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The Very Reasons You Should Shy Away From 100% Financing.

By
Services for Real Estate Pros with Auto & Home & Life Insurance throughout North Carolina

This post, in part, was inspired by my friend JL Boney.  His sarcastic piece of script was asking why one should wait to buy in this market.  Let this particular piece be not a wake up a call or a call to action, but a simple reminder.  There are options, explore them.

The Top 10 Reasons to not use that 100% USDA Product:

  • You can borrow 100% of the appraisal amount plus the guarantee fee (approximately 102% financing).  It's not an uncommon occurrence for the applicant to be able to include all or most of the closing costs within the loan.  I've been a big advocate of having money in the bank after closing for any costs that occur once you own the home, yet isn't it easier to have money (that you could be investing, at even the lowest returns) and save it by not making a down payment?  After all, borrowing others people's money doesn't make sense at all, especially when you can invest yours instead.

  • Most of the closing costs may be included in the loan amount, if justified by the appraisal.  Or you can chose to spend every last dime you have on a down payment and closing costs!

  • No private mortgage insurance necessary.  This actually makes your monthly payment lower.  But frankly, who wants that?  Besides, mortgage insurance is our friend;)

  • The processing on these loans is done by local lenders.  There's no need to let local folks see up your skirt when you can spread your financial legs to a National Lender whose awareness of your community is akin to Charlie Sheen's awareness of fidelity. 

 

  • Repayment Ratios are somewhat Liberal.  Compensating factors such as (credit score, rent payment history, cash reserves, ongoing increases in wages) are all factors.  Common sense doesn't figure into the rationale for lending these days, though.  Ignore that stuff.  Common sense is no longer a part of lending.

  • Whether they be new or existing homes, many qualify in areas across the country.  "Rural" may not be what you think it is, as defined by the USDA.  Sure, we are rural in some areas, but don't let that fool you... this is about lending on a piece of land that cows can graze and consume with acreages that would make Jed Clampit blush.  If you don't live on a farm, you can't get this loan.

  • If you are of moderate income, you are in like sin.  But who in their right mind that has moderate income wants 100% financing? 

 

  • Low fixed rates with that 100% financing!  Ugh, most folks want to pay out their ears in down payment money to get a low rate.  Right?

  • Hire a good Realtor.  Why?  Heck, there is no limit to seller's contribution if done that way.   Your Realtor can help you negotiate this. Check with your funding source/lender and their particular overlay (meaning that government guidelines are what they are, yet the lenders making these loans may not always follow these guidelines to T).  Or, take the alternative route and save thousands of dollars by not hiring a Realtor and doing it yourself.  I mean, how hard could it be?

 

  • One of the best Mortgage Deals across this Nation is awaiting.  But who needs a great mortgage deal when cash is flowing through your accounts like beer through a tap at a keg party.  I know, yet another alcohol reference.  Speaking of which, it's 7:22 and I just got home an hour ago.  Time to open the old adult malt beverage.

 

~  Jason Sardi is a Mortgage Consultant licensed throughout many states on the East Coast.  While having no Best Sellers to his name, he's really a decent chap for all intensive purposes.  By email, Sardiman can be reached at jsardi@ihmci.com.  By phone, he can be reached directly at 610-653-0317.  Don't you just love when folks talk in the third person?~

Comments (127)

Jason Sardi
Auto & Home & Life Insurance throughout North Carolina - Charlotte, NC
Your Agent for Life

Jon - If you actually read my post or the comments, you would know how I feel about "No skin in the game."  I'm a firm believer and advocate of reserves.  I like to see money in the bank after someone closes on a home, no matter if they have 20% down or nothing down.  If you think this article is perverted, wait until you see some of my Members Only posts;)

June -  I'd give you a Gold Star if I could.  Until then, please accept my sincere thanks:)

Neal -  Again, I've written over and over again my desire to see folks with money in the bank after closing.  Heck, if something goes wrong and breaks down with the home, it is their pocketbook from which the answer has to come.  I also think that 100% USDA Financing is a tad different than other "no out of pocket costs" to buy a home. 

May 25, 2009 10:27 AM
Lee Ali
Las Americas Real Estate - Fairfield, CT
"My understanding is that its just another way to buy a home with no out of pocket costs. But then after you close....then what do you do? Isn't that how people got into this mess in the first place?"

Neal, that is hogwash spread by banks. Wall Street got a hold of $27 Trillion somehow. They had to spend it.  Equity "supply" was manufactured because of this once-in-a-life-time "demand" from foreign money.

Residential underwriting is primarily based on DTI (debt to income) and commercial underwriting is primarily based on NOI (Net Operating Income), CAP Rate and DSCR (Debt Service Coverage Ratio) which are three very related numbers.

Many residential underwriters approved loans at DTIs of 60%, 70% and I have heard over 100%. [People have to eat, damn it.]

Commercial lenders approved loans at DSCRs of less than 1.2 (Income 20% above mortgage payments), 1.1 (Income 10% above mortgage payments) and even 0.95 (Income 5% below mortgage payments).

This is how the mess was created and NOT because of lack of down payments.

I totally agree with Jason that the home owner has got to have money in his/her hand to take care of emergencies; whether it is furnace blowing up or losing job. "Donating" 10% or 20% to sellers does not do anyone any good.

Jasan is the first person I have seen in the mortgage business who "gets it" at the core level.

