100% Financing —

Buying Zero Down
by James Robert Deal
Mortgage Broker, Attorney

There is zero-down financing available for buyers who have a wide range of credit scores and incomes. At times, there are even zero-down stated income loans available. Because closing costs can be paid by the Seller, you may be able to buy with no money out of pocket. You might even get your earnest money back at closing.

If you have money saved up, you will probably want to use it to make a down payment and get the very lowest payments and interest rate. But what if you don’t have 20 percent saved up or 10 percent or even 5 percent? What if you have the savings but want to hold onto the money to feel secure? Or what if you need your money for some other purpose, maybe to capitalize your business? 

If you can qualify for 100% financing right now, even if they payments are higher than you would like, should you wait three years, for example, to save up a down payment? Will the price of the home you want to buy increase more that the amount of the down payment you can save in three years? 

Should you wait? In Washington, no. The real estate market here continues to climb. The rate of increase has slowed for the last nine months, but it could resume its former rapid rate of increase at any point.

Will the price go up by more than you can save? In Washington, yes.

If you buy the home you want right now, zero down, you will own a home that will be gaining in value every year. Hold your new zero down home for three years, and it may increase enough in value that you will have 10 or 20 percent equity in it and will then be able to refinance it and get the best terms possible on a loan for 80 percent of the value. 

If you buy zero down, your payment will be higher than if you paid a down payment. But buying zero down can actually create the down payment you do not now have. Your payment will be higher, but you will not have to save money every month for your down payment. Instead of putting the extra money into your savings account, you put it right into your house payment.

One way to keep payments artificially low (although the interest rate will be higher and your principal balance will grow) is to get one of those oft maligned option ARM loans including the 100% Option-ARM loan.

BUILDING YOUR CREDIT SCORE
by James Robert Deal
Mortgage Broker

Deal Mortgage does not engage in "credit repair."

However, some of the basics about how to build your credit score are well known, and Deal Mortgage can point these out and help you to manage your credit wisely and build your credit score.

Further, our credit agency allows us to run scenarios in which we can calculate how much your score will increase if you pay off or pay down certain credit cards, collections, and liens. We do not charge any fees to run these scenarios, but the fees we owe to the credit agency must be paid, and they are reasonable fees. You typically would pay these fees by credit card. This is not considered "credit repair" but simply proper management of your debt load.

The precise factors used by the three credit reporting agencies to calculate your score are deep secrets.  However, some generalizations can be made about how to improve your scores. Remember, these are only generalizations.

Some borrowers naively presume that not having credit cards or closing most or all credit cards will improve their credit score. To the contrary, a mortgage company can only judge your ability to make timely mortgage payments to looking at how timely you make payments on your credit cards and car.

If you want a mortgage, you have to have credit and use credit. Don't come to me applying for a mortgage and tell me you have no credit cards. I will ask you why, and you will say: "I prefer to pay cash." I'm going to tell you: "Well, buy the house all-cash."

Scores range from 350 to 850. Generally, a person with a credit score of 620 who can pay at least 10 percent down can get good conventional rates, provided he has no recent bankruptcy or foreclosure, and provided he can go "full-doc," which means proving his income with W-2s or tax returns. Generally, a person with a score down to 660 can get a "stated income" loan with only a slightly higher interest rate than if he went "full-doc." See the Glossary for a discussion of stated income.

A generalization: The most important credit scoring factor is making payments on time. Around 35% of your score comes from payment history.

Nothing knocks a credit score down quite so much as a late mortgage payment. A late mortgage payment is even worse than a bankruptcy or a tax lien. One late payment can reduce your score perhaps 100 points. You are asking a lender to make you a loan, but if you have not paid your current mortgage on time, your new lender will have little confidence that you will pay him on time. Further, if you pay your mortgage late, the resale value of your loan on the secondary market might be reduced. Lenders sell most loans, so they don't like you when you make payments late.

Only slightly less important is paying your credit card, car, and other installment loans on time. One late payment on a credit card can impact your score perhaps 50 points.

Receive your credit card statement electronically. Don’t wait for the statement to arrive to remind you to make the payment. Statements get lost in the mail. You are responsible for the payment even if the statement never reaches you. "I didn't get the bill," is not an excuse. The credit card company will say, "You should have known it was due and called to inquire." 

Pay your mortgage electronically. Checks can get lost or delayed. Your credit score will go in the tank. You will not be able to refinance and get a better loan and will be stuck with your high interest rate lender for years to come. 

