Editors Note: Due to the mortgage and credit crunch, zero down home loans are no longer be available. If you’re in need of a Denver, CO mortgage contact us to discuss your mortgage options.

This is a loan where the borrower does not have to put any money down on the home. The borrower can then use their money for closing cost, title fees etc…

80/20 loans are sometimes referred to as Piggyback loans and have the added benefit of not requiring mortgage insurance.

Not all lenders will accept seller-paid closing costs. Some won’t, some will allow up to 3% of the purchase price, and some will allow 6%.

When the seller does agree to pay the closing costs of the loan, they aren’t actually paying for it themselves. They generally raise the purchase price an amount equal to the closing costs. The borrower is still paying it, but it is being added to the loan amount.

In many cases, a borrow can get a home loan with no out of pocket expenses when a seller agrees to pay closing costs. In this scenario, the sales agreement must be specific and state that the seller will pay borrowers closing costs up to a certain percentage or dollar amount. Some lenders only allow seller paid closing costs for non recurring items like one time lender fees. However some lenders allow non recurring and recurring closing costs to be paid by the seller, for example: the borrowers prepaid hazard insurance fees.

There are also purchase loans that will allow buyers to borrower as high as 107% of the value of the home (purchase price or appraisal value – whichever is lower). This will allow the buyer to use the 7% to pay for closing costs and debt consolidation.

If a home buyer has enough money to cover the necessary closing costs associated with the purchase, in other words, he needs only to take out a 100% loan rather than a 103%, 106% loan, he would have more lenders and loan programs to choose from, and better interest rate structure as a result.

There are different types of 100% loans. You can either get 1 loan for 100% or an “80/20″ loan. Speak to your mortgage professional to see which program is best for you!

There is a great debate within the inner-mortgage circles these days. Should we, as loan professionals, encourage clients to borrow as much money as possible? Or would consumers benefit more if we helped them to understand the advantages of 15-year amortization schedules and pre-paying principal? Let’s examine the pros and cons of both strategies.

Leveraging Your Property. In order to understand why you’d want to borrow as much as possible for your home purchase, you must first grasp the concept that equity has a zero rate of return. Here’s an example:

If Consumer “A” buys a home for $300,000, and puts 20% down, then they have $60,000 in equity. Over the next 5 years, the property appreciates $100,000 in value. Consumer “A” now has $160,000 in equity.

Consumer “B” buys a home for $300,000, and puts no money down. At the end of 5 years, that same home is now worth $400,000. Consumer “B” has $100,000 in equity, which is the same appreciation as Consumer “A”, a net $100,000.

As you can see, your down payment has nothing to do with your rate of return. What becomes important is how you choose to manage the $60,000 you didn’t use as a down payment. If you use it for frivolous activities, such as buying toys or going to Las Vegas, it would be more prudent for you to use that money as a down payment. Especially since this will enable you to obtain a lower interest rate.

However, if you were to invest the $60,000 in a vehicle that can out-earn the cost of that debt, then this could be a formula for success. This is why some lending professionals suggest putting as little down as you possibly can, maximizing your tax write-off, and investing the rest. This principle has been applied for many years in the life insurance game. The old saying goes, “Buy term and invest the rest.” The key component is taking the money you would have used as a down payment and creating an asset accumulation account. This account should earn a significant enough rate of return to enable you to pay your mortgage off entirely and achieve the ultimate goal of being debt-free.

Paying Your Home Down Rapidly. There are very few times over the course of my career that I have seen a client with zero debt and no financial difficulties. Choosing to pay off all of your debt can reduce stress and help you to gain freedom of cash flow for investment opportunities. A 15-year mortgage or a bi-weekly payment strategy provides structure. It can also put you on track to have your mortgage paid off within a set timeframe. Simply put, it contains built-in discipline.

It’s important, however, to understand that regardless of how rapidly you pay your home off, you’re not getting any greater rate of return on your investment than if you paid it off slowly.

Conclusion. So how does one determine which scenario is best? The choice depends entirely upon the individual. Savvy consumers who are disciplined, and are comfortable taking chances from an investment perspective, would do well with the first scenario. Over the course of time, it’s been proven that your rate of return over the long-haul will be far greater than the rate you’d pay for a mortgage in today’s rate environment. It’s important to seek the advice of a skilled investment advisor to ensure success with this strategy.

The second scenario is best for those who have a difficult time managing their money or who’ll sleep easier at night knowing they have a plan in place to pay their loan off more rapidly. Be sure that your budget can handle accelerated payments. When consumers “bite off more than they can chew” with a 15-year mortgage, they frequently end up having to refinance back into a 30-year schedule.

