100% Financing and Utah Mortgages

There seems to be some kind of myth circulating that it is impossible to qualify for 100% financing with the purchase of a new home. That is flat out false. Many lenders are still offering zero-down payment programs for purchasing a new home, however more restrictions are being placed on the types of borrowers who will qualify. That being said, it is more difficult than ever before to get a lender to give you 100% of the value of your home.

One of the most common loan programs for someone looking to purchase a home with no money down is the My Community Loan by Fannie Mae. Fannie Mae, a government regulatory organization, created a suite of loans available to moderate and low income borrowers. My Community loans allow interest only payments for 5 or 10 years as well as 40 year terms. Borrowers who qualify for My Community loans will see more leniencies regarding the amount of liquid assets required as well as the types of credit that are acceptable.

Another common 100% loan program is the Flex 100. For borrowers who do not have money for a down payment but who have a higher income or better credit rating than those who would qualify for the My Community Loans.

In pat years is has been common for individuals to utilize what is commonly referred to as Tandem Loans for 100% financing options. Tandem loans break the financing into two separate loans. The most common tandem financing is to utilize one loan for 80% of the required amount and 20% for the remaining amount. The 80/20 loan programs are still available to most borrowers. However, thanks largely to the amount of defaults that have led to the current mortgage crunch lenders are making it more difficult to find an 80/20 program with affordable payments. In today’s mortgage market the Tandem Loan option tends to have higher rate adjustments, meaning you will typically get a higher interest rate, however it may still be worth considering.

Having said all that, there are more reasons today to avoid 100% financing loan programs than ever before. I will discuss this in my next post, so come back for more!

IS YOUR HOME BAD DEBT?

I have never truly understood the term “Bad Debt.” It seems to me that all debt is bad, I mean, really is there such a thing as “Good Debt?” Now don’t get me wrong, I understand that there may always be a degree of “Necessary Debt” but “Good?” Typically a debt is considered “Good” if it leads to a better financial situation. Truth be told, outside of a Mortgage or Student Loan what kind of debt can help improve your finances in the long run? But, here is the rub: Sometimes, even “Good Debt” can be bad.

For too many Utah Homeowners our homes have become “Bad Debt.” I guess the simple rule of thumb is to determine if you are paying more for your home than you should. For many that is a hard thing to determine. Here are 3 things to consider when determining if you are paying too much for your home, in other words, 3 reasons why your home is BAD DEBT:

1. TOO MUCH OF MY MONEY GOES TO MY HOME: Experts say that our house payment should not exceed 36% of or Gross Monthly Income. That means that a homeowner earning a Gross Amount of $6,000 per month should have a house payment that is no more than $2,100 per month (You can get a whole lot of house for two grand a month). If you are paying over 36% then you are most likely unable to put money into other places, such as eliminating Unnecessary Debt or establishing a Savings.
2. MY INTEREST RATE IS TOO HIGH: Interest Rates effect our monthly payments, it really is that simple. I have always said that when considering refinancing it is the Fee’s that matter most, not the interest rate. I hold to my statement. However, I am still amazed at how many people tell me that they are unwilling to refinance to a lower rate without “significant” changes. What does that mean? To many a savings of $100 per month, which in many cases can mean as little as a .25% drop in rate is the difference between living off credit cards and having money to spare. There is no magic formula for determining if your rate is too high. Take a look at your budget, determine how much you need to save—at a minimum—to get where you want financially and then see what rate you need in order to make that a reality.
3. BAD USE OF MY EQUITY: Home Equity provides a false sense of security. I don’t care if you have 90% equity or 5% equity, you miss your payments you will loose your house. You loose your job, good luck accessing that equity without selling your home. Problem is, too many people have gone to the other extreme and are relying on equity as if it is a never ending vault of emergency funds. If you are using a line of credit for your expenses, or to pay off your car then you are going the wrong direction. Equity should be used to increase the value or marketability of your home. Using equity to pay off high interest debt may be a wise decision, however, using equity to afford a week in Fiji is just plain wrong.
   

My experience has taught me that by simply reviewing those three areas of our home finances we can go a long way to determining if we are using our home debt wisely or not.

Again, I realize there is such as thing as “Necessary Debt” and for most this should be limited to our homes, our education, and in some cases our car. Unfortunately, if is possible to use the concept of “Good Debt” as an excuse to avoid disciplined budgeting and wise financial analysis. If you think your home may represent Bad Debt, call me, let’s get it straightened out.