One of the few certainties in the real estate business is that it’s always changing. At this point, the financing end of the business changes daily. A lender may approve a loan one day and decide just before closing that it no longer offers that type of financing. Then, weeks later, they are back in the game.
It’s widely known that the easy-qualifier loans that got so many homeowners into trouble recently are no longer available. Most conventional lenders want the borrower to put cash into the deal, have very good credit scores, and be able to verify employment. Mortgage lenders are in a very cautious mode.
The 80-10-10 financing, a popular financing vehicle for qualified, low-cash-down buyers, has virtually disappeared. With 80-10-10 financing, the buyer makes a 10 percent cash down payment. A conventional lender gives the buyer a mortgage for 80 percent of the purchase price, and the borrower takes out a second mortgage against the property for the remaining 10 percent.
When buyers put less than 20 percent down on a home purchase, the mortgage lender usually charges private mortgage insurance, or PMI. This insurance protects the lender in the event that the buyer defaults on the loan. PMI adds to the cost of the monthly mortgage payment.
In time, if the buyer can substantiate that there is 20 percent equity in the property, the PMI can be eliminated. But, it doesn’t happen automatically. It requires a verification process.
HOUSE HUNTING TIP: Buyers who can’t get financing without PMI should be prepared to pay PMI for the foreseeable future. Home prices may not have bottomed out yet. No one knows when we’ll enter the next cycle of home-price appreciation. The future appreciation rate is uncertain. However, you can build equity, without depending on appreciation, if you pay down the amount owed until the mortgage equals 80 percent or less of the property value.
It’s precisely because of the declining market that lenders are gun-shy about 80-10-10 financing. There are few, if any, lenders who do 10 percent second mortgages for home purchases. If the value of the property were to drop 10 percent, the property would be 100 percent financed. Should values drop further, and the borrower stopped making payments, the lender could lose out completely if the property couldn’t sell for enough to repay the second mortgage.
Recently, however, buyers were able to purchase their first home in Montclair, a popular neighborhood in the hills of Oakland, Calif., using 80-10-10 financing. They were very well qualified financially, but they wisely decided to preserve some of their cash for home maintenance and improvements.
Their mortgage broker arranged a 90 percent mortgage for them — one that required PMI. The buyers shopped around and were able to find an 80 percent first mortgage with a lower interest rate. They got a private second mortgage for 10 percent of the purchase price, so they didn’t have to pay PMI. This alone saved them $150 per month. The first mortgage lender approved this financing arrangement.
Most lenders, at this point in time, won’t permit buyers to obtain secondary financing. But, there are lenders that will allow this sort of financing. If you don’t have access to a private-money second, see if the seller might be willing to carry back 10 percent. If you have 15 percent to put down, perhaps the seller would agree to a second mortgage for 5 percent of the purchase price. And, don’t be bashful about asking your parents for an early inheritance.
THE CLOSING: Many parents are pitching in so that their children and grandchildren can settle in a good long-term home in a desirable location.
Dian Hymer is a nationally syndicated real estate columnist and author of "House Hunting, The Take-Along Workbook for Home Buyers" and "Starting Out, The Complete Home Buyer’s Guide," Chronicle Books.
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