Interesting article in today's Mansion section of the WSJ discusses how buyers are turning to Jumbo loans to finance their small spaces.
In Expensive Markets Like San Francisco And New York Are Turning To Jumbo Loans To Help Buy Diminutive Apartments With Sizeable Price Tagshttp://online.wsj.com/news/articles/SB10001424052702304756104579453374018843750?mod=WSJ_RealEstate_M...
Even small spaces can require large mortgages in competitive markets like New York and San Francisco."It's not unusual to need a $1 million mortgage on a 700-square-foot property," says Peter Grabel, mortgage loan originator at Luxury Mortgage Corp., a mortgage firm based in Stamford, Conn. "We're setting all-time limits of cost per square foot."Between 2011 and 2013, 95 condos, co-ops and single-family homes measuring under 800 square feet sold for more than $800,000 in San Francisco, according to the real estate data company Property Shark. One 360-square-foot condo sold for $950,000, or $2,639 per square foot.
In that same time period in New York City, 1,710 properties of less than 800 square feet sold for more than $800,000. The average price per square foot of these units was $1,423. The smallest unit, 410 square feet, sold for $855,000 in 2013, or $2,085 per square foot. In New York, smaller units may be the better bargain: often the bigger the property is, the higher the price per square foot. Larger units in many neighborhoods are more desirable, thus more expensive and more likely to appreciate faster."New York housing prices have been trending higher with a bigger emphasis on larger, family-sized apartments, generally with three or more bedrooms and especially within the new development market," says Jonathan Miller, president and CEO of Miller Samuel, a real estate appraisal and consulting firm. "There have been sales of one-bedroom units priced from $2 million to $3 million that are neighbors with family-sized units selling well above $20 million." The reason for the high price of the small units is that they share the amenities and cachet of the larger units at the same address, says Mr. Miller.But it isn't always easy to get a jumbo loan (defined as more than $417,000 in most markets and more than $625,500 in pricey areas such as New York and San Francisco) for a small space. Some lenders have minimum square footage requirements. According to Hillary Legrain, a mortgage loan officer with First Savings Mortgage Corporation, in Bethesda, Md., many jumbo lenders have a 500-square-foot-minimum size requirement on a condominium. "The reason behind that is that those size properties are less marketable," she says.In markets like New York and San Francisco, a jumbo mortgage on a tiny place is less of an issue, since there are many comparable properties. According to the real estate website Zillow, high prices for homes under 800 square feet are concentrated in coastal markets. Along with San Francisco and New York, markets seeing luxury prices for diminutive homes include: Orange County, Calif.; Honolulu; Miami Beach, Fla; and the Nantucket-Martha's Vineyard, Mass., area.On the other hand, in Greenwich, Conn., only one luxury property under 800 square feet was sold for more than $780,000 in 2013, according to Zillow. In markets like this, with only a smattering of these properties, securing a jumbo mortgage for a small home can be trickier."Lenders generally won't approve a mortgage on any size home unless they can get an appraisal that shows similar properties routinely sell the same amount or more as the property in question," says Guy Cecala, chief executive and publisher of Inside Mortgage Finance. "And getting those appraisals can be hard to get if you want to buy the 'best,' or most expensive, small home in a given area."If there aren't many comparable properties, says Keith Gumbinger, vice president of mortgage-information firm HSH.com, "that might limit the number of lenders among whom the borrower would shop, and lenders who do make these loans may or may not have a full menu of product available." Mr. Gumbinger says that lenders may choose only to offer one product, like an adjustable-rate mortgage, or could potentially add a premium to either the interest rate or the fees.But Mr. Grabel says the square footage likely won't affect the loan terms, provided the lender is comfortable otherwise. "As long as you can find an appraisal to show that the value is reasonable," he says, "there's no special treatment you'd get other than, 'Wow I can't believe it's so expensive.' "Here are some issues to consider:• Expansion plans: If you purchase a small co-op or condo with an eye toward someday expanding into the unit next door, there's no guarantee that the co-op or condo board will approve the expansion.• Consider a larger down payment: In markets where there are few jumbo loans for tiny dwellings and the appraisal is an issue, buyers could consider a larger down payment to secure a government-backed or otherwise nonjumbo loan.