Set up an automatic minimum payment that will always get paid electronically every month. If you slip up and fail to make a payment, it will be made for you automatically. Then make extra payments when ever you can afford to do so.

Arrange for automatic overdraft protection. If you fail to make a deposit or deposit money to the wrong account, there will always be enough money in your account to cover your automatic payments on your mortgage, credit cards, and car payment.  It’s well worth the annual fee plus the fee for each overdraft.

The amount you owe ("numerator") as a ratio of your total credit available ("denominator") counts for around 30% of your score. This applies to each credit card and car payment and to your entire line of credit combined.

Keep the balance on each credit card below 30 to 50 percent of the card limit. If you are over 30 to 50 percent of your credit limit, pay the card down. Or ask the credit card company to increase your credit limit. Or accept a balance transfer offer from another credit card company and move part of the balance to another card.

Some people turn down new credit card offers. This can be a mistake. Having lots of credit available, as long as balances are low, can actually boost your score, because it increases the total size of your line of credit. It increases the "denominator" and thus reduces the ratio of what you owe to your total available of credit.

Use each card once every few months to buy a meal or pay for gas. A card must be used at least occasionally for it to count as credit available.

I know investors who have used credit cards to make down payments on rental houses or to pay for upgrades on their "fixers." They finish the work, sell the house or refinance it and get their money back plus a profit. And they pay off their credit cards in full.

If you own your home and one or more rental properties, after a few years you will have equity in them. You will be able to draw on the equity in your property and pay off your credit cards and use your real estate lines of credit instead of your credit card lines of credit. Owing money on secured lines of credit has less negative impact on your credit score than does owing money on credit cards.

One of the rewards of having a high credit scores is that when you pay your credit card down to zero, the company you paid off will offer you zero or low interest for extended periods of time. There is nothing wrong with accepting these offers and moving balances from one card to another.  When the interest rate on your credit cards is 2.99 and the rate on your HELOC is 10.5, it makes sense to leave some debt on your credit cards.

You should have cash reserves, and you should have equity in real estate that you can draw on. But sometimes you don't. If you lose your job, and if your reserves are low, you will soon be late paying your mortgage, your credit cards, and your car payment. Your credit score will plummet. Your credit card companies will jack up your interest rate. Your house will go into foreclosure.

However, if you have several $20,000 credit card with zero balances on them, you will be able to use them to keep current on your obligations until you find the next job or get out of your sick bed. If you have extra credit, you will be able to survive longer and not have to take just any job. You will sleep a little better at night.

A lot of businesses and individuals fail not because they are unworthy but because they are not deeply capitalized and do not have a big enough line of credit to draw on. The credit card is the little guy's line of credit. If you have untapped cards ready to draw on, you will have a lot more room for error. 

If you have lines of credit available on credit cards, you will have money to relocate to a different city if you have to. Moving is frightfully expensive.

If you have extra credit card capital to call on, you might, if you lose your job or get sick, be able to weather the storm and avoid bankruptcy. Avoid bankruptcy if there is any reasonable way to do so. 

Business credit cards are available. The rates are higher than on personal credit cards, but they are not unreasonable. Business credit cards differ from personal credit cards in that they do not allow for cash advances. They can only be used to buy equipment or pay for services. Business credit cards are replacing traditional bank loans to small businesses.

Regarding old collections: Don’t assume you should pay them off. After several years old collections have a negligible impact on your credit score. If you pay one off, it returns to the top of your credit report, and it has a negative impact on your score in the short term. Prime lenders sometimes insist that you pay off all collections as a precondition to getting a loan from them. Sub-prime lenders do not require this. It is less likely that lenders will require that you pay off medical collections. There seems to be an awareness among lenders that our medical insurance system is defective.

All lenders require that you pay off judgments and tax liens, because at closing they will jump onto title and will have priority position ahead of your new mortgage lender.

If you do pay off a collection or judgment, bargain with the collection agent. In return for payment get a letter on the collection agent’s letterhead which states that the debt was based on a misunderstanding (if it was), that it is fully satisfied (even if you paid less than the full amount owing), and that it never should have been sent to collection in the first place (if this is true). This letter can be sent to each of the three credit reporting agencies, and the item will be completely removed from your credit report. This can take up to two months.

