Special Loans for Wealthy Borrowers:

High Income Borrowers Benefit

from Portfolio Lending Flexibility

by Steve Hartfield, Emigrant Mortgage

Mention creative financing to most mortgage lenders, and you are likely to get a blank stare. As the mortgage markets have become standardized and the number of institutions holding their loans in their own portfolio has decreased to a paltry few, there is less and less variation among institutions each year. Most mortgage products among lenders are almost commodities today, with price remaining as the only difference between products. Despite this trend, a few exciting portfolio loan programs are out there-especially for the affluent home buyer.

When a borrower needs a mortgage that exceeds standard mortgage limits-anywhere from $207,000 to $2,000,000 or more-a few portfolio lenders are still available to help. The most common areas of flexibility for higher-income borrowers include higher loan-to-values, custom-designed mortgages and cross-collateralization. Borrowers with special situations need a portfolio lender that is resourceful. Mortgage lenders that stick to the standard programs will often decline to assist even the wealthiest borrowers if there is even a small glitch in the deal.

When a home buyer buys a home for less than $400,000, he or she can use private mortgage insurance to make a down payment of less than 20%. Most mortgage insurance companies, however, will not cover loan amounts higher than $400,000. Some lenders provide the solution for borrowers of higher amounts. Some of the more savvy companies now allow borrowers, who wish to finance up to 90% of the purchase price of a home, up to $1,000,000 an alternative. For a slightly higher interest rate, borrowers can make a down payment as little as 10% on a $1,000,000 purchase and keep their assets in other investments if they choose. No additional assets are required to be encumbered, and high-income borrowers can maximize tax advantages from the mortgage interest deduction.

Not many lenders are sophisticated enough to consider cross-collateralization as an alternative, but for some lenders  it is the cornerstone of creative financing and in many cases a real deal saver. By encumbering more than one property, the overall equity position of a loan is enhanced, and in many cases will enable the underwriters to approve a loan that may otherwise be considered too risky.

Cross-collateralization is also a great tool for someone that has found a house to buy before selling their current residence. Usually, such borrowers would have to wait for their house to be sold, and possibly accept a lower purchase price than they should in order to sell quickly. Some mortgage companies allow the borrower to use the equity as a down payment on the new house. Then, when the old house is sold, part or all of the proceeds are used to pay down the new mortgage by a previously agreed-upon amount. This option compares favorably with what is called bridge financing, whereby a borrower gets a new first mortgage loan on their new home along with a bridge loan covering both properties until the first home is sold. Bridge loans carry high interest rates and additional closing costs.

Custom-designed mortgages can also help meet the needs of high-income borrowers. For example, borrowers who seek to hedge their bets on interest rates can lock in a low fixed rate for part of their mortgage and keep part of their mortgage under an adjustable rate program. The result is two mortgages-both fixed and adjustable-wrapped neatly into a single hybrid loan.

This type of financing allows greater flexibility to put cash to other uses, including anything from landscaping and furnishings, college educations or other investments. Three-tiered mortgages are also possible as well, in which most any combination from 30 and 15 year fixed to 1 year adjustables, 3/1, 5/1 and 7/1 adjustables may be substituted with dollar amounts varying according to the borrower's goals. This unique loan is achieved as a result of the savings institution's ability to retain the loans in its own portfolio as opposed to structuring them to be sold in the secondary mortgage market.

Wealthy individuals with stock portfolios are faced with a unique dilemma. In many cases, a consumer will accumulate a strong net worth through prudent investments in the stock market. When it comes time to purchase a home, the buyer may be forced to liquidate equities in order to make the required down payment. Realizing a profit on the stocks will trigger capital gains taxes. In addition, the stock investment may be in the middle of a profitable move upward, liquidation during this upward movement may result in the loss of the full benefit of the stock investment's appreciation..

To delay tax payments and avoid missing out on future stock profits, some equity firms offer mortgage programs where a home buyer can use the equity in their stock portfolio to serve as a down payment on their home. The need for a down payment is eliminated. For example, a consumer buys a home for $1,000,000. Instead of cashing in $300,000 of stocks as a down payment (which would probably require $400,000 to be cashed in to account for taxes), the borrower can set aside the $300,000 as collateral for a mortgage loan of $1,000,000. The borrowers get 100% financing on their home-with the higher interest payments that brings-but they save on capital gains taxes and preserve future profits.

While a stock collateralized 100% financing program meets some goals, it usually comes with a higher price tag. In a recent review of rates on this program, programs such as those offered by Merrill Lynch offered mortgage rates on adjustable rate mortgages in the 7% to 8% range. In comparison, portfolio lenders offering pure mortgage finance options were still able to offer cross-collateralized property loans at rates between 4.5% to 5.5%. Of course, the securities firm's primary goal is to keep a client's money invested in equities with the firm.

While many portfolio lenders still offer unique products in the housing market, very few can handle the larger loans of higher-income borrowers. In order for these consumers to take advantage of these programs, they need to seek out the lenders that specialize in higher-end mortgage loans.

Contact Jolita and Kevin Wagoner, EXIT Realty First Choice, in Palm Coast Florida