May 25, 2009 01:41 PM
Jason Sardi
Auto & Home & Life Insurance throughout North Carolina - Charlotte, NC
Your Agent for Life

Lee - Residential Underwriting (techno-based) had approvals at a back-end debt ratio of 60%.  I saw it with the only eyes I probably will ever own.  I've rarely pretended to be an economist, yet the bail-out thing was ridiculous to me.  While all this is wonderful conversation, I doubt that we will find peace here.  There's a beautiful violence going on.  I'll live it, while I can.  Your comment resides, Lee.  After further review, I like the way you think, Lee.  You are damn savvy, my man. 

May 25, 2009 01:58 PM
Lee Ali
Las Americas Real Estate - Fairfield, CT

So my book has a chance of success after all. LOL!


May 25, 2009 02:36 PM
Jason Sardi
Auto & Home & Life Insurance throughout North Carolina - Charlotte, NC
Your Agent for Life

It sure does.  Just float any residual income you get from promoting it here to my retirement fund;)

May 25, 2009 09:39 PM
No Longer Active
Real Estate - Fallon, MT

Mr. Sardi,  Just wanted to stop by and respond to your bullshit before moving on.  I haven't had a chance to read this crap or the thread of comments but hearing my name singled out and associated with being "Mean" is a further illustration of the DOUBLE STANDARD that exists on ACTIVERAIN.  In my opinion that is the reason for the forums downfall.

May 26, 2009 09:16 AM
Amanda Evans
DFW Living - Fort Worth, TX
Real Estate Broker - Fort Worth Texas

Eat Mor Chikin.

May 26, 2009 04:01 PM
No Longer Active
Real Estate - Fallon, MT

Isn't there enough chicken shit around here?

May 26, 2009 10:05 PM
Jennifer Monroe
Indigo Home Team powered by Compass - Charlotte, NC
Real Estate REALTOR®/Broker/Designer

Who are you calling chicken shit Dano????

Hi Mandy :)

May 27, 2009 07:32 AM
Amanda Evans
DFW Living - Fort Worth, TX
Real Estate Broker - Fort Worth Texas
HI everybody. BTW--this is the only post I can comment on today for some reason.
May 27, 2009 07:54 AM
Amanda Evans
DFW Living - Fort Worth, TX
Real Estate Broker - Fort Worth Texas
That means there could be trouble. Anybody else havi
May 27, 2009 07:55 AM
Sandra Cummings
William Raveis Real Estate - Guilford, CT
Real Estate Agent, Guilford Connecticut

Chicken? We having chicken?

May 27, 2009 10:26 AM
No Longer Active
Real Estate - Fallon, MT

Jennifer... Not calling on any "one" chicken at the moment but there are Plenty of "P..." People in this world.

May 27, 2009 12:08 PM
Jason Sardi
Auto & Home & Life Insurance throughout North Carolina - Charlotte, NC
Your Agent for Life

Dano - You are no more "mean" than I.  I'm just a tad more diplomatic at times.   I think your take on double standards is correct, though.  Part of me wants that changed.  Another part of me wants it to remain because I enjoy hearing you bitch;)

Hall - Hi:)

Dano - Yes there is. 

My Jennifer - My guess is Sandra or Hall;)

Amanda- I had the same problem.  I couldn't comment on anything earlier, which in retrospect isn't a bad thing.

Amanda- ng trouble?

Sandra - I told you about meat and the bone, didn't I?

Dano - Fire up the lawnmower.  This town needs an enema.

May 27, 2009 04:57 PM
Todd Clark - Retired
eXp Realty LLC - Tigard, OR
Principle Broker Oregon

They just announced here that they are going to be adding more cities around me that can use this loan product and I can't wait! Before last week, there really was only a couple cities near me that could use the USDA loan and the ones that could I shouted it from the roof tops to use it.

Todd Clark - www.LivingBeaverton.com

May 29, 2009 09:35 AM
Jason Sardi
Auto & Home & Life Insurance throughout North Carolina - Charlotte, NC
Your Agent for Life

Todd - Very cool.  As their volume increases, just be prepared for longer turn-around times.  That shouldn't be a huge issue, as long as all parties are aware.  Having a sales contract with a closing date anywhere from 30-45 days is absolutely doable.  Personally, I have no inclination to make every moderate income applicant a homeowner... but I believe the responsible & ready ones deserve this chance.  They always have.

May 29, 2009 02:22 PM
Daniel J. Brudnok, REALTOR
Berkshire Hathaway Home Services Fox & Roach, REALTORS - Exton - PA License #RS-225179-L / Delaware License #RS-0025038 - Downingtown, PA
SRES, e-PRO,ABR,GREEN,CSP

Jason my friend you have put a much needed smile on my face....thank you for sharing.

May 31, 2009 04:05 AM
Jason Sardi
Auto & Home & Life Insurance throughout North Carolina - Charlotte, NC
Your Agent for Life

Dan - Anytime, my friend.  I would love to talk soon.

May 31, 2009 08:48 AM
Stuart Dobson
eLoanRates.org - Thornton, CO

nice, lol, I needed that today.  Especially after seeing three deals today alone become jeopardized by bank/lenders.

Jul 20, 2009 01:38 PM
Jason Sardi
Auto & Home & Life Insurance throughout North Carolina - Charlotte, NC
Your Agent for Life

Stuart - That's a shame but not necessarily uncommon these days.  Hook up with someone you can trust... it will be a little more comfortable through the good, bad, & in-between of Real Estate life these days.

Aug 13, 2009 04:48 AM