January 2011 Archives
Using a Second Mortgage for an 80-20 No Money Down Home Purchase Loan
Many renters want to own their own home, but they simply dont have the down payment to make the purchase. If youre able to afford a house payment as much as your monthly rent, an 80-20 no money down loan could get you out of the rent trap. (80% first mortgage – 20% second mortgage) “It allows people to buy without a down payment, or for those people who would prefer not to touch their savings to get into a house,” says mortgage expert. “What we’re seeing is a lot of young professionals,” he adds. “People who have gotten out of college and have good jobs. They have good credit, but they haven’t had the opportunity to accumulate a lot of savings.”
The 80-20 loans are also known as piggyback loans. The buyer takes out a loan for 80% of the cost of the home. Then takes out a second mortgage for 20% of the loan to use as a down payment. The homebuyer has three options for the 20% part of the loan. Most often the 20% loan is secured from a separate lender, but look up for the second loan to have a higher interest rate.
MortgageDaily.Com shows The second lender-the one who is only financing 5% to 20% of the loan-doesn’t see much benefit from lending the money unless he can actualize a high interest return. If the buyer borrows from the same financial institution, they could open a home equity line of credit and withdraw two separate amounts; one amount for 80% of the loan and 20% for the down payment.
The third option is to borrow the 20% part of the loan directly from the seller, also known as a purchase money loan. Kipplinger.com shows there is a down-side to the 80-20 loan. You likely will have to pay a higher interest rate, buy private mortgage insurance (borrowers usually pay 20% of a home’s value to avoid this) and make bigger monthly mortgage payments. Plus, it can be dangerous to be so highly leveraged. But in an expensive housing market, it can be the only way to afford a home.
Doug Duncan, chief economist of the Mortgage Bankers Association of America says, Most banks offer special mortgages to low- and moderate-income borrowers because the Community Reinvestment Act requires financial institutions to provide a certain share of business to these economic groups. But no- and low-down options for jumbo loans (higher than 300,700) are harder to find.
The costs of the higher interest rate from the 80-20 mortgage are sometimes off-set because there is no mortgage insurance built into the loan. The State of California only requires mortgage insurance for all home loans exceeding 80% loan to value or LTV. An 80-20 loan allows the home-owner to step aside the insurance requirement, thus having a lower monthly payment.
If your goal of an 80-20 loan is to have a lower monthly mortgage payment, another option is the T.A.M.I. program. The T.A.M.I. program includes mortgage insurance where as the 80-20 program doesnt require mortgage insurance. Robin M. Root; a senior level loan officer says the T.A.M.I. provides lender-based mortgage insurance in exchange for a slightly higher interest rate. Since the IRS, allows a deduction for all interest paid for home loans, the cost of the mortgage insurance is tax deductible. And, unlike the 80-20 loan program, when the buyer has equity built up, the homeowner has the flexibility to open a home-equity loan for home improvements or cash emergencies.
If you live in an average market and paid 200,000 for your home just four years ago, it is now likely to be worth more than 292,000. And if you were able to purchase just three more houses, then in four years, you could have sold those three homes and made enough money to pay off your mortgage.
If you think this is impossible because you are worried about finding the money to use as a down payment or qualifying for a loan, or are apprehensive about becoming a landlord, read on to learn about the everyday secrets used by investors to overcome these hurdles.
The easiest way to buy a house without a down payment is with a lease purchase. Search online to find lists of out-of-state landlords who may be looking to sell their houses once their tenants move out, and contact them by mail. Out-of-state landlords typically are motivated to sell because they live far away from the properties they own.
Offer to lease the home for an amount that is high enough to cover the seller’s entire house payment including principal, interest, taxes and insurance. Make sure that you also get an option to purchase the home at or below today’s value at any time during the next five years.
Try to arrange for your payments to begin after 60 to 90 days so that you will have time to find someone who is willing to buy the home on a rent-to-own basis.
To find this person, who is called a “tenant buyer,” put up plenty of rent-to-own signs in the neighborhood. Your tenant buyer will typically pay a little more in rent each month than you are paying to the seller. Set your tenant buyer’s purchase price at around 75 percent of the amount the home will be worth four years from now.
In addition, your tenant buyer should be responsible for any maintenance or repairs to the home while living there on a rent-to-own basis. Encourage him or her to have the home professionally inspected.
If three of your tenant buyers purchase their homes after four years, you should be able to make enough in profits to pay off your own mortgage 20 to 25 years before other people. The best part is that you can accomplish this without needing any money for a down payment or qualifying for a loan.
The mortgage is not one simple thing. There are many types of them and they each offer different advantages to those that are looking for one. Purchasing a home is one of the largest investments that you will ever make during your life time. It is ideal to make sure that you make this investment carefully and to the best of your ability. One thing about them that you will want to understand is whether you should go with an adjustable or a fixed type of loan. The differences may seem confusing, but they are very important nonetheless.
When considering a mortgage , you may first want to consider such things as the interest rates and the terms of the loan. Yet, there are other elements to think about as well. Once you find the lender that is offering you the best rates out there, look at what types of rates he may be able to provide you with. Heres a break down.
Fixed Rate
Any mortgage that has a fixed rate is one that has an interest rate that is not going to change. It will remain the same today as it will be down the road and throughout the course of the loan. It can be ideal to use this type of mortgage in most cases. It is especially helpful when interest rates are tending to slide up the scale. If you get a loan that is fixed while rates are climbing, then you will be secured into that low rate throughout the course of your loan, no matter what other rates do. In most cases, the fixed rate will be slightly higher than that of an adjustable but in the long run it may save you money.
