There could be multiple ways to define a “luxury home”, but for the purpose of this guide, we’ll consider it to be a home with a value several times higher than the average home value in a particular market. It’s not only mega-mansions with thousands of square feet, because a penthouse condo in a big city could be considered a luxury home. So let’s focus on the dollar amount.
Most private and hard money lenders that lend on residential investment properties will max out at a loan amount of $2,000,000. However, there are a few private lending firms out there that can lend up to $5 million, $10 million, or even $20 million dollars on a luxury home.
Challenges for Financing Luxury Homes
The biggest hurdles for providing bridge loans for luxury residential properties are occupancy and valuation.
Must be Non-Owner Occupied
Private hard money lenders only lend on investment properties, and it’s not common for someone to own a luxury home that’s a rental property. It’s typically a primary residence, in which case private lending is not possible.
There are two exceptions in California:
- Transitional Bridge – the borrower is using equity in their current home to buy another, and they plan to sell the departing residence shortly after the closing
- Business Purpose Cash Out – the funds will be used for a business or investment purpose.
For all other states, the home must be vacant, tenant-occupied, or a furnished short-term rental.
Valuation and Loan-to-Value
The valuation is another challenge. Luxury homes are typically very unique and difficult to appraise. If the borrower thinks a home is worth $10,000,000 and they want a 70% loan-to-value, that’s not realistic. Even if the appraisal ends up at $10M, the lender would likely be very conservative with such a unique property and may max out at 60-65% LTV. The reason for this is luxury homes are not easy to sell.
Luxury homes may be selling like hotcakes in a strong market as we had in early 2021, but when the housing market softens, luxury home values fall harder than all other asset classes. Lenders are always thinking about the worst-case scenario of having to go through foreclosure and owning the property. If that happens, lenders will typically sell the foreclosed property as soon as possible, and a luxury home could be difficult to sell.
Typically Pricing for Luxury Home Bridge Loans
The pricing for private financing on luxury homes is similar to bridge loans for any other property type. As of mid-2021, the interest rates range from 7% to 10% interest, plus 1 to 2 points for the origination fee. The maximum loan term is typically 2 years, and the borrower must have a clear exit strategy to pay off the loan.
Scenarios for Luxury Home Bridge Lending
The following are a few common scenarios for private lending on luxury homes and mansions.
Equity Cash Out for Renovations Prior to Sale
When a luxury home is being prepared for a sale, the owner may need to pull some equity cash out to use for major renovations prior to putting it on the market. A short-term equity cash out bridge loan can be a good solution to pay for the renovations. Lenders love this scenario because of the clear exit strategy, knowing the loan will be paid off with a sale.
The challenge with equity cash out loans is most private lenders won’t consider a 2nd position mortgage. So if there is an existing 1st mortgage on the home, it would have to be refinanced. If the home is in California, there are quite a few lenders that offer 2nd mortgages.
Refinance Another Private Mortgage
Some owners of luxury homes frequently use private/hard money financing and may have to seek a refinance of a bridge loan that is maturing, in cases where the lender is not willing to extend the loan term. Another private lender may consider a refinance without any cash out, so long as the loan is in good standing with no late payments. Lenders still want to see a solid exit strategy other than refinancing with another private lender.
Purchase by Foreign National
People from all over the world love to park their money in U.S. real estate, mostly in the coastal metropolitan cities like New York, Los Angeles, Miami, San Francisco, Washington DC, Seattle, Boston and many others. Private hard money lenders are typically fine with lending to non-US citizens, and many don’t require a personal guarantee. To off-set the risk, the lender will likely ask for a larger cash down-payment, perhaps 50% of the purchase price.
How to Find Lenders for Luxury Homes
You can find direct private hard money lenders right here on our website, and we have filters you can use to easily find out which lenders consider luxury homes.
- Start at the Find a Lender page
- From the Loan Type list, select either Private Money, Hard Money, or Residential Bridge. All of them will have similar results.
- Type in a state or major metro area, and click SEARCH
- Look for the Filters section, click Refine Results, then enter the loan amount. This is the primary filter for luxury home loans.
- View each lender’s profile to learn about their guidelines, background and more
- Click the green CONTACT button and reach out to the lender directly
Another way to find more lenders is to switch to the Commercial Bridge Lender category. Several lenders on our platform are focused on commercial real estate, so we don’t put them in the residential categories, but a few of them will consider luxury homes if the loan amount is over $2,000,00. But you must use the property type filter to select Single Family Residence.
Please remind the lenders that you found them on PrivateLenderLink.com.