Not Too Many Options For Those With "Pay Options"

Click on the title to link to this article. This article is talking about those with "pay option" arms. In our opinion, these along with the drop in housing values are the two biggest reasons for this mess we are in (on a very macro level). We preached to peope, "Stay away from these loans". The problem is lenders did not educate their clients as to the full story on these bad boys.

Here is a run down of a pay option arm. You have the option to make four different payments every month. Remember the advertiing of 1.5% rates and stuff. Well, those were option arms. One of your options was to make a payment with that rate, a 30 year fixed rate (which was always way higher than the going rate), an interest only 30 year rate, or a 15 year fixed rate. The big, big problem with these loans was paying at a 1.5% rate meant your mortgage was actually growing because your note was not based on that rate but a higher one. So you were not covering all the interest every month and, thus, your mortgage would grow. Now for markets like CA, NV and AZ where housing values were sky rocketing, nobody cared. Unfortunately, when the market came crashing down those people were screwed for two reasons:

1. They were now way upside down on the house since the value dropped and their mortgage had increased.
2. The rates on these ARMS started adjusting and, suddenly, people could not make those payments because they did not realize how high the payment would go. So they thought, "I'll just refinance." Oh now you won't because the guidelines changed so fast that most of these people could not get a loan any more because they needed stated income. So what would they do? Walk and get foreclosed on; they literally had no choice because they were stuck.

A screwed up mess has sense unfolded, and this is a huge reason for it. Read the article and shoot us any questions.

100% Loans? - Really?

The mortgage circus of the previous few years had quite an act in the center circle, including loans on investment properties that required no money down, no proof of income and only a bottom of the barrel credit score. We're all well aware of the mess this has resulted in. By the way, I'm convinced the most important screw up in all of this was the lack of a requirement that home buyers prove their income.

So, are these types of loans still available? Of course not, BUT, there are still opportunities to obtain mortgages with very little or no money down. Certainly, there's room for a debate about whether this is a good thing or not, but that's not the point of this article. We simply want to let you know what options are available.

Generally speaking, you should expect to put down a minimum of 5%, at least if you plan on obtaining a loan underwritten by Fannie Mae or Freddie Mac guidelines. However, the following is a sample of some very good mortgage options requiring less than 5% down:

• FHA loans - in most areas of the country, as long as your loan amount is less than $271,050, you can access HUD's FHA loan, which requires only 3% down; and, HUD is fairly liberal in it's allowance for the down payment to come via a gift from a family member, effectively resulting in 100% financing.
• VA loans - this is a loan that is insured by the U.S. Dept of Veterans Affairs and is of course designed to assist veterans purchase a home. For most areas of the country, as long as the loan amount is $417,000 or lower, the veteran will not be required to fund a down payment on the purchase of a home. One of the best features of these loans is the fact that the veteran does not have to pay mortgage insurance, or PMI, which can add a significant amount to a mortgage payment. The VA does charge a funding fee ranging from 0.0% to 3.3% depending upon the specific situation, but this fee can be financed in to the loan.
• State sponsored loans - in New Mexico, we have the NM Mortgage Finance Authority (I believe most states have something similar), which is a quasi government entity that issues bonds and uses those proceeds to fund mortgages. There are various programs administered by the authority, including more than one way to purchase a home with no money down. With a few exceptions, these programs have maximum income limits, depending on family size and location within the state, but the limits are fairly liberal and vary depending on the size of the family. Additionally, the majority of the programs require the borrower to be a 1st time home buyer, but a 1st time home buyer is defined as not having owned a home in the last three years.
• USDA loans - known as Rural Development loans, these loans are also insured by the Federal Government and allow for home buyers to purchase a home with no money down. There are income and geographic restrictions that must be adhered to, but if you do qualify, this just may be the best loan for someone who is not a veteran.

So, as you can see, there are some great options for purchasing a home with no money down. The common theme with all of these options is that you must be able to document appropriate income for the home you are trying to buy. What a novel concept.

If you have any questions about these programs, please don't hesitate to give us a call. We've only been able to give you basic highlights about each of these programs and would be happy to give you more details as you desire.