If you find this subject intriguing and would like to know more, I recommend that you read a book titled, Missed Fortune 101, by Douglas Andrew. It’s an outstanding read that is very simplistic and goes into far greater detail than I can cover in this column. Douglas is a financial planner who advises safe-structured investments such as whole life policies and tax-free fixed income instruments.

As a mortgage broker I often work with borrowers who’ve either contemplated, considered, attempted, and filed bankruptcy. The usual suspects aren’t the usual suspects at all. They’re typically hardworking people who’ve either had a physical ailment or a job loss derail them of their finances. They incomes from disability or unemployment is hardly enough to cover the bills so they turn to credit cards. Ultimately the debt load becomes to great so they turn to bankruptcy.

On Saturday the Rocky Mountain News had three articles on bankruptcy:

• More take a place in dreary line
• Bankruptcy law hits snag: few counselors
• New bankruptcy road perhaps not so bumpy

The question I’d like to see answered… Why not make the bankruptcy laws stricter for airlines?

Your Monthly Credit Card Minimum Payments May Double

For years, low monthly minimum credit card payments have encouraged us to spend more than we really can afford. Under pressure from the Office of the Comptroller of the Currency (which regulates national banks), the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision, some national banks will soon be increasing minimum monthly credit card payments so they are closer to 4% rather than the current average of around 2%. Some major banks have already increased the minimum payments and others are about to follow suit. In the long run, an increase is actually good news for consumers, but in the short-term, it could be devastating for people who have overextended themselves. If an average American, with $10,000 in credit card debt, minimum monthly payments are probably currently around $200(2%). Under the new guidelines, sometime this year, a minimum payments may go up to as much as 4% of the balance, or $400 on a $10,000 credit card balance. In addition, minimum payments and your interest costs will continue to rise as interest rates go up. If $2,000 or more is owed, and only the minimum balance of 2% each month is paid, it will take approximately 30 years to pay off the balance even if another charge occurs under a penny. Under the new guidelines, the minimum payment will have to cover the interest and have enough left over so one could pay off your balance in 10 to 12 years if any new charges were not made. This is good because people will get out of debt sooner and pay a lot less interest over the years (thousands of dollars for many people). First, people should think twice before adding purchases to their credit cards. If they charged a $2500 spring break trip to a credit card or if they just splurged for a $2500 flat screen television and charged it to a credit card, at 18% interest it would take 34 years and six months to pay it off if they paid a 2% minimum balance and never charged another penny to their credit card. In that time, one paid $6,421 in interest in addition to the $2500 original cost. When a purchase is made on a credit, know what the true cost to the consumer will be if they don’t pay it off right away.

Here’s an article from the Rocky Mountain News regarding the onslaught of bankruptcy filings.

As new rules loom, debtors in single day file 433 fresh cases

By John Accola, Rocky Mountain News
October 4, 2005

Record day, record month, record year.

A stampede of debt-laden consumers on the last day of the month broke the charts Friday in Denver’s U.S. Bankruptcy Court.

Bankruptcy Clerk Brad Bolton said Sept. 30 marked the court’s largest number of filers in a single day – 433 fresh cases – and also exceeded previous record highs for the month and year.

“It’s the No. 1 day of all time here, and I bet it won’t last a week,” Bolton said.

Bolton said he expects the figures to keep climbing as debtors rush to file before a new and stricter bankruptcy law takes effect Oct. 17.

This year, with three months remaining, Colorado filings totaled 28,093 on Friday. That compares with 27,993 filings for all of 2004.

For the month, September showed 5,432 filings, a 131 percent jump over September 2004.

Overall, bankruptcies are up 31.2 percent from a year earlier.

To declare bankruptcy, consumers whose debts total more than their net worth must also show that living expenses and monthly bills exceed their income.

The new bankruptcy law, however, will make it more difficult – and expensive – to go through the bankruptcy process, with higher bankruptcy filing fees and added requirements, such as mandatory credit counseling and debt education.

The extra legal hoops are designed in part to steer people away from Chapter 7 bankruptcy, where most debts can be wiped out entirely, to a less forgiving Chapter 13. In a Chapter 13, the bankruptcy court requires debtors to set up a plan to repay a percentage of their debts over five years.

An income “means test” presumably will prevent debtors with above-average incomes from filing a Chapter 7. In Colorado, a couple whose income exceeds $54,187 would likely have to file Chapter 13, according to the new rules.

Josh Stritecky, an attorney at Methner & Associates in Denver, was in bankruptcy court recently lugging a bag overloaded with bankruptcy files. Stritecky said he and his colleagues have been working seven days a week to keep up with the flurry of cases.

“It’s been crazy,” he said.

He said credit-card debt is just part of the picture. A lot of the cases involve job loss, huge unforeseen medical bills and divorce.

