"Piggyback" mortgages?

[Badfish740]

Ok, once again I turn to the Pine Barrens forums to draw on the collective wisdom contained therein. My girlfriend and I are both out of college 1 year now, have paid off our college debts, and are slowly saving for a down payment. Recently we've been researching "piggyback" mortgages which look good on paper, but I'd like to hear from folks who actually have one and what they think of it. We'd like to do an 80/15/5 (1st loan = 80%, 2nd loan = 15%, 5% down payment) on a $250K home which would give us a very manageable down payment of $12,500. That would allow us to have cash on hand for closing plus a "cushion fund" once we're settled in. Of course, I've also read of the option of rolling closing costs into a mortgage in order to have more cash on hand at the end of the sale. Is this something a lender would allow in a piggyback mortgage situation?

Our target price of $250K hopefully should net us a small, older home that is simply in need of major updating (kitchen, bath, facade, mechanicals, etc...), which is why we are concerned with having cash on hand once we are in the home. My fiancee's father is a contractor with a major design/build firm in North Jersey and I have construction experience as well, so we'll be able to do remodeling work at a considerable savings by sourcing materials at cost and incurring little to no labor costs. The less cash we tie up in a down payment and closing costs the better.

All that being said however, I am still cautiously weighing the options. We both have excellent credit, so what can we expect in terms of interest rates for both the first and second mortgages? I was assuming that they would be in the neighborhood of 6% and 8% respectively. Is that realistic?

 

[piker56]

2 mortgages

My wife and I bought our first home with 2 mortgages. It was in the early 80's, so the interest rates were much higher than today. We had a 30 year standard and a 10 year 2nd. We were both working and made extra payments on the 2nd, higher interest, loan and paid it off in a litle over 3 years. I'm assuming you will be able to do the same? It allowed us to buy a house with almost no down payment. The trick was to pay down the 2nd loan as quickly as possible. In doing that we built up equity faster, which helped when we moved. We were also allowed to finance closing costs. If your credit is good, I'm assuming you could do the same. As a young couple, just make sure you have enough left over to enjoy life. My wife and I were able to travel a lot as we bought a reasonably priced home that needed some work, but not enough work where we couldn't enjoy the house and life. Sorry to be so long winded, best of luck.

 

[Sue Gremlin]

I have that sort of arrangement on my mortgage. The second was a crappy rate, but we have since refinanced that with our credit union. If you have good credit, I think you should expect ablut 6.5% to 6.75% on your first. The second? That's probably going to be more like 9-10%. It's prime plus whatever percent your mortgage company comes up with. Yes, it sucks. But it gets you in. Once you have that mortgage for a couple of years, getting a good deal on a refinance will be much easier.

 

[Tom]

You could just do a straight conventional 100% financing with mortgage insurance (which is now tax deductible) and ask the seller to give you the allowable 3% seller contribution for closing costs and pre-paids at closing. This would essentially get you into the house for just a few thousand dollars. Bear in mind that it is a buyers market and as subprime mortgage ARMs reset over the next five years the market is going to see some major price reversals. Economists are predicting that home values will fall to levels not seen since the Great Depression. Right now you are a moving target that every home seller is hoping to hit. You hold the keys so don't be afraid to ask for the moon. If you are going to buy a home that needs renovation, you may still be ahead of the expected, and in some locations realized, deflation in home values.

Be careful of the lender you use if you want a second mortgage and yes the rate is going to be around 9 or 10%. Be sure to use one of the big companies like Chase or BOA, as many smaller mortgage lenders have had their funds dry up and recently buyers have ended up at the table and the lender couldn't fund the deal.

 

[Badfish740]

You could just do a straight conventional 100% financing with mortgage insurance (which is now tax deductible) and ask the seller to give you the allowable 3% seller contribution for closing costs and pre-paids at closing.

Wow, thanks for the info Tom. I knew the market was slowing, but I didn't realize that it was going to be so dramatic. Could you just explain the 3% allowable seller contribution? I'll take a stab at it to mean that the seller can offer to pay up to 3% of the value of the home in closing costs in order to sweeten the deal for the buyer? If so, on a $250K home that would mean $7500, which I hope would be a substantial portion of the closing.

