Super Jumbo Mortgages And Luxury Real Estate: How To Get The Deal Closed
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Things are booming for the ultra-wealthy. As usual.
The global pandemic saw a massive increase in the number of high-net-worth (HNW) and ultra-high net worth (UHNW) households.
The number of ultra-high net worth individuals (defined here as those with a net worth of $50 million or more) has expanded by 73% over the past eight years, according to Luxury Portfolio International’s?2022 Luxury Real Estate Outlook. During this period, these individuals have amassed another $4.5 trillion in assets.
And they’re spending a good chunk of it on homes.
Pop stars Beyonce and Jay-Z bought an $88 million mansion in Bel Aire with the help of a $52 million mortgage, which they got from Goldman Sachs.
Singer?Adele just bought a $58 million home in Beverly Park, California, from Sylvester Stallone, with the help of a $38 million mortgage from City National Bank.
DAK Mortgage has helped numerous high-profile figures finance home purchases, including a well-known TV personality, a cable news journalist, and a professional soccer (fútbol) player. More about how to work with these public figures later.
All told,?about two-thirds of the wealth held by ultra-high net worth households is attributable to property, according to Knight Frank. Not to financial assets.
The massive expansion of the very top end of the market creates opportunity for real estate professionals who have the capacity and wherewithal to market effectively to this demographic.
Chances are good a few thousand of them live near you.
If you’re a high-net-worth or ultra-high net-worth buyer, or a real estate agent involved in a possible sale of a property worth $5 million to $30 million and up, this article is for you.
$30 million is the new $20 million
Consider: Forbes defines the ultra-high-net-worth segment as?having a net worth of $30 million and up.?By this criteria, there are more than 16,000 people worth more than $30 million in Los Angeles alone – and Malibu’s not even in the county. New York City has over 24,000. And there are more than 9,000 such UHNW individuals living in Washington, D.C.
The super jumbo market is booming
2021 saw at least 40 properties sold for $50 million or more – an increase from the prior year of 35 percent. And eight properties we know of sold for $100 million or more – a 300% increase compared to the year prior, according to data from?Miller Samuel and the Wall Street Journal.
And where there are properties at this level being transferred, there’s a demand for super jumbo mortgage loans needed to finance them.
If you’re a real estate agent or broker and you happen to have one of these fish nibbling at your hook, you’d better have your gear together and know how to service clients at this level.
About the super jumbo mortgage market
In the mortgage industry, the term “jumbo” normally refers to mortgages greater than the Fannie Mae and Freddie Mac loan limit for a single-family residence, which is currently $647,200 in most markets. But the term hardly describes the market for mortgages for super-luxury homes – those priced at $5 million, $10 million, $20 million, and up. This is a much more specialized loan market, with a much more limited number of potential borrowers, and a narrower selection of lenders who are willing to underwrite mortgages of this size.
There’s no specific, formal definition of exactly what constitutes a “super-jumbo” loan. But in practice, these loans are bigger than what most traditional mortgage lenders are willing to lend – even under their usual standards for non-qualifying mortgages – without some special underwriting and the approval of senior management and/or the lending institution’s loan committee.
Why the additional scrutiny? Aside from the obvious risk of having such a large amount of liquidity tied to a single borrower, lenders know that it’s more difficult to sell these loans upstream in the secondary market. It’s easy to sell a conforming loan to Fannie Mae. It’s not too difficult for a bank executive to find a buyer for a $750,000 mortgage at the right price – or even a stack of them – if the bank decides they need to risk-off their portfolio and shore up their liquidity.
But to find a secondary market buyer for a $25 million mortgage on a single buyer? That’s going to take some shopping around.
Lenders in the super-jumbo market know that a loan like that is a commitment. Chances are good that their capital is going to be tied up for a while.
Lenders also know that if they do have to foreclose, it takes a lot longer to market and sell a $25 million property than it does to sell a $1.4 million ranch-style home in a middle-class neighborhood in San Jose or Honolulu.
Mortgages are common, even in the super luxury market
More than one in three super-luxury buyers worldwide – at least 35% – use borrowed money to buy their high-end homes?according to research from Luxury Portfolio International.
Yes, lots of these homebuyers could afford to write a check for the property outright for these homes if they wanted to. And many of them actually do. According to the same report, 24% of super-luxury buyers plan to make are planning on making cash-only offers for their next homes.
Many super-jumbo loans in the $5 million to $30 million-and-up range are never run through the traditional bank mortgage lending process. Offers are rarely contingent on financing. It’s very common for the buyer to close with all cash, or a well-collateralized short-term loan with minimal underwriting at the closing table.
When they do finance the property, they usually like to finance as much of it as possible. Most of them didn’t get to where they are because they didn’t know how to invest their money. So they’d rather keep their own money invested and just pay interest on the loan.
Financing also reduces the need for buyers to pay capital gains taxes on appreciated assets they sell to buy property.
Super jumbo loan programs
Mortgage underwriting in this market is highly individualized. There aren’t many lenders willing to commit this amount of capital to a single loan. But the ones that do like to lend at this level don’t want to lose the deal to an arbitrary underwriting metric if there are mitigating factors and the overall deal makes sense.
We have lenders able to approve loan amounts up to $30 million or more. 100% LTV is possible with sufficient cross-collateralization.