If you are in a hurry to close a loan, I can use such a letter from a creditor to do a Rapid Rescore, in which I fax that letter to my credit reporting agency. Your score is recalculated immediately.

If there are errors on your credit report, write a letter to the three credit reporting agencies. They are required by law to communicate with the company which posted the error to your record.  

Another generalization: How long you have had credit counts for around 15% of your score.

Another generalization: The type of credit you have counts for around 10% of your score. A department store credit card, secured credit card, or finance company loan (Beneficial or HFC) is less favorable than a regular credit card.

Another generalization: Recent applications for a lot of new credit counts for around 10% of your score.

There are enormous privileges that come with having a high credit score. Use credit wisely. Guard your credit score carefully.

How We Beat The Big Banks
by James Robert Deal
Mortgage Broker, Real Estate Attorney

When it comes to money, remember this:  The cost of money is the same everywhere.  Ditech’s money is no cheaper than our money.

And because of the approach they take, it can actually cost you a lot more. 

When you go to an Internet lender or to your local bank, they are trained to quote you a loan with no or low closing costs.  Sounds good doesn’t it?  Not necessarily.

For Bank of America or Ditech to give you no or low closing costs, it has to jack up the interest rate.  Their rate could be a quarter or 3/8 of a point higher than what I would quote you.  To get Ditech's $395 closing cost loan, you will pay an interest rate that is a full 1.0 points higher than the loan I can get for you.

In the short term, yes, you save.  In the long term, no, you lose big time.  If you are going to keep your loan two years or less, then it makes good sense to pay the higher interest rate and get low closing costs.  If you are going to keep your loan for more than two years, you will be way ahead by paying your closing costs and getting the lower interest rate and the lower monthly payments for the other 28 years of your loan.

Why would Ditech or your local bank jack up your interest rate?  So they can turn around and sell your loan in the secondary market for a huge profit.

Now if you are a first time buyer who has limited money for a down payment or for closing costs, then it might make sense to increase the interest rate in order to lower the closing costs.  We sometimes do that here at Deal Mortgage.  The difference is:  We give you all your options.  They don’t.  They play on your lack of knowledge about how loans work.

Call me at 425-774-6611 or 888-999-2022 for further information.

THE OPTION ARM

The Option ARM loan is also known as the Pick-A-Payment loan or the Cash-Flow loan. Option ARM loans are often vilified by mortgage gurus in the newspapers. Some people who take these loans are often shocked at the way the interest rate and principal balance climb month after month. Some are shocked that they have pre-payment penalties and are stuck with the loan for one, two, or three years.

Far too many loan officers fail to discuss the negative aspects of these loans and fail to tell the borrower all his options, including the no-pre-payment penalty option or the fixed interest rate option. Far too many borrowers are too trusting like sheep.

Despite all the negative propaganda about such loans, provided there is full disclosure and the borrower is sophisticated, there are situations where the option ARM loan is the appropriate choice.

There are many versions of the Option-ARM loan. All of them have a very low minimum required payment option that is so low it does not fully pay interest accumulating on the loan and so amortizes negatively. I will discuss the secure option ARM below.

The borrower has the option of paying the minimum payment, calculated on a 30 or even 40 year amortization at a 1.0% or 2.0% or 3.0% interest rate. Or the borrower can pay a payment that covers interest only. Or he can pay the 30-year or 40-year amortization payment or the 15-year amortization payment.

If the borrower pays interest-only each month, the balance remains unchanged. (However, the interest rate he is paying is higher than the rate he could have gotten had he applied for an interest-rate-only loan instead.)

If the borrower chooses to pay only the minimum required payment, then the balance owing increases each month that the borrower pays the minimum payment, that is, the loan amortizes negatively. To some borrowers that is a terrifying thought. To the more courageous, it's a terrific thought: In the greater Seattle area, with property values going up 8% to 15% per year, it is not a great concern if the balance owing on the loan goes up 2% per year.

Investors love the Option Arm loan. With extremely low minimum required payments, the investor has money left over from rent income to pay the mortgage payment in full and maybe more to cover negative cash flow: for example, to cover the loss of rent if a tenant fails to pay and has to be evicted, or to pay for a new electrical system or a new hot water heater.

With the standard option ARM loan, the minimum payment will typically rise 7.5% each year.

The one drawback of the option ARM is that although the required minimum payment is low and predictable, the interest rate is adjustable each and every month. The interest rate is the total of an index plus a margin. The margin is fixed, and represents the lender's consistent, guaranteed profit level.

