Note: I should have titled this post: “LPMI, PMI and Piggy Back Mortgages…Oh My”. I just realized my error thanks to Bill’s comment. My bad…my apologies! And there’s no way for me to
80/20 in the title.
LPMI (Lender Paid Mortgage Insurance) is one of my favorite mortgage products to use for clients with less than [photopress:wiz.jpg,thumb,alignright]20% down. Here are some of the benefits of an LPMI mortgage:
Loan amounts up to the conforming loan limit (currently $417,000 for a single family dwelling).
Mortgage interest tax deductible for adjusted gross incomes over $100k (unlike PMI).
Convenience of one mortgage payment vs. two mortgage payments on a property.
Often provides lower payments a lower total mortgage payment than the “piggy back
Two years ago, our company switched our loan operating system to Encompass, so I have data available for the past two years (closed transactions from March 2005 – March 2007). I’m pretty surprised at the results after analyzing my purchase transactions and so thought I would share this with you.
Mid Credit Scores
3% had credit scores between 600-619
17% had credit scores between 620-679
25% had credit scores between 680-719
47% had credit scores between 720-799
8% had credit scores above 800
25 % of clients purchased with 100% LTV Financing (80/20 or 100% LPMI)
Average zero down mid credit score = 723
7% FHA Financing
- Mid credit scores ranging from 644 – 744
- Average FHA mid credit score = 720
39% had 20% or more for down payment.
The most popular loan programs for my clients:
47% opted for a 30 year fixed conventional
26% have 5 year fixed period ARMs
So what do I make of this? The consumers with scores under 620 will have a much tougher time, if they’re able to purchase at all. Especially without a down payment of 5% or better. Depending on credit history (1-2 years of no late payments), they may be able to go FHA or VA for financing. The 3% (credit scores of 600 – 619) of my clients who I helped with financing over the past two years, would probably need to go back to drawing board and work on their improving credit scores (and, more importantly, work on changing their credit/spending habits) before being able to obtain financing for a home. With that said, out of the 3% who were able to buy, I’m only worried about two buyers who may not have followed my advice of working on their credit and revamping their budget (and one of them has a 5 year fixed period ARM).
The 17% (credit scores between 620-679) would probably fit into FHA financing. Over the past two years, most of my clients would opt for 80/20 or 100% (LPMI) financing over FHA for the following reasons:
- The upfront PMI (1.5% of the loan amount) is no longer refundable on new loans.
- Monthly PMI was not tax deductible (VA does not have PMI) for loans originated before 2007.
- The payment with 80/20s was lower than FHA.
- Borrowers could keep the 3% down (required with FHA) in reserves instead of draining their savings.
This information is just a reflection of my purchase business from March of 2005 to my closed transactions as of today. Historically, I have served more south King County families. Just over the past year, with my move to Seattle, my business is beginning to expand to Seattle and Bellevue areas.
Before reviewing this data, I was certain that a larger percentage of my business was zero down or subprime. Now I can see that I’ve done many zero down/subprime “prequalications or preapprovals” and they just didn’t pan out…but the effort that goes into a preapproval almost feels like you completed a transaction…especially for a subprime buyer.
Again, I don’t represent every lender…just little ol’ me! 😉
It’s all over the news, we’re hearing about major subprime lenders having to restate their losses and every day, lenders are coming into my office to inform us of changes to their guidelines. This is all good, right? It will be tougher to provide loans for home buyers who maybe should be spending more time to learn about budgeting and using their credit cards. What about the people who are all ready in these programs?
First, allow me to explain the basic dynamics of these loans. Many of these mortgages are zero down, 80/20s (80% of the loan to value for the first mortgage/20% of the value for the second mortgage). The first mortgage is typically offers a fixed rate for 2-3 years with a prepayment penalty (the standard is six months interest) that matches the fixed rate period. In addition, the mortgages may be interest only or amortized at 30, 40 or 50 years. The rates on these mortgages are completely dependent on credit score.
