Sunday, December 23, 2007

Credit Crunch Didn't Kill The Homeownership Dream.

So you heard that loans are harder to get. But, you still want/need to buy a home. Is there any program that you can qualify for a home with little or no down payment?
Lots of them. We may not be talking number of grains of sand on the beach or drops of water in the ocean, but there are more ways to get get into a property with no down payment than most laypersons would believe.
Many loan officers would have you believe that it is a hard loan or that takes something special to get 100 percent financing. It doesn't. In 95 percent plus of all cases, that's just setting you up for three points of origination, setting them up to ask you for referrals, and trying to get you to not shop around. Nor is it a difficult loan to do. As long as you meet the guidelines, 100% financing is routine. Many lenders are begging for these loans, even today. When I wrote the original article, I talked about how in my humble opinion, some of these lax underwriting processes were setting the lenders up for unbelievable losses, but as long as I and my clients are telling the truth and playing by the rules, there was no reason why my clients should not benefit.

The first way to get 100% financing is obviously to have a lender loan you 100%. However, the best way to structure it, in the vast majority all cases, is the 80/20 "piggyback" loan. Unfortunately, right now lenders aren't doing piggybacks above 90% of purchase price. This will likely change when the market is restored to rationality, but we have to live with lender rules, good or bad. He who has the money/power makes the rules, and all that. One rule that I have learned the hard way is never apply for a first and a second from different lenders, even if it looks like the rates will be better applying that way. Even if both wholesalers swear on the name of the big JC, don't do it. You are wasting your time.
If the lender who wants to do the first won't do the second, there is a reason, and the reason is that this person is unlikely to be approved for the second, and the transaction doesn't close until both loans are ready. If I've got the first with the lender, that's leverage that a mortgage banker can use to get them to approve marginal seconds. Not so with lenders who are just doing the second. Not to mention that there is ten times the potential for confusion and several times the work coordinating between lenders.
What do you need in order to get 100% financing, you ask? Well, that's a variable. If you have can prove you make enough money to justify the loan, a credit score of 600 to 620 is still sufficient. The higher the credit score the better the loan, but if you've got a 620 and can prove you make enough money to qualify, the loan can be done. The possibility does not vanish completely until you are below a 580 credit score, although comparatively few lenders will go below 600 for 100 percent financing, and they're all high interest subprimes, competing for loans no one else will do.
If you can't prove you make enough money, some subprime lenders may currently do 100% financing on a stated income basis down to 680 credit score, and maybe down as low as 660. A paper 100% stated income is a thing of the past, and I don't anticipate it returning soon, if ever. Be very careful about overstating your income as you are still going to have to make that payment every month. Stated income loans are a good way to get in serious financial difficulties if you don't understand their limitations. Therefore, despite the ability to inflate your income, I strongly advise against it. Furthermore, as I've said elsewhere, the rates for stated income loans are higher than for full documentation loans, and they become progressively more so the worse the credit score gets. Plus, sub-prime loans aren't as good as A paper in the first place, having higher rates and pre-payment penalties which can only be bought off by accepting much higher rates. Not only is it difficult to get 100% stated income financing, but it will be 1% or more higher than the rate that the person who can prove they can make enough money will get. For all of these reasons, I strongly advise you to stay within a budget where you can prove you make enough money, even (especially!) if it means you have to settle for a lesser property.
Now things like being 30 days late on your rent, and how long of a rental history you have will also influence your ability to get 100% financing, not to mention the rate you will be offered. As with so many other things, take care of your credit and it will take care of you. Make payments of whatever nature, in full and on time. Better yet, don't incur any debts you don't have to. The number one obstacle to being able to afford the loan, and therefore the property, is for most people existing debt.
Suppose your credit is so bad that you do not qualify for 100% financing from any lender? Well, not all hope is lost, although it really does constrain your choices. Most lenders will permit seller carrybacks, so long as they are subordinate to lender financing. So if the lender is willing to give you 90% financing, you can do one of the things that called 80/10/10 financing: 80% first, 10% second, 10% third that is a carryback with the seller. There are a multitude of ways to structure a deal if you know your limitations in advance, but you do have to know them.
Now not every seller is going to be willing or able to carry back money. They are selling the property because they want money, or something that money can buy but the property won't get them. If the seller doesn't have enough equity to cover the costs of selling plus what you're asking to borrow, your offer is probably not going to appeal to that seller. A good buyer's agent will steer you away from properties where the seller doesn't have the equity to work with you. Another thing is that sellers may want you to offer more money in order to accept your offer. Furthermore, they might charge you a really hideous interest rate as an incentive to pay them off ASAP. And they may realize that the reason the lenders won't give you 100% financing is because you are not the best credit risk out there. Given the current buyer's market, some sellers are willing to carry back financing in order to get rid of the property, particularly if the offer is for top dollar. Once the market turns back towards the sellers at all, the ability to do this is likely to vanish. There are many advantages to being willing to shop in a buyer's markets, of which that is only one.
So obviously, you need to know if 100% financing through the lender is possible or likely for someone in your particular situation. You need to know this before you go making any offers to purchase property - and there are types of property where 100% financing is only an option with a seller carryback.
Now, a couple of final points: Just because you can get 100% financing does not mean it's a good idea, or that you should. You get better rates from lenders if you put money down, and writing offers that include having money for a down payment shows a seller that you are serious about buying the property. Other things being equal, I'm going to counsel my sellers that an offer that comes in with even a 5% down payment is a much stronger offer than anything that comes in wanting 100% financing. As a mortgage banker, I've dealt with enough of these that I know the questions to ask to determine if it is likely to work, possible, or ain't gonna happen.
Furthermore, speaking of strong offers: You will need a decent deposit to convince the seller that you're serious about buying the place. Most 100% financing escrows are currently failing, a fact most listing agents are painfully aware of without having any clue as to how to tell if the buyer is qualified. The seller is going to spend a lot of money on the escrow for your attempt to purchase that property, and has to give you sole shot for however long an escrow period you agree to. This means they can't work with other offers while they're working with you, and time is money to a seller. They want to know that if you can't consummate this contract in a timely fashion, they are going to have some compensation for the trouble and expense. Prospective buyers with 100% financing can expect to have to put a larger deposit down. Somebody offers a $500 deposit on a $500,000 property, that's going to be rejected so fast and so thoroughly that your fax machine will spin.
So if you really have no money, even though you can obtain 100% financing, trying to buy a property in this fashion is likely to be a waste of time. Also, 100% financing isn't available for the McMansion market above 417k. A jumbo loan requires a minimum of 5% down. For the buyers in the inflated markets you may have to put some dough away in the old savings account. Cheers and enjoy your holiday festivities.