With recent changes in the mortgage industry, borrowers are left with little choices when it comes to loan financing. As lenders are facing credit crunch, it's increasingly harder to get a mortgage loan by those with inadequate credit, income and assets. The following articles may help borrowers to get better terms and easier financing.
Zero Down Loans
It wasn't too long ago when an average home buyer with decent credit and some down payment (or little down payment for that matter) could get a home mortgage without a headache. There were plenty of lenders out there to get them what they want. This applied to those with inability to show income documentation such as W-2 or tax returns. The circumstances have changed dramatically in the last couple of months. It's almost impossible to get an equity type of 2nd mortgage without showing required assets (that's money in the bank to cover several months' of combined mortgage payments). So, so called 80/20 (1st mortgage at 80% of the purchase price and 20% for the rest) is out of the picture for most borrowers.
So, where do we turn to now? There are options mortgage borrowers have now to qualify to get the loan they deserve to move into their dream home or refinance current home. If you are buying a home with no money down, it's time to return to the mortgage programs that were popular a few years ago before the 80/20s were all the craze, it is Fannie Mae Flex Program.
The Fannie Mae's programs also provide for borrowers with bruised credit. The system approves loans with credit issues with rankings of Level 1, 2, and 3. , the higher the level, the higher the risk and subsequently the rate. The FNMA program requires a $500 minimum investment, so you will need a little cash. The catch is that you prove your income- pay stubs, bank statements, etc. The term 100% loan program as a term that's interchangeable with Zero Down…they mean the same thing…your loan is the same value as the sales price of the home. For example, you find a home for $200,000. A Zero down loan means no down payment so the loan is $200,000 which also equals 100% of the sales price. So that explains why the two terms are interchangeable.
However, Zero Down Payment is not the same as Zero Cash. Zero Down Payments means exactly that, no cash needed for down payment, but what about all the closings cost? Buying a house involves closing costs, prepaid interest, and usually establishing an escrow account for taxes and insurance. All of those added together will need to be paid in cash at the closing and be thousands of dollars. You can estimate closing and prepaid items pretty accurately for homes with a sales price between $170,000 and $300,000 of between 2.0%. So for example, on a $200,000 priced home, 2% equals $4,000. Needing $4,000 cash to closing is hardly Zero Cash. There's more to the story. And, there are ways to use a No Down payment loan and create a Zero Cash sale for those of you without cash or those who do, but don't want to use it. How do we turn a Zero Down Payment Loan into a Zero Cash transaction? It's really rather simple. You use a Zero Down Payment and then get the all the costs paid by the seller or in the form of gift mone from relatives. If the market wasn't so slow, it would be pretty tough to get sellers to cover costs…but right now it works just fine. So, if you have bad credit and want to buy a home with Zero Cash do it now before it's too late.
Buy Down Mortgage
Okay, you have decent income and credit but your debt to income ratio (ratio of your total monthly expense vs. gross income) is too high to qualify, what to do now? This is where buy down mortgage comes in. Buy down mortgage isn't anything new. When the real estate market was hot, no seller would consider offering to pay for buy down costs for the buyer. Now, it has become an option that a willing seller can't ignore when the house has been sitting on the market for 4 months with no buyer in sight. For a buyer, a buy down can make the difference in whether or not you qualify for a loan. With interest rate buy downs, your monthly payments build over a three-year period. It's the equivalent of putting money in the bank for the first couple of years of your loan.
And for the seller, other than lowering the asking price, there isn't much a seller can do to compete with other sellers for a buyer. They can't throw in extras or upgrades like builders can.
But sellers can go toe-to-toe with anyone, including builders, when it comes to financing. In fact, they can go even further than most builders do. What's more, they might find that helping would-be buyers qualify for a mortgage or trimming their monthly house payments might prove a much better alternative than cutting their prices - and at a lower cost.
What we're talking about here is an interest-rate buy-down, which is usually one of the first tactics builders use to stimulate activity when sales start to slow. Individual sellers, on the other hand, rarely turn to buy-downs as a sales stimulus. Not because the move doesn't work for them, but because they don't realize the option is available. But once they get it, they jump on board because they are anxious to set themselves apart from their competition.
A buy-down is a tactic in which the seller pays a lender to lower the buyer's rate. Sellers buy down the rate for the first two or three years of the mortgage. This financial tool all but disappears from mortgage menus during strong markets. The most common type is 2-1 buy-down.