One woman, a legal assistant in Denver who makes about $50,000 a year, said she wouldn’t qualify for Chapter 7 after mid-October. She declined to provide her name for this story because she feared her career would be affected by the stigma associated with bankruptcy. She was faced with repaying about $15,000 in credit-card debt, $10,000 for a student loan and two mortgages totaling roughly $125,000, according to her filing. She only had $50 in her checking account and $50 cash, according to the filing, made in August. She said she believed she would never fully pay off her debts.

“I just couldn’t cut it,” she said. “I’ll never take out a loan for anything again in my life.”

The law also takes aim at business bankruptcies. Denver attorney Brent Cohen, a commercial bankruptcy specialist, said retailers filing for bankruptcy – either to reorganize or to liquidate – could have a harder time keeping store leases.

Cohen said the new law favors commercial landlords, in some cases allowing them to break their rental agreements with a bankrupt tenant. Current law allows bankrupt businesses to sell those leases as an asset and even remain on the premises for years until a reorganization plan is approved.

Tighter deadlines will give business tenants fewer breaks.

“If you have a landlord resisting the debtor’s efforts . . . and the debtor needs additional time to organize, that can be a very difficult deadline to live with,” Cohen said.

accolaj@RockyMountainNews.com or 303-892-2666.

Copyright 2005, Rocky Mountain News. All Rights Reserved.

As a mortgage banker and broker, I’ve come across borrowers who’ve filed for bankruptcy. On October 17th the laws will change. The biggest change is that fewer people will qualify for Chapter 7 bankruptcy.

Chapter 7 – Gets rid of all debts except some taxes and possibly alimony payments. Liquidates all assets that are not exempt (cars, work-related tools and basic household furnishings). Some property may be sold by a court appointed official or turned over to creditors.

Chapter 13 – Allows a borrower with a stable income and limited debt, to pay off bills under a court approved repayment plan over a 36 to 60 month period rather than surrender any property.

Once your loan application is filled out and sent to the lender for review, the first thing they will look for is your ability to payback the loan you are requesting. My team and I have a streamlined loan process to help you get your ducks in a row prior to this review. A grand slam loan package is in perfect order and answers all the important questions up front. We know what the lenders are looking for, based on long-term relationships with them and extensive knowledge of guidelines for a multitude of loan programs that are available today.

What is the lender looking for when they review the loan application?

The lender wants to know about your personal financial picture, including savings and credit history and your employment stability. The co-borrower’s history is also taken into consideration. The lender also considers the loan amount and appraised value of the home you are looking to purchase. Not every applicant is approved the first time through the process. If the underwriter has any questions or concerns, he or she will require certain conditions be met before they approve the loan. Pre-approval prior to house hunting lets you know exactly how much you are qualified to borrow in advance.

What can I do on my end to make it easier?

Before taking out a home loan it helps to establish a consistent record of paying your bills on time. If you have utility bills that are overdue, bring these up to date. Make sure you are paying credit card installments in a consistent and timely manner.

We can help you evaluate your debt-to-income ratio to determine what mortgage payment will be comfortable and affordable for you on a monthly basis. Aim for having enough savings to cover your down payment, closing costs if necessary, and two month’s expenses in case of emergency. We’ll help you find the loan program that works for you.

If I just started a new job six months ago, can I still apply for a loan?

A stable employment history is important, but the lender does take human factors into consideration. If you’ve recently completed college or vocational training, or were released from the military, you have good cause to have a lack of consistent work history. If your profession is seasonal, and gaps in employment are normal in your field, there are loan programs that can work with your situation. If you are a freelancer or do contract work, the lender will look for consistency in income over the last two years.

Consistency is the key word in the lender’s mind. But know that lenders have developed many different loan structures to meet the needs of the general public. When your grandparents bought their first home, they probably put 50% down and made a lump sum payment when the note was due. Times have changed, and so have loan programs. My team and I stay on top of current mortgage trends. We monitor rates daily and have a support network of Realtors®, CPAs, Financial Planners and Credit Repair Consultants to lend you additional assistance.

Until recently, seniors 62 years of age and older have not had the best choices when it came to getting cash from their homes. Traditional home loans only offered the option of either selling one’s house or borrowing against its equity.

With reverse mortgages coming on the scene, seniors now have some additional cash-flow alternatives. This type of loan allows mature borrowers to convert their home equity into tax-free income without leaving their current home or making mortgage payments – and they do not need an existing income to qualify.

How a Reverse Mortgage Works
Reverse mortgages are probably best understood when compared side-by-side with traditional home mortgages, otherwise known as “forward” mortgages. The following table shows the differences between the two:

Both loans incur debt against your home, and both affect equity, but they do so in different ways. Traditional home mortgages require making monthly payments to a lender. With a Reverse Mortgage, payments are made to you.

