When You Don’t Have a Rich Uncle
What you are about to read isn’t for everybody – that sounds sinister, right? – but you really should read all the way through because you’re going to want to be prepared when the appropriate situation presents itself. We’re talking about Jumbo Loans . . . well, sort of. We’re really talking about coming up with the down payment and how that becomes a slightly larger feat when the purchase price starts climbing northward.
We have a partner who is looking to help your clients either come up with enough money for a 20% down payment or increase your client’s down payment so they can purchase a larger house. Let me break this down for you:
The limit for a conforming loan is $484,350 as of right now. That means any home that has a purchase price of $605,438.75 or higher is where this partner of ours is helping your client. (Here’s the math: $605,438.75 – 20% for the down payment = $484,351, which is the point where the loan steps out of “conforming” land and into “jumbo” land.)
This partner of ours is NOT a lender; they’re an investor. In other words, they’re not loaning your client the money to help with the down payment; they’re becoming an investing partner with them who will share in EITHER the gain or the loss of the change in value of the home. There’s NO interest being charged, and there’s NO monthly payment – as I said, it’s an investment. Let me be clear right here: I am not trying to sell this to anyone; I’m simply presenting you with an option that could be that extra help your client needs to purchase that dream home.
In broad strokes, here’s how it works: they will invest between 5-10% to be coupled with your client’s down payment to total at least a 20% down payment on a home. This could mean that your client brings 10% to the table, and they contribute 10%, so your client can buy that $750,000 home. Or, let’s say your client has $150,000 for the down payment already, but the home your client REALLY wants is $815,000. Our partner could come in with the additional money needed, and your client’s monthly payment for the $815,000 home would be the same as the $750,000 home. In many cases, that extra 10% they can bring to the table is the difference between a great home in a great neighborhood and THE home in THE neighborhood.
Now, here’s how the investing partner makes their money in Jumbo Loans – they’re not doing this for their health remember: The home your client purchased for $750,000 you’re now selling for $850,000 ten years later. The mortgage balance is $470,000, which means your client has $380,000 in proceeds. The investor gets their initial investment of $75,000 plus 35% of the change in value of the home. In this case, the home increased in value by $100,000, so 35% of that is $35,000. All told, the investor gets $110,000 ($75,000 + $35,000) out of the proceeds of the sale.
Remember how I said they’ll share in your client’s gain OR loss? Different scenario: your client purchased the home for $750,000 with 10% down from their pocket and a 10% investment from these guys. Five years later, your client needs to sell the house at a loss – it’ll only sell for $650,000. The investor’s initial investment of $75,000 was for a 35% share of the “change in value”. In this case, the change is $100,000 (in the negative), so they’re going to take a $35,000 loss against their $75,000 investment. In other words, your client would only owe them $40,000. If the negative change in value were more than $215,000, your client wouldn’t owe them anything ($215,000 X 35% = $75,250 > $75,000 – anything beyond the investor’s initial investment cannot be recovered).
There are other details in the agreement that range from time periods to fees, but I won’t bore you with those at this point. If this is something you can see helping your client get into THAT home, I’ll be more than happy to sit down with you and your client and go over ALL the details so everyone’s fully informed.
In addition to this helping you with existing clients who are currently frustrated because they need that little extra something, this could help you start a new marketing campaign to find more of those clients who just need that little extra to help them get into the home of their dreams. Also, you could use this tool as a way to attract more listings in these higher price points because you have a way to help them attract more qualified buyers. Call me. We can sit down and brainstorm other ideas where this could help with Jumbo Loans. Get me a 44-oz Coke, and I’ll be ready.