100% Financing Gone?!?

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100% financing, gone?!?

Surely, you can’t be serious?

I am serious.  And don’t call me Shirley.

Yes, it’s true.  100% financing is gone.  The rumor had been circulating around the business over the past few weeks, and at the end of March, the announcement was released by mortgage insurance companies (PMI companies) that they would no longer be writing PMI insurance on loans with 100% loan-to-value (LTV). 

Months ago I blogged and predicted that one of the trickle-down effects of the mortgage meltdown would be that credit-worthy borrowers would be penalized because of a few (ok, more than a few) bad apples.  And now, borrowers who could have once easily qualified for 100% financing are now being forced to change plans.

Can you really blame the mortgage insurance companies, though??

The mortgage business is really pretty straight-forward.  In order for a bank or other lending institution to loan me and you hundreds of thousands of dollars, we should be prepared to invest a little in the process (a downpayment of 3%, for example).  We should be able to prove we can meet our credit obligations (a good credit score).  We should be able to prove that we can afford the monthly payments (capacity and document-able income).  And the collateral (the house) should be a fair asset in case we don’t pay the money we owe (appraisal).  If we put down less than 20% down, there is a chance that if the property goes into default, that the lender will lose money in the foreclosure process.  Mortgage insurance (PMI), insures against those loses.  The less money you put down = the higher the risk of loss = the higher the monthly mortgage insurance premium.  

The problem is this . . . loan guidelines got too loose.  Borrower’s didn’t have to prove an investment in the property (no downpayment).  They didn’t always have to prove excellent credit (middle to low credit scores at 100% financing).  And guidelines could be pushed to stretch a borrower’s capacity (high debt to income ratios allowed with good credit, cash in the bank, etc).

So what happens when home values slump or even worse, go down?  If values go down = less equity in the house = more risk of loss = mortgage insurance companies wished they didn’t have the policy on that house.  And, now you got it . . . 97% financing is now as big of a risk as PMI companies are willing to take.  And with that program, borrowers have to prove they have the credit (680 credit score or higher), the capacity and the collateral (appraisal).

Remind me why people used to say ugly things about PMI being a rip-off?  I never really understood that.  Hmmmmmmmm.  More on that next time.

Jeffrey Pinkerton is a Mortgage Consultant and President of Hillside Lending, LLC and writer for “the Mortgage Blog.”  Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing.  For more information about available programs and interest rates, please visit www.hillsidelending.com.

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