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100% Financing in 2007 and Beyond

One of the most commonly asked questions that I get from realtors and clients now days, is who can qualify for 100% fianancing and how to qualify for it.

Mr Housing BubbleIf there’s any loan out there more likely to burst the infamous housing bubble it would have to be the misuse of 100%-interest-only-adjustable-rate financing.  So let me address this question head on as the mortgage industry is changing dramatically. 

In spite of all that is going on the mortgage industry these days, this doesn’t mean there’s not an appropriate place for 100% financing.  It does mean however, that before you consider 100% financing you must first understand the proper application of this type of loan.   You have to carefully evaluate the subject property and then you must ask yourself several questions about your personal finances and your ability to repay the loan through thick and thin.    

100% Financing is speculative.  

 You are speculating that the real estate you are buying will be worth more tommorow than it is worth today.  So how do we know the answer to this question for any given property?  Well, we don’t.   So right off the bat, you should expect a higher interest rate for 100% financing becuase of this added risk.  What we do know is that given enough time real estate will eventually appreciate, therefore if you hold a property long enough odds are it will be worth more in the future.   

Since banks are assuming the full collateral value of the property during the first few years of ownership, they are requiring a much greater scrutiny of the buyers credit history, the appraised value of the property, and they are taking a much closer look at the buyers liquid assets and income.  (Something they should have been doing all along). The days of stated income 100% financing are long gone.  If you want 100% financing you can still get it, but you need to back it up with solid evidence of your ability to payback the loan.

Here’s a questionaire that will help you determine if 100% financing is right for you.

  1. Do you plan to hold the property for longer than 5 years?
  2. Is the property in a well maintained neighborhood that can be expected to appreciate?
  3. Are you happy with the floor plan?
  4. Will it suit your needs for many years to come?
  5. Is the home structurally sound and not likely to require any major improvements in the next 5 years?
  6. Is your current employment stable?  Is there any possiblity that a life event could cause you to move against your wishes?
  7. Do you have at least 8-12 months worth of house payment saved in liquid assets?
  8. Is your credit score above 700?
  9. Is your overall debt ratio less than 50% ? (meaning that less than half of your gross income is going towards  your debts including the new house payment)
  10. Is your income documented and verifiable through pay stubs or tax returns?

If you answered “Yes” to all of the above questions then there’s a good chance tht 100% financing may still be an acceptable form of financing for you.  If you answered “No” to one or more of the questions then you should probably consider other forms of financing or put your plans on hold for a while.

This questionaire provides you with a rough guide to help determine your likelihood of qualifiying for this type of loan given the current lending environment.  However, it is essential that you meet with a well trusted mortgage professional that can evaluate all the variables to determine whether or not you should even consider this type of loan.  If the answer is that 100% financing is not the right choice for you, let that be OK.  Focus instead on developing financial plans that can steer you into a home with the “right” loan, even if it means waiting a year or longer.

Fannie Mae and Freddie Mac have many loan programs that can assist borrowers in getting into their first home without taking on unnecessary risks and with loans that make sense.  Many cities have government programs that can help you qualify and otherwise offer you other types of government subsidized loans.

Martin Rodriguez is the Senior Loan Officer – President of SCV Loan Solutions.   A mortgage planning firm that works in affiliation with the financial planning offices of Total Financial Solutions.

Flow Chart: Real Estate Purchase Transaction

For those of you that prefer visual concepts, 

I have prepared a simple flow chart that illustrates the key steps involved in the purchase of real estate.  This illustration is designed to provide buyers with a road map to ownership from begining to end, it is not a detailed list of everything that occurs in a transaction.

I realize there may be some variance from state to state as some states are non-escrow states, but the overall process is generally the same.

If you have any recommedations or see anything that I may have missed please let me know. 

Lastly, If you’d like a PDF copy of this, please feel free to email me.

Click here for Flow Chart

Griffith Observatory: One of LA’s most distinguished buildings – Inside and out.

Recently my good friend John Evarts and I visited the Griffith Park Observatory atop the Hollywood Hills. 

If you’ve never been here, this place is an absolute must for any LA tourist or resident

The views from the observatory are abosultely fabulous and you can see clear across the LA basin from downtown to Catalina Island.   (I took this picture from the back of the observatory)

Los Angeles Skyline

Realizing what a gem this facility is for the city of L.A,  John and I decided to co-author a blog featuring the Observatory as one of LA’s most distinguished buildings.  You can read John’s Blog about the exterior of this building and the 5 year re-modeling project here

In this blog, I will give you the .05 cent tour of the inside of the facility, but do yourself a favor and check out this place next time your in LA.

The Obervatory has 2 floors full of exhibits and astronomical objects that are arranged into several theme featured halls.  One of my favorites was the Gunther Depths of Space this hall focuses on the night sky, our solar system, the milky way and galaxies beyond.   I could spend all day in this one part of the museum reading about all of the exhibits and the constellations that we see in the night sky.  Did you know that Polaris, aka the North Star appears stationary in the night sky?  All the other stars appear to rotate around Polaris?  Why is this? And how can you easily spot Polaris — contrary to popular belief its not the brightest star in the sky, in fact its relatively faint.  You’ll find the answer to these questions in this hall.

