Boyd says it is not irresponsible at all.
“It’s an alternative space, but it’s not the subprime of the past, not by a long shot.”