Because there’s usually no financing contingency in the purchase contract, it’s critical to get loans approved quickly. Otherwise, the buyer risks losing his or her earnest money deposit, which in these markets is usually substantial.
Fortunately, there are several programs available that can help you get the deal closed and funded in time. Some of the most common loan programs or creative financing techniques include:
These can be a great resource if the borrower doesn’t have W-2s, bank statements, tax returns, or other conventional means of providing proof of income. This is frequently the case for luxury home buyers, who are often self-employed entrepreneurs, investors, independent contractors, or have foreign-sourced income.
Even where such documentation is available, conventional income underwriting may take too long to complete. Asset verification is much faster.
Let’s take a closer look at each of these three approaches:
Cross collateralization
This program is a great match for borrowers who already own other properties. The equity in other properties can serve as collateral for the loan on the luxury home. Cross collateralization is a common solution where the buyer has a pending sale that hasn’t closed yet but can’t wait for the other deal to go through.
The lender takes a first lien position on the newly purchased luxury home as well as the cross-collateralized property.
We have lenders that will lend up to 100% LTV if there’s enough other collateral, and proof of at least 12 months of reserves. That is, there’s no down payment required.
Cross collateralization LTV isn’t limited to new purchases: You can do it on refinances, as well, though LTVs on cross-collateralized refinances can be limited to 90% for owner-occupied properties and 80% for second home or investment properties.
For cross-collateralization, the borrower has to own the properties.
Pledged assets
You aren’t limited to collateralizing real estate. You can also put up other types of assets as collateral to help secure a loan on a high-value property. Examples include:
Eligible assets do not include assets bought on margin, options, warrants, IRA assets, 401(k) assets, annuities, insurance benefits, and Section 529 or other education savings plans.
In contrast to the cross-collateralization technique, pledged asset programs don’t require that the borrower be the actual owner of the collateral. This means that family, friends, or foundations and trusts may possibly provide assistance with the collateral on these loans.
Asset depletion
The asset depletion technique works well with buyers who have a lot of wealth but can’t document adequate income. It can also help with unconventional or difficult-to-underwrite income situations, such as self-employed or small-business-sourced income.
In this technique, the lender takes the available assets, and calculates how long that pile of assets can generate an income stream sufficient to cover the mortgage, insurance, and other carrying costs. If the calculation is high enough, the lender will approve the mortgage.
This program is available for new purchases or refinances. The assets must be liquid, held in a U.S. bank, and 100% owned by the borrower. Typically gift funds are not allowed.
If you or your client has significant assets in cryptocurrency,?you can even use crypto to help qualify for a mortgage.
The borrower must have reserves equal to at least 12 months of principal, interest, taxes, insurance, and any association fees.
Typically, you can’t use annuities or privately held stock for this program.
For more information on each of these fast and easy ways to get the loan approved,?click here.
Bridge loans
Buyers in this market frequently use a short-term bridge loan to buy the property. These shorter-term loans are usually for a year or less. The borrower may not want to liquidate large amounts of assets right at that moment, or may be waiting on the sale of another property to provide cash for the new purchase. Or they may just want a fast approval and funding so they can get to the closing table fast, and plan to arrange more permanent financing later.
Bridge loans don’t require credit underwriting or income underwriting. They are specifically designed to work in time-sensitive situations.
At DAK Mortgage, we have a number of flexible bridge loan solutions that can help you get the deal through fast.
Delayed financing
Sometimes HNW and UHNW buyers choose to close with cash on hand. This can be good if they want to close quickly, and if they don’t need to liquidate highly appreciated assets to buy the home, thus generating a capital gains tax liability.
But they don’t want to tie their liquidity in real estate for too long. They may have other investment opportunities for that cash. So they frequently buy the property and then look to get a mortgage, using an approach called?delayed financing.
Restricted stock
It can be tricky to use restricted stock units to qualify for a mortgage. If you or your high-net-worth client has significant restricted stock, it’s critical to go through the right lender. Not all lenders recognize restricted stock units in their underwriting criteria – or even understand it.
Don’t risk the deal by trying to run the loan through the wrong kind of lender. We have lenders who deal with tech and financial industry executive compensation plans all the time and understand how these benefits are structured.
You can use vested restricted stock units to help qualify for the loan. The borrower will need to provide the current RSU balance and a vesting schedule.
Privacy considerations
Discretion is critical. For legal, security, business, and PR reasons, buyers in the super-luxury home market usually don’t want to attract attention to themselves?– nor do they want publicity to draw competing bids on the property.
Sometimes there are personal issues such as divorce or other fraught family issues involved in these transactions. And sometimes the act of buying a property in another city can lead to speculation that a founder or executive is stepping down or about to sell his or her company, which can have an effect on the market.
At DAK Mortgage, understand the need for absolute discretion. We have programs that offer complete privacy and confidentiality for our clients.
What to do now
If you’re a real estate professional, advisor, or independent mortgage broker – or you’re a borrower yourself – and you’ve got a deal that needs to go through, contact us today.
At DAK Mortgage, we specialize in difficult-to-underwrite situations, including:
… and much more!
We work with a network of specialty lenders who understand the luxury real estate market and the super jumbo borrower, and how to get the deal closed and funded.
Don’t go it alone! Call David Krebs at (321) 239-2781, or?click here?to make an appointment to discuss your situation.
All contacts are completely confidential.
We look forward to working with you.