 

[Tom]

Wow, thanks for the info Tom. I knew the market was slowing, but I didn't realize that it was going to be so dramatic. Could you just explain the 3% allowable seller contribution? I'll take a stab at it to mean that the seller can offer to pay up to 3% of the value of the home in closing costs in order to sweeten the deal for the buyer? If so, on a $250K home that would mean $7500, which I hope would be a substantial portion of the closing.

You are correct. The seller concession is based on the sales price and the seller credits this back to the borrower at the settlement table to be applied toward the buyers closing costs and pre-paids (taxes, insurance). One thing that is not allowed through conventional financing is receiving cash back at the table that is left over from a seller concession. Also, if the seller concession is more than your total closing costs and pre-paids, use the balance of what is left to pay points for a better interest rate. Conventionally speaking, you only need to have a minimum of $500 of you own funds into the transaction when doing 100% conventional financing. The rest can come from a seller credit and gift funds from a family member (not that gift funds are something that you are considering or need).

People generally took out a first and second mortgage in the form of an 80/15 or 80/20 (although the 80/20 are becoming harder to qualify for) to avoid paying mortgage insurance (MI). However, last year congress made MI tax deductible for primary residences, so there is really no advantage for taking out a second mortgage any longer, especially with the current rates. Also, with MI once your loan to value hits 80% you can request to have the MI dropped. So, if you buy a fixer-upper and put alot of sweat equity into it, your LTV may hit 80% sooner than the regular amortization of the mortgage itself. Of course, you would have to have an appraisal done to verify this for your lender.



Just some thoughts.

 

[Boyd]

A "rule of thumb" I've seen before is that your combined annual income should be about 1/3 of the cost of your home. Not sure how much validity that holds, but it doesn't seem too unreasonable.

Just be really careful, as Tom has mentioned, a lot of people are going to lose their homes or see much if not all of the equity they thought they had evaporate. A big reason for this is that lenders encouraged people to buy more expensive homes than they could really afford, and everyone went a little crazy trying to buy stuff with no money down.

If you can pull this off then that's great. But just remember there really isn't any such thing as a free lunch, and you need to really understand what you're getting into if you aren't using a "classic" deal with 20% down.

 

[Ben Ruset]

You should be able to get a FHA mortgage with 3% down. Thats what I did when I bought my house in 2001. I used Cendant Mortgage, which was a great company to deal with.

I'd be wary of a piggyback mortgage or any other weird tricks. Of course, I'm now in an ARM that will reset next year, but by then I should be able to re-fi to a conventional with a lower rate. Knock on wood.

As far as equity disappearing, I sort of expect the house to eventually devalue to about what I owe on it. Which is why I would be very careful about anybody taking out equity in their house except to pay off higher interest/shorter term debt.

 

[MarkBNJ]

Economists are predicting that home values will fall to levels not seen since the Great Depression.

Economists need to get on TV too.

Depending on the area you live in I wouldn't expect a lot of devaluation. I could be wrong, but I think the economy can more than absorb the lending issues. We're lucky in that we put a lot down and just have a straight-up low-risk loan. But as my Dad always says: there's always more people, and there's never more land.

 

[Tom]

If you want to follow what is going on in the mortgage world check out this link: http://ml-implode.com/

We are feeling this first hand at the company I work for.

 

[Boyd]

Making comparisons to the Great Depression seems a little harsh, but if you've been following things the current data is pretty shocking. $6.4 Billion in new delinquent loans during the 2nd Quarter, overdue mortgage payments up 10% from the previous quarter which is the greatest increase since 1990. But the statistic which startles me the most is that actual foreclosures are 93% higher than a year ago.

From all I've read I think you're probably right about the economy absorbing the crisis, but that doesn't help a lot if you're the one losing your home...

 

[Tom]

If you are planning on buying a house that is in need of repairs so that you get it at an under valued price, you won't be able to use FHA...unless you do a 203k loan which is where they lend you the money for the repairs and role it all into one mortgage. To do that though, you have to work with an FHA 203k consultant and have solid estimates and deadlines in place.

Regular FHA financing requires the house to already be in decent shape.

