Buying a luxury home is quite unlike purchasing a conventional property. From the location to square footage, you’re paying for a premium, high-end asset. However, just because you’re purchasing a luxury property doesn’t mean you want to offer a large down payment—or perhaps you don’t have the free capital to do so.

Below, we outline what makes a home a luxury property and how you can secure the mortgage to buy the home of your dreams.

How a ‘luxury home’ is defined

Luxury homes are generally defined as homes exceeding a value of $1,000,000, although this varies from state to state depending on the real estate market. It’s important to remember that what might be considered luxury in one area may not be viewed the same way by residents in a nearby state. For example, a small but beautiful home may stand out in a crowded neighborhood, but be relatively modest in a community comprised of sprawling mansions.

High-end properties all have one thing in common—they’re ahead of the trend. A luxury property offers unique features that aren’t typically found in conventional homes, and they’re generally found in an area surrounded by other exclusive properties to support real estate values.

Unless you’re paying cash, you’ll need a home loan to fund your purchase.

Why you need more than a conventional home loan

Typical home loans are issued by public or government-sponsored entities (GSEs). These bodies include banks and other financial institutions. Home loans from GSEs are fully-backed by sponsors FannieMae (FNMA) and FreddieMac (FHLMC), who will only purchase loans up to the value of $421,100 (although the figure can be higher in areas such as Los Angeles County). Lower-value home loans, or conforming loans, make up most of the US home loan market.

If you’re looking to borrow a sum of money which exceeds the GSE limit for your area, you can approach a private lender or a bank for a higher-value loan known as a jumbo loan.

Jumbo Loans

Put simply, jumbo loans make it possible for borrowers to buy more expensive homes through high-dollar loans. The term ‘jumbo loan’ is derived from the large mortgage sums available from some lenders.

Lenders of jumbo loans are not selling the loan to a GSEs. Because of this, they are not restricted by typical approval criteria and regulations. Jumbo loan lenders can set their own approval criteria, and the requirements can vary widely between lenders. You should always shop around before committing to a loan provider—you’re looking for the loan that best suits your financial situation and property type.

Jumbo loans and risk

Jumbo loans are generally a higher risk for lenders than conforming loans are. This means that:

  • Interest rates are slightly higher
  • Approval criteria are stricter
  • Jumbo loans may take longer to close (often up to 60 days)

Borrowers seeking a jumbo loan, particularly self-employed borrowers with a fluctuating income from year-to-year, should begin their approval process as early as possible—even before viewing a home.

Qualifying for a jumbo loan

You should be prepared to face a rigorous approval process if you’re looking for a jumbo loan. Criteria include:

  • An excellent credit score (FICO score 700+)
  • Down payments of at least 20% (exceptions are made when other criteria are met e.g. large assets, high credit score)
  • Proof of consistent income and short-term reserve assets
  • A low debt-to-income ratio

What you pay back

Although elevated interest rates are common, some lenders see prosperous borrowers as low risk and set their interest rates accordingly. Fixed and variable rates are available.

You can also expect to pay closing costs and appraisal fees, and potentially private mortgage insurance, which is often paid through a slightly higher interest rate.

Although buying a luxury home can be more time-consuming and intensive than purchasing a conventional property, remember, you’re paying for the extraordinary. If you can commit to the jumbo loan repayments, you can secure your dream home.

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