I got a contract earlier this month. 100% financing on new construction. The preapproval was sent a while back and I had kind of forgotten about it so it was a nice surprise. And about an hour after the contract hits my fax machine, I get a courtesy call from a local realtor. After exchanging pleasantries we get down to discussing the deal. And as I have discussed in another blog..... 'The Question' came right away.
"Are we going to have any problems with the 100% financing?"
Now, I do understand that some times a 100% financing deal can be difficult to get closed. I also understand that as little as 5% down tends to raise the chances of the loan actually closing and funding by quite a bit. But what does this really mean? Does it mean that a 100% financing deal is a roll of the dice? Does it mean that we should judge our buyers/borrowers based on just ONE of very many aspects in a real estate transaction? No!!
Let's examine a simple little Truth In Lending. And it is that there is a profound difference between the borrower who NEEDS 100% financing an one who ELECTS 100% financing. You see... this particular borrower in my scenario qualified for 100% even without selling their other home. But, they wanted to hold on to as much money as possible until their other home does sell. And they weighed the options of the interest rate differences between 100% financing and the reduced rates with money down..... They ELECTED to get the 100% loan!! The deal closed.... and closed on time with out a hitch. Much to the amazement of my friendly neighborhood realtor. ;-)
So, before we judge our buyers/borrowers, let's look harder at the deal and try and understand it fully. A simple call to the loan officer and some smart questioning can determine whether the deal is solid or not. Brian Brady, America's Most Opinionated Mortgage Broker, has offered a blog on how to prequalify a buyer. Use this information as a foundation of knowledge when you work alongside your lending partners.
Tom Burris
DallasLoanGuy.com
Dallas, TX
I work with a tax professional who curses 100% financing up and down. I also know more open minded tax people that are much more open to 100% financing. It's really new school vs. old school. We just have to decide if our customers can handle the 100% or are using it for an investment advantage. I don't see any reason to put money down on a purchase personally but I am signficantly more educated on the market and the concept of equity as well.
I am weary however, of borrowers who cannot afford closing costs on one of these loans. DU may take the loan but if my clients don't have 2 months of reserves am I really doing them a favor by getting them that financing?
I agree with you Tom, it is becoming a bad word to realtors, I still do it and will continue until they don't let me anymore.
Joe, We aren't! Just because they want the house, doesn't mean they should have it.
LOL, David. It is actually a GOOD term to us all. More people have access to homeownership than ever before.
Joe, I agree that lack of reserves should be tightened. But it isn't. And all we can do about that is make darn sure we get get the client into the best possible loan. Before they run into a loan officer who will not take as good of care with them.
Tom.... as David mentioned, I am getting tired of this also. I have a client that need 100% financing, has great credit scores, but not money...well, very good. 680 and above. He hasn't found a home yet, but I suggested doing an application as a TBD address. I told him the reason why and that it would be good to send in with any offers. He agreed.... This is a very good idea....
I have yet to have a buyer's agent reject my 100% pre-approvals. ;-)
People finance 100% on autos..... a depreciating asset. Real Estate is safer.
While I agree that most of the Option ARMS over the last several yrs have been taken out irresponsibly. But I have to disagree with lumping 100% Home Loans into that same category. We aren't in 'old school' anymore.
Putting money down on a home in Texas doesn't make any sense.... other than to achieve a lower payment.
Tom... I hope you don't mind if I jump in here.
Joe...... there are going to be many haters of the 100% financing now because of the foreclosure rate. A few things that you and the media keep over looking.
I guess why I mentioned all of this is because you brought up the issue with people buying homes in 2005 and now there is less equity. The average homebuyer lives in their home for 6 plus years. THE ONLY problem and reason why people keep bringing up your scenario is because so many loan officers put clients into these with much higher rates, TELLING no PROBLEM, that they can refinance in 1 year. Making it sound easy and what could happen or couldn't happen. This is the route of the problem, placing false hopes in a clients mind and putting them into a loan at a much higher rate to make more money.
Just my thoughts and opinions and more people need to be educated on all the facts and not just hear se or the media.
Jeff....
I haven't heard people screaming about 97% loans..... 3% down aint crap.
Especially when they finance back in 1.5% like on on FHA..... I have seen TONS of FHA deals go thru with no reserves.
A lot of people were given a shot at the American Dream.... and squandered it. Loan officers are an extremely small % of the problem.
Tom.... great point which I am working on now.... the FHA loans and how nobody was up in arms about this.
And trust me, I wasn't trying to blame this all on the loan officers, but there were many that were part of this problem. Not educating the consumer.... bait and switching. I am going through with one right now. He was promised by both Wells Fargo and a company called Fidelity. Wells promised a rate of 8% but 40 days to close and the other company promised 9%, but to close in 2 weeks. I am giving this client 6.75%.
But overall, these foreclosures are a combination of several things... and not just 100% financing. We could be here forever if we had to break this down. thanks. My post will be up in a few hours.