Adjustable Rate
There are also many reasons why you may decide that an adjustable will work well for you. Besides being less expensive in the long term, they are also ideal for when interest rates are high and are falling. When interest rates are higher, securing an adjustable rate loan will allow you to take advantage of the slipping that they are doing. These are ever changing rates though, so if the rates tend to climb, you may be in trouble. One thing to note about them, though, is that they are generally not going to move up or down more than 5% and there is a lock of fluctuation per year at 1%. Carefully consider this option in a mortgage.
When considering either of these two options in home loans, carefully look at what the financial market is expected to do. You may even want to talk to your financial advisor about the difference and how likely it is to effect your situation. Remember too that interest rates fluctuate quarterly most of the time. They also vary from one lender to the next. You will want to consider the big picture here so that you can find the most ideal solution for your specific needs. An adjustable rate or a fixed rate mortgage quote can be given to help you to see what the end result for each will be.
If you are applying for a mortgage, you’re going to have to deal with credit scores. Here’s a primer on credit scores and methods for improving them.
Credit Report
Step one in the process is making sure that you have a current copy of your credit report. Congress recently amended the Fair Credit Reporting Act so that consumers may now receive one free credit report annually. There are three major credit bureaus: Equifax, Experian, and Transunion. Since entries can vary across bureaus, you’ll want to request a free report from each of the three companies. (Go to www.annualcreditreport.com)
Credit Score
It’s also imperative to know just what a good credit score is. Most A-Paper scores typically begin around 680, although this number may differ slightly among lenders. Don’t despair if you come up shy, there is always room for improvement. Increasing your score just 5 points can save a significant amount of money. For example, if your score is 698 and you increase it to 703, then you could save yourself thousands of pounds over time as a result of a slight improvement to your loan’s interest rate.
While credit repair is necessary for some, it is not the panacea to increase your credit score. Even if you have stellar credit, you can enhance your score through these steps:
1. Evenly distribute your credit card debt to change the ratio of debt to available credit. Let’s say you have a credit score of 665. If you have debt on only one card, and four additional credit cards with zero balances, evenly distributing the debt of the first card could move you closer, and possibly into, that ideal bracket.
2. Keep your existing accounts open and active. The average consumer is usually anxious to close credit card accounts that have zero balances, but doing this can cause them to lose the benefits of a long-term credit history and increase their ratio of debt-to-available credit. The bottom line is don’t close those old accounts!
3. Keep credit inquiries to a minimum. Each inquiry into your credit history can influence your score anywhere from 2-50 points. When it comes to mortgage and auto loans, even though you’re only looking for one loan, multiple lenders may request your credit report. To compensate for this, the score counts multiple auto or mortgage inquiries in any 14-day period as just one inquiry, so try and stay within that time frame.
Remember, credit scores do not instantly get better. Improving them requires time and diligent effort on your part, so it’s a good idea to start at least three to six months prior to submitting your application for home financing.
If credit repair is what you need, you can either begin the process yourself or seek out a repair service. If you decide to make your own improvements, visit as many websites as possible to get information regarding credit laws and consumer rights. Diligently search through them and educate yourself to ensure that you don’t sustain any self-inflicted wounds. A good place to start would be the Federal Trade Commission’s website, which contains a plethora of helpful literature.
If you’re facing severe or complicated credit issues, then you’ll probably want to enlist the assistance of a professional credit repair company. Before you do, be sure to familiarize yourself with the FTC’s regulations on credit repair. With over 1100 credit repair companies to choose from, it’s important to be certain you are dealing with a reputable firm. Examine the FTC’s information on fraudulent practices to avoid falling victim to credit repair scams.
Albeit, addressing credit issues can be uncomfortable. By taking these steps now, however, you’ll be that much closer to obtaining the home of your dreams.
Can’t remember how many times I’ve been asked “What is a reverse mortgage”? Reverse mortgages are a great way to get a loan using your primary asset. The flexibility, of course, comes at a price. A reverse mortgage is a loan using your property and is referred to as a “rising debt, falling equity” deal.
To compare reverse mortgage to a traditional one, the type of mortgage commonly used when buying a house is classified as a “forward mortgage”. To qualify for forward mortgage, you must have a steady source of income. Because the mortgage is secured by the asset, if you default on the payments, your can loose your home. Your equity is the difference between the balance mortgage amount and how much you’ve paid.You own the house when you make your final mortgage payment.
The reverse mortgage process doesn’t require that the applicant have great credit, or even to have a steady source of income. The major stipulation is that the house is owned by the applicant and a minimum age is required as well, the older the applicant, the higher the loan amount. Another less known requirement is that the reverse mortgage must be the sole debt against your house.
In a reverse mortgage your debt increases along with your equity. Instead of making any monthly payments, the amount loaned has interest added to it – which swallows up your equity bit by bit. If the loan is over a long period of time, when the mortgage comes due, there may be a large amount owed. On the other hand, if it was to increase, this could allow for an equity gain, but this isn’t typical of the marketplace.
There are a few options in withdrawing the money form the loan. It can be a single lump sum, regular monthly advances, or a credit account. There are conditions in this kind of mortgage that would warrant the immediate repayment of the loan; the mortgage will be due when the borrower dies, sells the house, or moves out.
Failure to pay your property taxes or insurance on the home will undoubtedly lead to a default as well. The lender can pay for these obligations to reduce your advances in order to cover the expenses. Be sure you read the loan documents carefully and in detail and also make a point to understand all the conditions that can cause your loan to become due.
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