For some, taking out a mortgage is a necessity to land a home, for others it’s a financial strategy.
"The primary reason for a wealthy individual (to take out a loan) is smart leverage, meaning the clients tend to look at their balance sheet in total, both assets and liabilities. If they can balance in long term with favorable terms, they would do it as one part of their overall financial plan," said Michael McPartland, managing director and head of residential real estate for Citi Private Bank North America.
The high-net-worth individual, for example, may have other investment opportunities to put their equity in that might bring them better payback, according to Emmanuel Vuillequez, senior vice president with Wells Fargo Home Mortgage.
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Therefore, the typical length of time taken out for super jumbo mortgages (that of $10 million or more) is shorter than that for a regular mortgage, according to Elizabeth Carasaniti Cino, director and residential real estate sales executive for Bank of America’s Global Wealth and Investment Management division. However, this often depending on market fluctuations and a client’s strategy.
"They’d keep the mortgage if there is an economic benefit, and if that trend turns, they might not hold it anymore," Mr. McPartland said.
"Historically, the average length of these super-jumbo mortgages are about four-and-a-half to five years, but it’s not the case anymore," said Ms. Carasaniti Cino.
The dynamic market motivates people to refinance their loan more frequently.
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"We saw a trend in 2015 of jumbo customers refinancing to fixed rate loans, taking advantage of historically low interest rates," wrote Mr. Vuillequez in an email.
Minimum interest rate and longest interest-only time is the ultimate pursuit for clients, according to Ms. Carasaniti Cino.
A Mansion Global analysis of data reported from the Home Mortgage Disclosure Act shows that in 2014 and 2015, those who took out mortgages for more than $10 million earned an average of $4.5 million.
Over a 25-year-term, the average debt-to-income ratio for these super jumbo mortgages is 23 times higher than the minimum 36% recommended for regular customers.
Income Level of $10 Million Plus Mortgage Borrowers
| Bank | Min. income ($million/year) | Ave. income ($million/year) |
|---|---|---|
| First Republic Bank | 5.4 | 7.2 |
| JP Morgan | 3.6 | 6.6 |
| Citibank | 2.2 | 6.1 |
| Wells Fargo | 4.2 | 4.5 |
| Bank of America | 2.5 | 3.8 |
"Lenders need to be able to review income history and will require current W2s, tax returns and other documentation proving other assets," Mr. Vuillequez said. "We need to make sure they can afford to pay back," said David Steckel, Wealth Management Product Executive at Bank of America.
Banks will look at a variety of factors when reviewing jumbo loan applications, according to Mr. Vuillequez, including income consistency, liquid reserves, equity and market conditions, debt-to-income ratio and credit scores.
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Although the basic criteria for a successful application remains the same, for larger loans, Wells Fargo has stricter requirements on loan-to-value, meaning a client needs to put more money down, and reserve more liquid funds after deducting the down-payment and closing costs.
Among the top five big banks that accepted most super jumbo applications in 2014 and 2015, First Republic Bank has the highest success rate.
Between 2014 and 2015, 81.8%, or 9 out of 11 super jumbo mortgage applications, originated with First Republic Bank, while only two out of nine, a lean 22.2%, originated for Wells Fargo, which ranked fifth.
Success Rates for $10 Million Plus Mortgage Applications
| Bank | Total applications | Denial rate | Origination rate |
|---|---|---|---|
| First Republic Bank | 11 | 9.10% | 81.80% |
| Citibank | 9 | 11.10% | 66.70% |
| JP Morgan | 19 | 10.50% | 52.60% |
| Bank of America | 21 | 9.50% | 38.10% |
| Wells Fargo | 9 | 22.20% | 22.20% |
First Republic Bank declined to comment.
The denial rate largely depends on the level of risk each bank is willing to take, said Mr. Steckel from Bank of America, which, for example, takes a relatively conservative approach compared with other banks.
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"Borrowers should understand that a larger loan often involves more risk to the lender because it offers a larger amount of credit to the homebuyer," said Mr. Vuillequez, "Lenders may have stricter credit requirements for these type of loans. Wells Fargo assumes the total risk for these loans as they remain a part of our portfolio and not sold to the secondary market."
Disclaimer: This analysis only includes conventional mortgages for purchasing one-to-four-family, owner-occupied dwellings. Mortgages for manufactured homes, multi-family dwellings and home improvement were not included.