Category Archive: ‘Mortgage Qualifying’

Best Mortgage?

Hat tip to both daytrip and just some guy for sending in this article from the latimes.com:

http://www.latimes.com/business/realestate/la-fi-equity-building-mortgage-20150103-story.html#page=1

All with no down payment, no closing costs and no mortgage insurance. The Ongs’ real estate agent, Jill Medley, called it “the best loan in the history of real estate.”

The key feature of the so-called wealth-building home loan is a sharply reduced interest rate on a 15-year term. Instead of requiring a down payment, banks allow borrowers to use their money to pay interest upfront, often called “buying down” the rate.

For their $400,000 house, the Ongs used what would have been a 4% down payment — $16,000 — to instead buy down their rate to 0.5%. In little more than three years of monthly payments, the couple will have more than 20% equity in the home, assuming the property value stays the same.

That more than doubles the equity they would build with the same amount down on a 30-year Federal Housing Administration loan at the going rate of 3.25%.

The Ongs pay only about $150 more each month than they would have paid under the longer-term loan, which would include a hefty mortgage insurance payment.

These are NACA deals, which are capped at a $400,000 purchase price.  Down payments are required but they come from grants, which is how they get around having to pay the PMI.

Buyers also have to live where they can find a house for $400,000 or under, and select a house that nobody else wants – because if there are multiple offers, these 100% financed deals that rely on multiple grants for the down payment will be the last deal chosen by the listing agent.

Buying down the interest rate is a great idea for buyers who are confident they will be in the home for years.  But the benefits diminish quickly for those buying higher than $400,000.

Here is a comparison:

$800,000 purchase price

$160,000 down payment

$640,000 loan amount

15-year loan with 2.0% rate (buydown would probably cost $15,000?)

$4,118.46 per month for 180 months.

30-year loan at today’s 3.75% jumbo rate:

$2,963.94 per month for 360 months.

Paying the loan off in 15 years saves you around $300,000 in interest, which is good.  But if you can live with a monthly payment of $4,118 per month, have an extra $65,000 for additional down payment and opt for a 30-year loan, you can buy a house for $1,125,000 and have the same payment as the $800,000 house.

Unfortunately $800,000 doesn’t buy you much around here any more, and if buyers happen to wonder into a house listed for $1,125,000, they may decide to forget the imposed monthly discipline of a 15-year loan, and instead pay down the loan voluntarily as time goes on.

Underwriting Guidelines

Rob Dawg brought up how discriminatory the underwriting guideline is for those who use interest/dividend income to qualify – they have to prove that the income will extend three years into the future.  Yet those homebuyers on salary or hourly pay don’t have to make any such assertion, and they could get fired the next day after closing.

There are other underwriting guidelines that make you scratch your head too.  Here are some examples:

1. ‘Gift’ for down payment – The previous standard was that as long as your down payment was at least 20% of the purchase price, the entire amount could be a gift.  But now the Fannie/Freddie automated underwriting is allowing 10% down payments to be all-gift too.  Is that really ‘skin in the game’?  Sellers can still pay all buyer closing costs too.

2. Reserves – If you are buying a rental property, you have to use at least a 20% down payment (25% on 2-4 units), AND have at least six months’ worth of payments in the bank at closing – which includes your PITI payments on current residence and the new rental property.  It makes sense too – you could get hit with a quick vacancy, and the bank would want you to have ample reserves.

However, when buying a residence as an owner-occupier, the required reserves are much less.  The guideline states that the buyer should have two months’ worth of payments in the bank – which isn’t much – and a lender told me he has been closing FHA/VA loans recently with less than one payment’s worth of dough left in the bank!

3.  Appraisals - With the new rules that isolate appraisers from influencing agents, you’d think the inflated-appraisal problem would be solved.  But they still give appraisers the actual sales price and tell them to hit it, which takes out some of the objectivity.  Even so, today’s article (LINK – hat tip T&W) included this quote, “If you thought what was happening before was an embarrassment, wait until the second time around”.

Think of these questionable guidelines when you hear how the ‘tight credit’ is mucking up the market!