In this case, the rate is bought down by two percentage points in the first year and 1 point for the second year. So, if the market rate for a fixed-rate loan is 7 percent, a 2-1 buy-down would result in a 5 percent start rate. Then, the rate would move to 6 percent during the second year and 7 percent for the remaining term. Buy-downs aren't cheap, and they come right off the seller's bottom line. But in the long run, they achieve the same result - that is, lowering the monthly payment - as cutting your asking price. But the seller's bottom line takes far less of a hit with a buy-down than with a drop in price. Better yet, you don't have to pay for it in advance, so there's no cash out of pocket. Perhaps the most difficult hurdle for the seller to get over when considering a buy-down is that it's expensive. But, is it really more expensive that cutting the price?
Here's an example of a 2-1 buy-down for a $250,000 mortgage, with a start rate for a 30-year fixed loan that would otherwise be 7 percent. For simplicity purposes, assume the loan represents 90 percent of the purchase price. Thus, the selling price would be $277,778.
In year one of the $250,000 loan, the rate would be 5 percent, resulting in a payment of $1,342 for principal and interest. In year two, the rate would move to 6 percent and the payment would increase by $157 a month to $1,499. Then, beginning in year three, the rate would be back at 7 percent and the payment would rise to $1,663. Over the two-year buy-down period, the savings to the buyer would be $5,827. That also would roughly be what it would cost the seller to buy-down the rate on behalf of the buyer. But for the buyer to achieve the same $1,342 initial payment, the seller would have to lower his price from $277,778 to $224,200 - or $53,578. Those are some huge differences - $53,578versus $5,827. And some people would say that temporary buy-downs cost sellers too much in comparison to somewhat meager savings achieved by the buyer. However, buy down isn't for everyone. There are certain limitations in qualifying for buy-down mortgage. Some borrowers could benefit more from traditional mortgage.
Dreadful of ARM Reset?
If you obtained a purchase loan or refinanced at a high loan to value and chose a short-term adjustable rate mortgage in the process , regardless if your loan expires in 6, 12, or 18 months it is important to begin working on your credit now. The reason is simple. The combination of falling home prices, rising interest rates and tighter underwriting guidelines will make high loan-to-value loans available only to those with the best credit. If you are not in that group you will have to deal with the consequences of an ARM Reset and payment adjustment which can be financially devastating. In markets with a tight credit supply (meaning tough to get loans), having solid credit is absolutely important. Loan program selection to get out of ARM reset is an important question to answer, however, if your credit is bad, there may not be much choice left over. So what can you do to improve your inadequate credit score or maintain a great one? It is important to obtain a copy of your credit report and ascertain where you stand. If your scores are declining, the following may apply.
- Too many inquiries on your credit report
- Balances on revolving accounts of more than 30% of your credit limit
- Reporting of a late payment on your mortgage or other reporting accounts
- Too much debt, for example another car, second home or other large debt item
- Public judgment, tax lien, unpaid parking tickets, collections, etc.
Here are some common ways to rectify a score drop:
- If your score is hit by excess debt it may be because an old mortgage or automobile account is still showing as active even if you've already refinanced that old mortgage, or turned in a leased vehicle or sold your old car. While you no longer have that debt the bureau may count it against you if the account is not properly recorded as closed.
- If you've been shopping excessively for items that require a credit inquiry your score will take a temporary hit. Take a break from running your credit for about 3 to 6 months to allow your score to recuperate. Too many inquiries make you look desperate for credit - which hurts your score. Time will clean this up.
- If your balances are getting large it may make sense to open another card and transfer some of the debt to the new card. This may be effective if you only have one or two cards with high balances. Having a third may allow you to return your debt levels to under 30% of the credit limits. This takes discipline however; do not use the new card to rack up additional debt.
Essential Reminders
- Do not miss a mortgage payment, please. This is one of the worst things you can do. There was a study recently that showed Americans are more likely to make their credit card payment than their mortgage payment. If you are in a short-term adjustable ARM and are planning on refinancing in the next 12-18 months this is a terrible decision.
- Know what is on your report. I've seen loan applications declined because borrowers didn't know that their gym membership was reporting on their credit and they neglected to pay their gym dues. I've seen a late library book from a local library shave 50 points of a credit score. Don't let trivial items hurt your chances at getting a great loan.
- Fight erroneous information. No one is going to clean up your credit report for you without you being vigilant about keeping it clean and pristine. Dispute errors quickly and in writing to document your efforts. Your credit is your responsibility.
