Tag Archives: zero-down

It may not be your business…but it is all mine!

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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!  😉

Confessions of a Zero-Down Lender

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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…

Exotic Loan Programs and Potential Foreclosures

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[photopress:Dollar_20Squeezed.jpg,thumb,alignright]Every “exotic” loan program has a potential appropriate user of that program. What we are seeing more and more today, is the industry using these perfectly good programs inappropriately, to “get the deal done”. Before I go into my take on the situation, let me point out two relevant sites worth reading. One is on “Non-traditional mortgage product risks and the other is HUD’s warning regarding Predatory Lending.

None of the programs being used today are new. What IS new, is the fact that they are being used by the wrong people for the wrong reasons, with the assistance of the real estate professional and the lendng reps. The Feds in their statement, acknowledge that these products have been around for a very long time, and have been used appropriately until recently. On the HUD site, the main point that ties into the “exotic loan” problem, is when lenders are “Making loans without ample consideration to the borrower’s ability to repay”.

Client A has $100,000 in a 30 year bond he purchased 28 years ago with an interest rate of 14%. He has $1,200,000 in various retirement investments. He has $50,000 in a savings account for emergencies. He is 57 years old and is buying a view condo for $750,000 that he plans to live in forever. He earns $200,000 a year and plans to work for at least 8 more years, possibly longer. He decides to buy the condo with zero down and an interest only loan.

That example may sound ludicrous, but 12 years ago they were the ONLY guys I saw using interest only loans. Their investments were earning well over the interest rate on the mortgage. They weren’t going to take money from an investment earning 12% to put down on a property where the mortgage was only costing 7%. Until recently, interest only loans were an investment decision, not a means to qualify for the home purchase.

Basically what the Feds are saying is that the exotic loans are, and have always been, very good programs used sparingly in the past by very savvy and knowledeable people. These lower payments were not meant to be used as a means to qualify for more house than you can afford. They were meant to be used by people who more than qualified at a higher payment, but chose the interest only option for reasons other than to qualify for the home purchase.

The key phrase in the Fed paper is “consideration of a borrower’s repayment capacity”. The key phrase in the HUD warning is “ample consideration to the borrower’s ability to repay”.

Zero down loans replaced VA and FHA for the most part. High rates on the second mortgages replaced PMI. Ten years ago a person might put 5% down and take out a 95% first mortgage and a lower rate, but they had to pay “Private Mortgage Inurance” on the top 15% of the LTV. The PMI amount was not tax deductible. The payment on the second at the higher rate was lower than the loan plus PMI payment and fully tax deductible. A conventional loan with a high rate second may “look” bad, but actually the numbers usually work better than a regular loan with PMI (the old fashioned way) or a 3% down FHA with an up front plus monthly MIP (Mortgage Insurance Premium).

Bottom line is that ALL of the “exotic” loan programs have valid and good uses. Let’s include “stated income”. Stated Income loans have long been used appropriately by people who more than qualified for the loan. Stated Income was often used by someone who had income they didn’t or couldn’t report on their tax return. There was no question but that they could afford the monthly payment, problem was they couldn’t PROVE it, or were not willing to prove it. Maybe it was some limo driver earning $23,000 a year and getting $1,000 in tips he wasn’t reporting. Maybe it was someone with a cash business that was showing $65,000 a year on his tax return and stuffing the rest in his mattress. Maybe it was a prostitute or a mob member…whatever. It was someone who could make the payment, it was just somebody who didn’t want to prove that they were able to make the payment, and so used a “stated income” loan. Stated Income loans are not supposed to be used as a means to “pretend” that you make more than you DO earn.

Zero down loans are NOT for investors! Yes I will yell that one from the tallest building. I heard that lenders “start to question” a guy who has SEVEN zero down loans in a short period of time. DUH! Why’d you let him get to seven, when he shouldn’t have had ONE! Zero down loans are only for people buying a home to LIVE in it.

So, bottom line. When you start seeing foreclosures, don’t assume the market is headed south. Understand that lenders are not following the Fed and HUD guidelines to give “ample consideration to the borrower’s ability to repay” before approving the loan. Maybe the guy who bought at $450,000 only qualified at $400,000 and was stretched beyond his limit. Maybe the guy who bought 6 homes zero down, stacked costs and stated income in 18 months time, got caught in the web he weaved when first he to practiced to deceive, the underlying lender with full knowledge of the real estate agent and the loan broker. Maybe all the guys who took the $6,000 seminar on how to buy lots of property with no money and no job, are all going down…but that doesn’t mean they are going to take the whole market down with them.

I went to a closing with someone else’s client as a “favor”. I got to the table and asked them if they knew that the payment including taxes and insurance was 60% of their gross income! The lender said, “the lender isn’t impounding taxes and insurance”. The buyer said, “We thought the payment was going to be $300 less than that AND included the taxes and insurance. They asked me if they could sell the house in six months if it was impossible to make the payment. I said not with the costs stacked into the price and the prepayment penalty stacked on top of that. I stood up from the table and said, no one is signing today. How many foreclosures will come about because no one stood up and said, “No one is signing today”.

If someone readily qualifies for the payment at say 33% of their gross income (not 60%!) and has a reasonable “back end” when you add their other debt payments to say 40% (not 73%) and isn’t using stated income, no impounds, interest only and subprime loans to get around the high back end, all is fine.

The “Exotic” programs have their place in the lending industry. We just have to stop agents and lenders from using these programs inappropiately as loopholes to “Get the Deal Done”. If the buyer doesn’t like any of the homes he can afford, send him home. Don’t send him to a lender who can figure out how he can qualify to buy a more expensive house, that he will like better, but can’t really afford.