On May 31, 6:04 am, Stan Brown wrote:
Wed, 30 May 2007 21:42:49 -0700 from Tim Smith reply_in_group@mouse-
potato.com:
One possibility is 80-10-10 financing. You take an 80% normal mortgage,
and make a 10% down payment, and take a home equity loan equal to 100%
of your equity (which is 10%). The home equity loan plus your down
payment makes 20%.
The advantage this has over just doing 10% down and borrowing 90% is
that many lenders will require private mortgage insurance then. That
can cost more per month than the payments on the home equity loan in an
80-10-10 arrangement.
Maybe there's something I don't understand(*), but every time I've
dealt with a mortgage bank they've tried pretty hard to make sure the
down payment isn't borrowed money. For instance, a year ago when I
bought my present home I had to show several months' bank statements
to prove that my down payment was savings and not a recent loan.
This scheme essentially means borrowing half the down payment -- and
simultaneously taking on a second mortgage. Does any decent lender
really go for this?
I also wondered how easy it is to get an agressive loan today. One
difference in the lending process is whether the loan is conforming,
which means it meets requirements so that it can be resold in the
broad secondary market. To make mortgages easily tradeable, they have
to have some consistent standards so that instituitions can buy/sell
them in volume and understand what they are getting. And one of
those standards means you can't be borrowing the down payment, which
is why you see this on conventional loans. Now, there are lenders
that will do non-conforming loans of all types, taking on risk for
higher rates. However, after going overboard making all kinds of
bad loans in the last cycle, some big ones went bankrupt and those
that are still making these loans are being far more cautious.
I'm also surprised by Tims comments where he said you don't need PMI
if only the primary mortgage is no more than 80% of the purchase,
meaning you can borrow more without PMI as long as it's a seperate
loan. That may be true, but it's strange. PMI protects the mortgage
holder, so of course they don't want to be exposed for more than 80%
of the value. But the other obvious part of the equation is if they
do lend 80%, don't they then care about the fact that the buyer
borrowed most or all of the rest of the money? That means they have
no money, no cash reserve, and makes them much riskier. So, whey
would they wave PMI? With only a 20% margin, if they foreclose, they
could still easily wind up screwed, especially in a market like now.
Here in the NJ/NYC area if you bought about 2 years ago and had a
foreclosure now, the property sale price, commissions, expenses, etc
could easily exceeed the 20% safety margin and result in a loss to the
primary mortgage lender.
In this situation I'd look first to any special programs that many
states have for first time home buyers. Then I'd go find out what
kind of loans I could qualify for and what the rates are. Then I'd
think long and hard about the risk involved. With insufficient money
for a down payment, just because someone will make you a loan at some
higher rate, with PMI, etc, doesn't mean it's a wise thing to do.
Think about what happens if one wage earner lost their job or had
reduced hours for 6 months. Or if the car suddenly blows up and you
need a new one. Could your survive or would you wind up in
foreclosure?
(*) "Oh, don't be so modest, Stan. There are *many* things you don't
understand!"
--
Stan Brown, Oak Road Systems, Tompkins County, New York, USA
http://OakRoadSystems.com/