Cash isn’t the only option if you don’t want or can’t qualify for a regular home loan.
If you are 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.
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 hold in your brokerage account. The advantages 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. So, if somebody is highly leveraged or if they are high-net worth but have bad credit, none of that matters.
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 are 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%. This is the maximum loan-to-value ratio typically used by lenders who offer cross-collateral loans. So, if your other home is worth $500,000, you would qualify for a $1,050,000 loan. That allows you to get 100% financing for the $1 million dollar purchase. Private mortgage insurance is not required. The lender will mortgage both properties to secure the loan.
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. Bear in mind that liquidating assets can be a taxable event that triggers capital gains taxes. Be wary of cashing out your 440(k) or other retirement account for cash. You will have to pay income tax on the money you withdraw from a 401(k), plus if you are under age 59 1/2, the Interal Revenue Service will assess a 10% penalty, although there are some exceptions to the penalty such as for total and permanent disability.