Understanding Creative Financeing Offers
Earl L. Huse, JD
April 12, 2008
Experts are seemingly thinking new concepts every day. As an example, think for a moment about real estate loans. Can you remember when there were only a few loan types available? When a fixed rate mortgage was really fixed for 30 years? Remember when mortgages were assumable? When Adjustable Rate Mortgages had no lifetime caps? Well, today things are certainly different in the mortgage world. A fixed rate, as an example, can be fixed for 5, 7, 10, 15, 20, 30 or 40 years and who know what other types of fixed rates are being proposed today. All these terms of the loan make monthly mortgage payment and qualifying guidelines entirely different.
When some financing markets get a little difficult for a potential buyer to qualify for a real estate loan, some lenders get creative in their approach to lending and qualifying a buyer. They want to make money on the investments they have available to them and they need to get the money available to them lent as soon as they can. As an example, perhaps a lender has a commitment of say $10,000,000.00 with a proposed rate of return to investors of 7% per annum. And further suppose that the current fixed mortgage rate by the typical lender (competition) is at 6-¾%. One way the lender could market this higher interest rate is to exaggerate the underwriting guidelines to increase borrower´s debt ratio´s, or, extend the term of the loan to 45 years which would decrease the principal & interest payments thus reducing the borrower´s debt ratio´s to ease his qualifying.
In the above scenario, the lender could also offer a 100% loan-to-value program and do one of several ways to entice a borrower:
1. An 80%/20% loan. Whereby the lender offers an 80% loan-to-value 1st trust deed at 6% interest amortized over 30 years and a 20% 2nd trust deed at 9% interest amortized over 15 years.
2. A 75%/25% loan. Whereby the lender offers a 75% loan-to-value 1st trust deed at 6% interest amortized over 30 years and a 25% 2nd trust deed at 9% interest amortized over 15 years. (This could be a "NO INCOME QUALIFYING LOAN") fully assumable to a qualified buyer.
3. A 70%/15%/15% loan. Whereby the lender offers an 70% loan-to-value l1st trust deed at 6% interest amortized over 30 years, a 15% 2nd trust deed at 9% interest amortized over 30 years, and the seller to carry back a 15% equity position loan at whatever agreed term structured between buyer and seller. (This could be a "NO INCOME QUALIFYING LOAN") fully assumable to a qualified buyer.
4. Or just about any other combination of structuring that the lender could arrange in order to be competitive at the time in order to lend the available funds to homeowners.
It would be nice to think that all one has to do is just apply for a loan and that they would automatically be approved, no matter what their job stability is, their credit history, income is and if they have the ability to repay a loan. Well, this is real life, and things do not happen that way in the mortgage banking industry.
There are guidelines that are set forth by banks, lenders (all types of lenders), mortgage companies, Fannie May (The Federal National Mortgage Association (FNMA). This is a federally charted, public company, which purchases mortgages from lenders. It has specific standards with respect to mortgages it will purchase (i.e., concerning loan to value, maximum loan limits, buyer creditworthiness, etc.). Most lenders sell or intend to sell the mortgages they make to FNMA. Loans and mortgages meeting FNMA have become known as "qualified" or "conforming" loans, Freddie Mac (FHLMC, Federal Home Loan Mortgage Corporation. A federal agency purchasing first mortgages, both conventional and federally insured, from members of the Federal Reserve System, and the Federal Home Loan Bank System), and Ginni Mae (GNMA Government National Mortgage Association. A federal association, working with F.H.A., which offers special assistance in obtaining mortgages, and purchasing mortgages in a secondary capacity).
There are property guidelines as well that fall under the underwriting guidelines. Not all properties can be financed through conventional means and may require "Non-conforming" lenders to assist in the financing of these special circumstance properties. Sometime a borrower owns too many properties and the lenders will not or cannot fund a loan to the borrower, as a result, banks and portfolio lenders step in to accommodate these borrowers.
To think all you have to do is go out and buy property and receive cash back at the close of escrow with no job, no money, no income of any type, is truly an American Dream. Don´t get me wrong, however, there are some creative ways a person "can" buy real estate today without any money down have no job, no money for a down payment and still receive cash back at escrow closing. The type of lender sometimes used for this borrower is a "Hard Money Lender" although the derivation is obscure, it refers to those loans which by reason of the creditworthiness of the borrower are riskier and, therefore, have a higher interest rate for which the "hard money lender", and the hard money lender charges higher points than for a qualified loan. The loan-to-value ratio is usually much lower then any conventional lender (60% loan-to-value or less).
With the foreclosure rate increasing through-out the United States in record numbers, there will be loan officers, mortgage companies, and who knows who else, that will try any and everything they can to get your money now, and they really do not care about you now or in the future. Be cautious in your endeavors; be careful with lending policies and the lender you may choose. Understand the procedures, guidelines, terms, and rates (terms, length of time before any interest rate adjustments, start rate, is it fixed and if so, what is the duration of the rate) and mostly, understand what you are getting yourself into. Seek professional advise from realtors, accounts, and yes, lawyers.
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