What a Reverse Mortgage Involves

Here are some important points to know when considering a reverse mortgage:

Eligibility: To qualify for a reverse mortgage, you must be at least 62 years of age. All owners who are on the title deed must meet this age requirement. You must also have paid off all, or most, of your home mortgage. Lastly, the home you reside in must remain your principal place of residence.

Mandatory Counsel: To receive a reverse mortgage, federal law requires that you first undergo counseling to understand how these mortgages work. This ensures you will make the right decision when it comes to choosing a plan. Also, the counseling service must be provided free of charge.

Tax-Free Income: One of the advantages of a reverse mortgage is that the money you receive will not be taxed. The amount you’ll obtain depends on several factors including the plan you select, the type of cash advances you choose, your age, and the value of your home. Typically, the older you are the larger the loan, as you will have more equity in the house.

Cost: The cost of a reverse mortgage varies considerably from one type to the next. However, you can typically use the money you receive to offset the loan fees. The costs will be added to the loan balance and must be repaid with interest once the loan terminates.

Repayment: Reverse mortgages do not require any payment as long as the borrower(s) remain in the home. Should the borrower(s) pass away, sell the home, or permanently relocate, then the loan would be due in full, along with interest and additional costs. If two borrowers are on the loan and one dies, the loan would not be due since one of them still occupies the home.

Home Equity Conversion Mortgage – The Federally Insured Loan

The most common type of reverse mortgage is the Home Equity Conversion Mortgage, otherwise known as a HECM mortgage. This is the only reverse mortgage program that’s federally insured and backed by the U. S. Department of Housing and Urban Development (HUD). This type of reverse mortgage is popular for a few reasons:

• Ability to choose your own interest rate. You can select one that changes annually or one that changes every month.
• You have several payment options. You may receive monthly loan advances for a fixed term or for as long as you live in the home. You may also choose to receive a line of credit or combine monthly loan advances with a line of credit.
• The loan can be used for any purpose. With a HECM, you don’t have to designate the loan to a specific use; you can apply the funds to anything you choose.
• Protection. This is one of the most attractive features of a HECM. This plan protects you by guaranteeing continued loan advances even if your lender defaults.

Sell or Stay?

The main reason people choose a reverse mortgage is to gain financial independence and maintain an adequate standard of living without leaving their current home. The best way to decide if a reverse mortgage is right for you is to compare it to the other option of selling your house. To do this, ask yourself these three questions:

1. How much cash can I get by selling my home?
2. How much will it cost to buy or rent a new place?
3. Is it worth my moving now, or do I prefer to do something else with the money?

Perhaps you’ll confirm what you knew all along, where you now live is the best place to be.

Contact me today if you have any questions.

I haven’t posted anything related to mortgages in a while so this week I decided to talk about the credit scoring model. First and foremost, FICO is the Fair Issac Corporation model. It’s used exclusively by Experian. The are five main categories of information that the FICO score evaluates:

Credit Payment History: 35%
At 35% Credit Payment History weighs the most. While events such as a bankruptcy, foreclosure or tax liens will have the greatest negative impact on your score, multiple and/or recent late payments have a tremendous impact as well.

Credit Balances: 30%
What is your credit balance to your credit limit? The Outstanding Credit Balance ratio has the second highest weight on your credit score. High balances on your credit cards can be viewed as a red flag since it’s an indication that you may be overextended. If you have multiple credit cards, you may want to spread the wealth to keep the credit balances to credit limit ratio low.

Credit History: 15%
Credit History is a reflection the length of time that you’ve had accounts open. You’re rewarded for keeping long term debt. Older credit accounts that have been used more frequently will have more weight than those that are newly opened or used with less frequency.

Credit Inquiries: 10%
Opening a new credit account doesn’t harm your credit score dramatically especially after you make the first payment. However, credit inquiries can negatively impact your score. Generating many credit inquiries exudes that you are trying to secure a large amount of credit or you are being turned down by lenders and have to apply elsewhere.

Credit Types: 10%
This percentage of your FICO score is based on your mix of credit. Do you have a good mix of credit cards, retail accounts, installment loans, finance company accounts or mortgage loans? It looks at the whole picture and totals how much of each type of account that you have.

Whenever I speak to potential borrowers one of the questions I typically ask is “What’s your credit like?”. Most of responses I get are excellent, good, fair, poor. However, excellent, good, fair, and poor are meaningless in the mortgage world. The Fair Isaac (FICO) scoring algorithm is used to determine your ability to repay debt regardless of your gender, religion, race, creed, height, weight, etc. The highest score you can get is 850. The avergage score is around 680. Scores above 720 are considered excellent. Scores below 620 are considered poor.

To find out where you rank, you can get a free copy of your credit report now at www.annualcreditreport.com