Want to buy a luxury home but the down payment is daunting? Here are 10 things that will help.

It used to be that buying a home meant coming up with at least 20% of the purchase price, a sizable amount. But purchasing a luxury or high-end home was even more cash cumbersome, with some lenders requiring a 30% down payment. If you were purchasing your dream home for $1,000,000, $750,000, or even $500,000, the down payment can easily add up to an intimidating sum.

Likewise, even an average home purchase can require a sizable down payment in high-cost areas (hello, California!), often preventing first time home buyers from getting their first keys. Studies show that renters in the nation’s 20 largest metro areas say that coming up with a down payment is the #1 obstacle to buying a home. And in areas like San Jose and Los Angeles with super high-cost real estate, a 20% down payment adds up to 180% of median income for one year! 

Thankfully, there are better options for home buyers these days when it comes to down payments. In fact, last year, the average down payment on a single-family home purchase was only 14.8%. And according to Freddie Mac, about 40% of all homebuyers put down less than 10% on the overall value of their homes. 

Of course, you’ll want to contact a great mortgage broker to discover all of your loan options, but here are 10 great ways luxury home buyers can make that down payment more affordable:

1. A jumbo loan may offer less than 20% down.

When purchasing a luxury home, you’ll likely want to explore a jumbo mortgage loan. A jumbo loan is just a non-conventional loan for a purchase price/loan amount higher than Fannie Mae and Freddie Mac’s loan limits. Currently, those limits sit at $636,150 in high-price areas (much of California), or $424,100 for the other 93% of the U.S. While a jumbo loan will give you the funds necessary to close on your dream home, it does come with additional scrutiny and requirements from the lender. 

Some jumbo loans traditionally even required 30% down payment, but the good news is that these days, certain jumbo loans will allow you to put only 5 or 10% of the purchase price down, making a luxury home purchase imminently more realistic.

2. Ask the seller to finance a piece of the mortgage.

While this practice has become far less prevalent, having the seller offer some form of secondary-financing is a great option for luxury home buyers who don’t want to (or can’t) part with a sizable down payment. Quite simply, the seller will back up your mortgage financing with a small second personal loan, maybe for 5, 10 or even 20% of the purchase price, closing the gap on what you need to put down. 

Why would a seller do this? Luxury homes are often harder to sell, with fewer buyers to choose from and bigger price drops in a soft market. So seller-financing is a great win-win for the seller, too, if it means the difference between finalizing a sale at the price you want.

3. Borrow from retirement funds.

One legitimate option for luxury home buyers to come up with the necessary down payment is to borrow or withdraw from retirement funds. Of course, you'll want to consult your financial planner and tax adviser to work out a strategy that makes sense. But some 401(k) plans allowed you to take out 50% of their vested balance up to $50,000 as a tax-free loan, although the loan has to be repaid after a specific period (usually five years). 

You can also withdraw funds from a traditional IRA or up to $10,000 without getting hit the 10% penalty, although you might have to pay taxes on the amount.

Again, check with your financial planner well ahead of time and also ask your mortgage broker about doing this within loan guidelines, but many luxury home buyers find a little down payment help from their retirement accounts.

4. Borrow from family.

Today’s home buyers are having such a challenging time coming up with the necessary down payment that about 25% of them are turning to family and friends for gifted funds to help them buy. There’s no reason why you can’t formulate a similar arrangement to come up with the funds for a luxury home downpayment.

5. Consider an FHA loan.

FHA’s loan limits are based on a percentage of the national conforming loan limit. So in high-cost areas (like most of California!), the FHA loans may go all the way up to $636,150. AN FHA loan may also be attractive because it usually allows a much lower down payment, sometimes as low as 3.5% for qualified borrowers. While you may have to Private Mortgage Insurance and there are other restrictions with FHA loans, it's worth looking into for a higher-end house purchase.

6. Work with a mortgage broker who specializes in luxury real estate. 

You’ll have a lot of options when searching the right mortgage broker or lender to handle your purchase loan, but you may be well served interviewing a lender that commonly works with luxury real estate. Their experience, product and industry knowledge, and relationships with banks and lenders could prove helpful! 

7. Keep a great credit score.

One of the best ways to ensure that you get the best rates, terms, and loan options available – including a minimal down payment – is to keep a great credit score. Typically, lenders consider home buyers with super-prime credit scores (760 and above, but an 800+ score doesn't hurt!) as low-risk borrowers, so they'll offer the best possible pricing and conditions. Consult your mortgage broker, but you'll also want to check your credit well before your home purchase and make sure your score is tip-top.

8. Check with your bank.

You’ll have plenty of options when it comes to applying for a mortgage loan, but it may be worth your time to check with the bank that has your accounts, too. If you have significant funds, investments, or retirement accounts with one bank branch, they may have some leeway in offering great low down-payment options for your luxury home purchase.

9. Take out a second loan.

In years past, it was common for home buyers to take out an 80% first loan and then back that up with a 20% second loan, eliminating the need for any down payment at all – and also avoiding Private Mortgage Insurance. While those subordinate loans aren't as popular these days, you may still be able to find second position financing to ease the burden of coming up with a big down payment out of pocket. 

10. Find funds from other sources.

When necessity requires, homebuyers often become resourceful and find funds from other sources to soften the down payment blow. That may include tapping into an equity line or cash-out refinance from another property, personal loan, or business loan. 

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Contact us if you have more questions about down payments or buying your dream home!