When I meet with Mr. and Mrs. Subprime, I advise them of their options of buying now using this type of subprime mortgage or that they can work on their credit, job history, etc. and buy later with a better mortgage program. Because there are no guarantee of what rates will be (or maybe because they know there’s not guaranteed they’ll clean up their act) and because they want to buy a house now, they often opt for the subprime mortgage. Once this happens, I heavily stress (or Jillayne would say, I lecture 🙂 —which I’m sure I do) to Mr. and Mrs. Subprime that they have 2-3 years to change their spending habits because once their fixed period rate is over, their mortgage is going to adjust and do so big time. I let them know that I want them to be in the best position for a refinance into permanent financing (or to have a better mortgage should they decide to sell the home assuming they have any equity) and that the subprime mortgage they are using to obtain their home is temporary financing.
Many of my clients in these mortgages have done very well and I’m proud of them. They have taken the responsibility of owning a home and having a mortgage to heart. I’m able to restructure the original mortgage and improve their situation greatly. The concern is for Mr. and Mrs. Subprime who just didn’t get the hang of it. They continued to charge up their credit cards, they bought or leased a new car to go in their new driveway and maybe a new TV, too. They’ve been sliding ever since the holidays and are now having a tough time paying their mortgages on time. Maybe they just have one mortgage late. Their credit is rough at best. Their fixed period (and prepayment penalty) is over and now they really need to refinance fast because their mortgage has adjusted for the first time—their rate is now 2% higher. Their situation has gone from bad to worse. With all the tightening in the subprime market, even if their credit scores and scenarios are the same as when they bought, there may not be a program for them to refinance out of now. They will be forced to sell (hopefully they have enough equity to pay commissions and other closing costs) or to somehow manage to choke down their increased payments.
I guess this post is a plea of sorts. If you currently have a subprime loan (especially the type I described) please contact your Mortgage Planner to have your credit reviewed to make sure you’re on the right track to be able to refinance (or have a better loan for when you sell) when the time is due. Do not assume there will be a program for you if you have not made significant changes to your spending and use of credit cards. If you’re a real estate agent or loan originator, check in on your subprime clients to let them know of the changes in the industry…see if they need guidance to stay or get on track so they don’t wind up stuck with a higher mortgage payment, being forced to sell or foreclosure.
This is a two part (well so far I’m planning a second post…their could be more) series of a couple of clients (names changed to protect identities, of course!) who have purchased homes utilizing 100% financing. Both parties utilized similar programs but they wound up in entirely different situations.
Mr. and Mrs. Spender eagerly wanted to purchase a home. They were tired of renting and had two kids with one on the way. They didn’t have a lot of money in savings and their credit had a troubled past (some of it was medical and some was plain irresponsible). They live paycheck to paycheck but they are anticipating receiving raises and bonuses from their employer. Their credit report shows that they rely on their credit cards and you can see on their bank statements that they dine out a lot and spend their money on frivolous extras.
Based on their credit scores, I was able to provide them with an 80/20 from a sub-prime lender who does not verify where their funds are coming from for closing and would allow for the seller to pay up to 6% of the closing costs. I structured their preapproval with the seller paying all the closing costs. In fact, at funding Mr. and Mrs. Spender receive a check back for a majority of their earnest money.
Not long after closing, the Spenders discover that the gas heater in their home was defective (apparently this was missed on the home inspection?). It just so happened that the repair company they called to repair it had previously serviced it and informed the previous owners that it needed to be replaced. Mr. and Mrs. Spender decided to take their Seller to Small Claims Court and their Agent attended with them. I had asked them what the results were, here is their edited response:
“Yes we took them to court and even though we had all the documents showing that the (sellers) knew the furnace needed to be replaced and needed to be fixed the judge did not find that we had proved our case… so we got nothing.. (the Real Estate Agent) came with us and she was just as shocked… She too was amazed that all the paperwork we sign to protect us from buying a home with flaws, the (Sellers) even stated and had to initial that there was no problems with the heating system and even though we had documentation to show that they knew there were problems and didn’t disclose it… we got screwed to be honest…. They knew.. They didn’t care… and the judge just wanted to get out of there… It was a joke…