Each year brings new lending challenges, and 2022 has proven to be no exception. Luxury home buyers often face different issues than more traditional buyers. Here we share five things luxury buyers should know and address before making an offer on a new construction or existing home this year.
1. RSU or Other Stock-Based Income
The stock of many tech companies is trading at or near 52-week lows this year. When lenders compare the income of the previous two years to the projected income for the next three years, there is often a steep decline. When income appears to decline by more than 20%, lenders may not be able to use the RSU (restricted stock unit) income at all or use a significantly lower amount. It’s critical to work with a lender that understands your RSU income and will share how they calculate the income. Ask if an underwriter has reviewed the loan. For those who leave a larger company and accept a position with a start-up or non-publicly traded company, you may not get credit for any stock-based income. Make sure to ask early what income the lender is using and how long that income is valid before it is subject to re-review.
2. Private Equity Funds as Investments
If you invest in private equity funds, the firm issues you a K-1 each tax year which is reported on your Schedule E. Most lenders will then use a traditional analysis of averaging the previous two years’ income for entities reporting on the Schedule E. However, these investments often do not model well in traditional self-employed business analysis. For buyers with significant holdings in these funds, cash flow underwriting may be more appropriate and usually only available through the private wealth divisions of larger banks that do portfolio lending. An easy way to determine if you are working with someone who understands these investments is to ask about their experience with private equity funds.
3. Property Restrictions
There has been significant interest in resort-type locations where the property offers voluntary rental agreements when the homeowner is not using the home. These properties often provide hotel-type amenities, from ski condos in Park City or Aspen, to detached second homes in Napa, to beach locations in Hawaii, to luxury condos in larger cities. However, many of these properties do not meet the guidelines lenders allow. Before putting money down on any such home, we recommend connecting with a couple of lenders and getting high confidence that they have a lending program specifically for these unique properties.
4. Down Payment Source
As investment portfolios have declined over the past several months, buyers have looked for alternative options for funding a down payment. As part of the pre-approval process, the lender should be able to help identify alternative opportunities that may be helpful with the down payment. Standard options include bridge loans for a departing home that will be sold, margin or asset secured loans, or home equity lines of credit on real estate that you will retain. Funds from a business can be challenging to use and must be addressed upfront. The lender should ensure that all sources of the down payment are allowed and included in the analysis.
5. Declining Income Trends
Many businesses reported high income in 2021. However, as the headlines regularly flash “Recession,” more and more companies are warning of declining income. When analyzing a self-employed borrower, if the income is declining, it can be challenging for an underwriter to determine what is a realistic number to use. It’s always best to work with a lender who understands advanced tax analysis and can help flag any negative trends before an underwriter identifies them. In these situations, it makes a big difference if you help tell the story to the underwriter and point to a similar year in the past. For many, 2019 is a good indication of the current income trend. By showing this, the underwriter has more comfort in picking an income grounded in experience.
The Pre-Approval process matters, especially for Luxury Buyers! Do NOT fall for shortcuts like a quick 15-minute approval letter…it hurts everyone and puts you at risk. Think of the pre-approval process as the foundation of the entire transaction, and then hold to that standard.