There are many other halls downstairs that feature specific astronomical topics, its too much for me to write about here, but you will find “the hall of the eye”, “the hall of the sky”, “the cosmic connection” and many others.

Downstairs you will also find asteroids and meteorites that have penetrated our atmosphere and have been collected over the years.  Some of these shooting stars have some pretty fascinating stories behind them, like the one that struck a lady in Alabama and nearly killed her.  The meteor grazed her leg and burned a streak into her leg.  Thank your lucky stars!!!

Griffith Observatory

Ok lets get into the really cool stuff, located on the upper level.  The main floor has 3 distingushing domes, the center of which is the planetarium which is the focal point of the entire museum. 

Inside this dome you can sit back in recliner seats and stare up into the center dome, and watch a presenation called “Centered in the Universe.” The star projector in the center of the room will project the night sky on the dome and for the next 30 minutes, you will get the best tour of the night sky you’ve ever seen.  It’s abosultely awesome.  You’ll think you’re outdoors looking at the real sky.   You’ll learn about the early days of astronomy, the constellations, and about key discoveries that have enabled us to better understanding the depths of space.  If you think that Planet Earth is amazing, this show will give you a whole new appreciation for how small we really are and how enormous our solar sytem and galaxy are.  Its more than you can wrap your brain around..

The center dome is flanked on either side by two other domes that each have specialized high power telescopes that are available to the public for free viewing of the sky.  The west dome has a solar telescope that allows you to see solar activitiy such as solar flares and sun spots on the Sun.  The east dome is used primarly at night and is capable of focusing on any celestial event that is visible from the LA area.   This telescope is open until 10pm and you can see the moon, the stars, nebula’s, galaxies and more.  You’ll have to check with the observatory to find out what this telescope is focused on, for any given night.

If you have young kids that are curious about the night sky, bring them here.  While, most of the displays are geared to teach children of all ages, younger kids might find it boring, because there is a lot of reading to do at each exhibit.  Keep in mind, this isn’t a Disneyland exhibit.  Its a real working musuem, so expect to take your time learning and thinking.

Again if you’ve never been here, please check it out next time you visit LA.  7 Milliion guests have visited the observatory since its opening in 1935 so there really is something here for everyone.

If you’ve already been here, let me know what your favorite part of the musuem is?  I’d love to hear your comments on this Shining Star located in the Hollywood Hills.

Under the Mortgage Microscope: Understanding Points vs. No Points

One of the most common questions that I get as a mortgage broker is, “Can you do a zero point loan?”  
Of course I can, any broker can do a loan with no points. 

The real question is understanding the trade-off between a zero points loan vs a loan where points are paid. (all other things being equal, of course.)

Many “loan shoppers” often focus on this dimension alone and they will run the other way if the lender mentions that a loan has points included.  This is short sighted and illustrates a lack of understanding of where the point costs come from, and what benefit (if any) points may have.  I am not advocating one way or the other for loans, with or without points, the answer to that question needs to be addressed on a case by case basis.   I just want consumers to understand that a zero points loan doesn’t necessarily mean they are getting a low cost loan, and they should evaluate all of their loan costs, both with and without points to determine what is best for them. 

I recognize a borrowers desire to get a low cost loan.  We all want the lowest cost, and best value in anything that we buy.  Whether it be our clothes, a car, a house, or in this case a loan.  It comes down to doing a cost-benefit analysis that will help borrowers understand what they get for the cost of their points. 

Before I explain how to do this analysis, let me be very clear about something.  No matter what kind of loan you get, meaning one with points vs one without points.  The bank is going to make their profit margin on the loan, – end of story.   Pay me now or pay me later, the bank always wins.  With that in mind, the borrower has a decision to make.  Buy down the interest rate with points or take out a loan with no points.

There are 3 ways you can look at this problem.  

If you’re taking out an interest only loan, use this formula. 

  1. Start by finding out what the rate/terms are for a 0 points loan.
  2. Then find out what the rate will be if you pay 1 point.  (make sure the terms don’t change from the original 0 point loan.)
  3. Compare the payments from the 0 point loan to the loan with points, and subtract to find the difference in the 2 payments.
  4. Divide this payment difference into the total cost of the points. 

Here’s an example.  
       $500,000 loan at 0 point, with rate of 6.75% has Int only payment of $2812.
       $500,000 loan at 1 point, with rate of 6.25% has Int only payment of $2604.
       The diference in payment is $208 per month.
       The cost of 1 point is $5,000 which divided by $208 = 24.

24 is the number of months it will take to recouperate the original $5,000 cost of the points.  
Therefore, if you plan to keep this loan for more than 24 months, then you’re better off paying the points and taking advantage of the lower payments.   If you plan to sell or refi within 24 months, then don’t pay the points and take the 0 point loan.

