Nowadays it's fairly straightforward to obtain a mortgage to buy your luxury fractional or private residence club home. The bad news is that not all lenders are familiar with the concept of fractional property, so you might not be able to obtain a mortgage from your neighborhood bank. The good news is that the number of lenders who are offering mortgages for fractional property including private residence clubs is growing all the time. In fact for the banks that do lend for these types of loans it's essentially no different from getting a mortgage on any other second home.
Many of the leading luxury fractionals will already have a financing arrangement in place, which will make your purchase steps easier. It's also a good sign, since you have some comfort from knowing that the lender will have done their own due diligence on the development to assure themselves that they are happy to lend against the property.Types of Mortgage
"Typical amounts that you can obtain a loan for are from $50k to well over $750k, with no real upper limit," said Scott Christian, President of First Fractional Funding. His company offers various adjustable rate mortgages (ARMs) with a fixed period of from 1 to 10 years. Interest only options are also available, in which your payments for the first 3 or 5 years only repay the capital and then start including interest in your payments at the end of this initial period.
For all these fractional mortgages the interest rates are slightly higher by 1 to 2% than the rates you'll be paying on your primary mortgage. For instance, at the moment the 5 year ARM rate is 7.4% for fractional mortgages. "At the end of the fixed period on the ARM you can rollover to extend the fixed period" said Beth Jungel, SVP of Independent Resort Lending, this provides you with a way to keep payments at a fixed level for a further defined period.Requirements
Usually you'll be able to borrow 75-80% of the value of the property, so will need to find a deposit for the remaining 20-25%. In a very few cases the developer may be willing to help with the financing, so for instance the developer may provide you with financing for 10% of the cost, you put down 10% then you could get a mortgage for the other 80%, but this is very much the exception. Credit requirements are often somewhat stricter than for a primary mortgage. First Fractional Funding look for a credit score of 700 and a maximum debt to income ratio of 45%. Brad Geghan, owner of Vail Beaver Creek Mortgage, said he has some more flexibility with some of the local banks he works with and can provide mortgages to customers with a 650 credit score.
In terms of documentation and process "it's the same standard as any second home loan" said Jungel. So you'll need to provide information on your income and your assets and liabilities. Both Christian and Geghan confirmed the straightforward nature of the funding process with Geghan commenting that he'd even "put one together in seven days and closed."Who Offers Them
When you're looking for financing one of the first places to start is asking the resort developer if they have a financing arrangement in place. They may have set up financing with one of the lenders below or with another local bank. Two national banks that offer fractional mortgages are Independent Bank, though their Independent Resort Lending and National Bank of Kansas through their First Fractional Funding. Several local banks offer fractional mortgages, especially those in areas where there are luxury fractional developments. Some mortgages brokers that offer fractional mortgages include: Carteret Mortgage, Vail Beever Creek Mortgage and NextStar Funding.Overseas Lending
Most US lenders won't lend for fractional property outside the US, so your options are to check with the local developer, ask local banks or take out a second mortgage on your primary residence. In Europe some UK based lenders will lend for Brits buying across the continent, so we expect to eventually see similar types of lending by US based banks.
One question that fractional buyers often have, is what happens if another owner of your property defaults on their mortgage. According to Christian the lender will then foreclose on just the share that has defaulted and this will not affect the other owners. In fact the lender is most likely to offer that share back to the other owners because they are the people that know and like the property. Having said all that Christian commented that so far he had not even had any late payments, never mind gotten close to foreclosing.
So overall, obtaining financing for buying your luxury fractional home is just like obtaining a mortgage on any second home. Based on our conversations with the lenders above, thousands of people have already taken out mortgages to fund their purchases.