 

[Tom]

Here is an interesting statistic: over 40,000 jobs have been cut in the mortgage industry since the start of the year because of the subprime mortgage mess. Over 25,000 of those cuts happened last month alone.

 

[Lorun]

Save until you have a down payment that will lower the amount of the mortgage payments that will fit into your budget. Put together a detailed budget of what you spend monthly. Before you buy a house ask for the past few months utility bills. Get bills from the winter and summer months. The difference between a house with outdated systems and electric heat and a house with modern appliances and gas or oil heat and good insulation could be the difference between being able to afford the house. Put those numbers into your budget. Lenders are going to offer to lend you way way way more than you can afford. I have seen a lot of people get hurt. Live with parents or in-laws, rent a super cheaper apartment than you can afford. If you go into a house with fancy financing you are likely going to struggle to ever save up a nest egg.

Realize that the monthly estimates for your mortgage payments given by the house hunting web sights and realtors and bankers are going to be much lower than actual. Find out what the tax payments are really going to be and work them into your monthly payment amounts. Expect taxes to double in about 2-5 years. Do not forget home owners insurance. Get a real quote from an insurance agency.

Anybody offering to give you a mortgage with a small down payment is not your friend.

Good luck.

 

[Tom]

Lenders are going to offer to lend you way way way more than you can afford....Anybody offering to give you a mortgage with a small down payment is not your friend.

That a lender will offer you way way way more than you might afford is very true. However, it is not the lender per se that is offering you more it is their underwriting engines such as Fannie Mae's Desktop Underwriter or Freddie Mac's Loan Prospector that will return loan approvals with debt to income limits of 50% to as much as 90% depending on your fico score, credit profile, cash reserves and down payment. Fannie and Freddie are government agencies that securitize conventional mortgages made to prime borrowers.

Rest assured that nearly no one in a real estate transaction is your friend, except for your attorney. Real estate agents and mortgage brokers all work on commission. There can only be one persons interest at heart under such circumstances. I am not saying this to scare anyone from purchasing a home. And bear in may that under the current market conditions, the entire industry is struggling. Agents and lenders became accustomed to an over inflated market where you could be a complete idiot and make a decent living. Many went on to buy themselves $500K to $1Mil houses and are now making about a third of the salary they previously enjoyed. As a buyer in this market and the market that is going to continue for the next few years at least, you are in charge of the situation.

 

[Boyd]

Here is an interesting statistic: over 40,000 jobs have been cut in the mortgage industry since the start of the year because of the subprime mortgage mess. Over 25,000 of those cuts happened last month alone.

I hate to sound cold, but those are long overdue. The jobs never should have existed in the first place, the industry only has itself to blame for convincing naive buyers that they could have their cake and eat it to.

This is something which has been building for a long time and people should have seen it coming... especially people in the industry. When I bought my first home in New Jersey 10 years ago I was shocked by how much house the realtor and mortgage company thought I could afford. I bought a $150,000 home and they were saying I could look at $250,000 homes. No thanks.

Then when I sold that house for $195,000 four years later the buyer wanted to put together a no-money-down deal. My agent and I thought the deal would never go through, but it did. And guess who her employer was? Ben's favorite company, Cendant I owned a little Cendant stock, but I actually sold it shortly after the closing...

Tom is right on target with the advice about who to trust. GET AN ATTORNEY. You need one, no matter what anyone else might tell you. There are good real estate agents - I know one I really like and trust, but I also understand the relationship. She doesn't make anything unless the deal goes through so it's bound to affect her view of the world.

And Lorun has great advice also. Badfish, I think you're headed in the right direction though in looking at an existing home instead of building a new one as we discussed here: http://forums.njpinebarrens.com/showthread.php?p=34695

 

[MarkBNJ]

From all I've read I think you're probably right about the economy absorbing the crisis, but that doesn't help a lot if you're the one losing your home...

Oh no, not at all I agree. Hopefully the government will step in and help the deserving. It's unfortunate, and harsh economic reality. What I find interesting is that the auctions for these foreclosed homes are busy. We may see a big upsurge in rentals for awhile. $50 or even $100 billon in lost value is peanuts next to the GDP. I would guess our biggest risk is just rampant fear and people drastically reducing spending or panic selling their properties.