For loans with fully amortizing payments use this formula,

This formula is a little more complicated because you need to consider the difference in principle reduction over a period of time for 2 different interest rates.  Here’s simplified way to do this.  You will need the help of an amortizing calculator which can be found on my website by clicking here – Calculator

  1. Do the calculations shown above for an interest only loan.
  2. Then using the calculator determine the monthly payments for the 2 loans with and without points.
  3. Compare the yearly principle reduction between the 2 loans and find the difference in principle.
  4. The difference in principle along with the difference in monthly payment is added together and divided by the cost of the points to determine a break even point in months. 
    (To get exact numbers I recommend you contact me, because there are other elements to consider in this formula that would be too difficult to explain here.) 

Lastly you should also consider that if you are paying points, you could spend that money on your down payment and therefore reduce the principal balance of the loan.  In this case, I recommend going with the zero points loan if the monthly payment, with the reduced loan amount, is lower than the payment with higher loan balance and points. 

Hopefully, I didn’t lose you in these explanations and you’re still with me.  It’s important that as a consumer you understand how all of this works.  Points can help you lower your rate, knowing whether it makes sense to buy points or not is a matter of doing the math and knowing how long you plan to hold onto the loan. 

As a professional consultant, I calculate the break even point for all of my clients and I let the client decide whether or not they would like a loan with or without points after they have reviewed the analysis.  Sometimes the decision on what loan is best is influenced by other factors, but at least the clients knows exactly where their money is being spent and what the loan is really costing them.

Martin’s Money Guide

 What is Martin’s Money Guide

Martins Money Guide is your source for answers related to commercial and residential lending.  As an experienced mortgage consultant I can  develop custom solutions for your lending needs. 

The mortgage marketplace has hundreds of different loan products and lending programs.  While this is a good thing for consumers, it makes it difficult to compare loans on an apples to apples basis.  Selecting a  loan is no longer a matter of  getting the lowest interest rate.  Its a matter of matching your financial situation and your financial goals to a loan product that makes sense.  Only an experienced mortgage professional can sort through all of these issues to make recommendations that make sense and save you money. 

If you have lending questions or need a professional mortgage consultant, please visit www.moneysolutionspro.com.
Rest assured you will get the best mortgage consulting services available.  

Under the Mortgage Microscope: Prepayment penalties understood.

Despite consumers dislike for prepayment penalties lenders often make them a requirement of the loan.  Nobody wants one; nobody likes them.  So why can’t we just get rid of them altogether?  My rule of thumb is to generally avoid prepayment penalties when possible, but is there ever a time when it’s advisable to accept a prepayment penalty? 

To answer this, we need to look at the big picture so that we can better understand the role of prepayment penalties in a loan.  Sure, prepayment penalties exist to protect the lenders profit margin on a loan, but a closer look reveals that the driving force behind prepayment penalties is the need to lend in a marketplace that would otherwise not exist.

Say for example a lender has $25M to lend.  They can choose to lend that money to borrowers with strong credit scores and make a profit margin of 2-3%, or they can choose to lend this money to higher risk – low credit score borrowers and make higher profit margins of say 4-5%. 

Herein lays the reason for the prepayment penalty.  Without a mechanism to tie a borrower to a loan for some pre-determined period of time, the lender bears the risk of losing the intended profit margin which is the driving force behind their willingness to provide loans to individuals with less than perfect credit histories.   In other words, why lend money to higher risk borrowers if there’s no additional gain. 

It’s for this reason that sub-prime loans contain a pre-payment penalty.  However the penalties are not exclusive to the sub-prime borrower.  Often you will find A paper borrowers that have a penalty.  In these cases it can be for other reasons.  Remember, just because a borrower has “A” grade credit it doesn’t mean they qualify for an “A” grade loan, many other factors are in play.  The type of income documentation provided, and the loan to value ratio, are some of the reasons why an “A” borrower may have a loan that requires to have a prepayment penalty.

So Should I accept a prepayment penalty?

No.  Avoid prepayment penalties any time that you can.  Remember, the penalties are there for the lenders sake not yours.  Sometimes you will get a lower interest rate for accepting a penalty, but this rate reduction needs to be weighed heavily against your ability to get out of this loan if necessary.  Most people can reasonably forecast their lives for the next year and a 1 year prepayment penalty is pretty safe bet.  However, anything longer than a year has too much uncertainty.  Take into consideration that a family hardship, the loss of income, or any unexpected reason requiring you to sell or refinance the property will likely cost you thousands of dollars if you trigger a prepayment clause.  Therefore the savings associated with a rate reduction will be eaten away by the penalty should you trigger it.

If your credit score and borrowing situation is such that you can’t get around a prepayment penalty, then you have no choice but to accept it. However, before you accept a penalty, you need to be certain that you understand it and can live with the loan as it is for the duration of the penalty period.  

Generally, there are 2 types of prepayment penalties, Hard and Soft and they can range from 1-5 years in length.   

A hard penalty means that if you refinance or sell the property, the penalty will be invoked and you will have to pay the lender..

A soft prepayment penalty means that the borrower can sell the property without penalty however if they try to refinance the property, the penalty will apply.

So needless to say prepayment penalties will always exist as long as there is a market for lending to anyone other than the perfect borrower.