The index fluctuates with the markets and might be from 2.50% to 3.50% depending on the index chosen. The MTA index is a popular one. It is the average of the last 12 months of interest rates on the US 1-year treasury bill. Rates on T-bills are fairly stable and change slowly, and because an average is taken of the rate over the last 12 months, the MTA is said to be a "lagging index." Another popular index is the one-year Libor. See Mortgage-X for the various indices.

The index plus the margin typically ranges from the high 6s to the low 8s, and it depends on whether the property is owner or non-owner occupied, whether the borrower fully documents or states his income, the loan-to-value ratio, and the credit score. The interest rate is adjusted monthly. The lender sends the borrower a letter each month giving him his payment options to the penny.

With the option ARM loan the lender will pay the broker a significant rebate, meaning that the broker will not have to charge the borrower points. Thus, the borrower's closing costs are lower. 

Most option ARM loans come with pre-payment penalties for one, two, or three years. Lenders pay loan officers higher rebates to deliver them option ARM loans with long pre-payment penalty periods. However, there are one-year and no-pre-payment penalty option ARM loan available. The borrower might have to pay points and the loan officer might have to be satisfied with a lower rebate.

Option ARM loans can be obtained on a fully-documented or stated-income basis. Rates are a little lower for one who qualifies full doc.

To qualify for an option ARM loan on a stated income or full doc basis, one must qualify at the fully amortized payment level, not at the initial start rate.

Most option ARM loans are made on a stated-income basis, and wage earners are allowed to state their income as well as the self-employed. Lenders to to www.Salary.com to determine whether the income stated is reasonable for the borrower's line of work.

The option ARM has been used for retired people who want to stay in their home but who do not want to pay fully amortized loan payments. Again, with property values going up 8% to 15% per year, it is not a great concern if the balance owing on the loan goes up 2% per year. An elderly home owner’s $400,000 home may be going up in value $30,000 to $60,000 each year, so it would be a very stupid move for him to sell it and go rent an apartment, regardless of what the mortgage gurus say in the newspaper.

For such a person an option ARM can be a half-way reverse mortgage. With a reverse mortgage, the borrower pays a large loan fee at the beginning and then receives as much money as he needs each month up to a certain monthly maximum. For the borrower who can pay a reduced mortgage payment, the option ARM can offer similar advantages.

THE SECURE OPTION ARM

With the standard option ARM loan, the minimum payment level rises 7.5% each year and the interest rate changes monthly. However, there is now the secure option ARM loan, where the minimum payment and the interest rate are both fixed for five years.

Typically the fixed interest rate is in the 7s. The borrower may pay interest-only on this loan at an interest rate that is 3.0 points lower than the fixed interest rate, which typically yields an interest-only payment in the low 4s. A big advantage is that the borrower is allowed to qualify at the interest-only level in the low 4s.

The only downside is that the minimum payment level on the secure option ARM is a little higher than on the true option ARM.

THE 90%, 95%, 100% OPTION ARM

The option ARM or secure option ARM is often used in conjunction with a second loan. Typically, the option ARM or secure option ARM loan is for 80% of the purchase price. The borrower may pay 20% down, but more often he pays 10% down, 5% down, or even 0% down.

Typically, the second loan is a 30-year fixed loan due in 15 years. Typically the interest rate is in the high 8s to low 11s. The lower the down payment, the higher the interest rate on the two loans.

I have helped many buyers buy with 5% down or 0% down, especially when they are confident that they can handle the payments. Be advised that I strongly believe that if you can handle the payments, it is better to buy a home sooner rather than later and buy zero down if you have no down payment.

The seller is typically allowed to pay up to 3% of the buyer's closing costs, meaning that the sale price is artificially increased 3%. This allows the buyer to finance his closing costs over the term of the loan instead of paying for them out of cash on hand. The net result is that a buyer can get into the property for very little money out of pocket. For such loans the lender will want to see reserves sufficient to pay the first two to six months of payments.

It is fairly easy to get 90%, 95%, or 100% financing for owner-occupied property. Sometimes it can be easier to get an option ARM loan than a conventional loan. There are option ARM construction loans available with sometimes on 5% down.

In some market periods 100% financing for rental property is just not available. When it is available the borrower many need to prove he has a year of payments in reserve. With down payments of 5% and 10%, non-owner occupied property financing is obtainable but at higher rates than with 20% down.