A Step in the Wrong Direction
He says "they have great credit scores and I qualified them for USDA with 6% concessions. You have to get 6% because that's the only way they can buy."
He spoke to them about short sales and foreclosures, mentioned new homes and as he's speaking I'm thinking to my self " why are you boxing me in and essentially setting me up for failure."
I told him that if our only option was 6% were limited in the options as it relates to housing we may have and really were taking shots in the dark when putting in contracts. He says that I can just pad the deal and go over list price and use the extra funds to be credited toward cc.
I told him that that was a horrible strategy and we would begin making offers on homes only to go 2, 3, months deep only to lose the deal and waste everyones time when the banks counter and we can't pull the trigger. He seemed offended and began telling me he gets 6% all the time on deals he originates.
The worst part is he tells me in frustration "well that's all you can do because he only has $800 to his name" I tell him "don't you think that's a step in the wrong direction?"
I mean escrow alone is $1000 not to mention appraisal, inspections and most IMPORTANTLY..........reserves for a couple months god forbid anything were to happen.
Now guys don't get me wrong. I love helping first time home buyers and I also have done several down payment programs and have successfully done bond programs getting my clients money back at closing but all of them at least understood they would need some money and understood the additional cost with buying a home.
My point is that this mess started by extending credit to anyone and everyone and we were leveraging buyers at 100ltv and no reserves for the potential danger of job loss or default. We didn't educate them about not only buying a home but the important of equity and protection against devaluation.
Now 4-5 years deep we seem to not have learned anything!!!
Oh and his response to all this. "I have a moral duty to qualify someone with good scores no matter how little they may have."
Replies to This Discussion
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Permalink Reply by Jeff Payne on -
Eric, you are spot on my friend. This is most likely a losing proposition. I would like to know what the 6% would be used for? Can the mortgage brokers still charge fees that would be padded into this 6% over and above their normal fees? I have been approached with deals like this before and simply say no thank you to the person trying to get me into this. In the end the buyers are paying for the 6% and that is part of what got us where we are today, in a big mess. Buyers closings costs in my area on the average priced home RARELY ever go over 3% but to be safe 3-4% is plenty to get ALL of the buyers closing costs covered. As far as only having $800 to his name, it is sad that the lender would not try to work with the buyer to give him a plan to save money in order to have a cushion should something happen to him. It amazes me that a buyer could get financed with NO reserves.
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Permalink Reply by Wendy Rulnick on
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Eric - Not only are your points correct, this guy is trying to do your job. His job is to find financing. Your job is to structure the contract. I'd refer them to some other mortgage brokers.
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Permalink Reply by Bryant Tutas on -
Eric. I guess it depends. USDA loans have been HUGE in my area for many years. In fact up until about 10 years ago you couldn't do FHA in my area so USDA was the way to go. The buyer only needs $100 to do a USDA loan the loan is actually for 102% (I think) of the appraised value so some of the cost can be added on top of the purchase price.
Many families would be destined to be renters forever if it weren't for the USDA loan. With rates as low as they are now the USDA loan can be great opportunity for some buyers.
Now getting 6% through on a short sale probably ain't going to happen. But may work on a REO and will certainly work on new construction.
If the buyer is fully aware of the advantages and disadvantages of purchasing with no money done then I see no issue wit it at all.
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Permalink Reply by Richard on -
Congrats to you Eric...........it seems like the lenders still have not learned from the past and the rest of us will pay for it somehow.
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Permalink Reply by Eric Mieles on -
Bryant, this is great because I am about 20 minutes from you so this will be great discussion. You are correct in your assesment of new construction being an option and actually after all was said and done that's exactly what I told the mortgage broker. However, it's not entirely about what product will work best rather why are we repeating the same mistakes.
I think I know the answer and frankly it boils down to the almighty dollar!! Everybody wants to get paid. Nobody wants to say NO, NOT YET, NOT GOOD or NOT NOW. Nobody wants to stand up and go left when everyone is expecting right.
It's not out fault, soceity has trained us this way. The majority are ok being sheep and we get hearded amongst the many. Ask a REALTOR what do they do and the answer is "I'm in real estate." Ask them if the have any niche or area and they say "Um I can sell everywhere. I can help people buy and sell."
Have you ever noticed it's called "General Real Estate?" Anyway sorry...lol...off topic but not really (And please everyone I know there are the few commited pros who are that way because they don't fall into this mix)
So let's look at the scenario for this buyer:
Short sales: I would be wasting peoples time and doing a tremendous diservice to the community and parties involved.
Foreclosures: Okay so he actually finds a REO that's in decent condition. You and I both know it will have 4 offers on it. We come in at over list, potentially set ourself for appraisal issues not to mention if we win we have now leveraged ourself into a home at the very very top of what the market will bare if not already slightly over thus leaving no equity and the worse part is we all know it goes a little something like this for the banks.
1. Cash Offer---KING!
2. Conventional--No contingency
3. FHA
4. USDA
5.Down Payment Assistance
Traditional Sale: Possible chance here since were dealing with the owner straight however we all know that they tend to already be priced above market since there is a profit margin thats desired and/or the payoff is the deciding factor for the list price which is higher than MV. Again this positions us with no equity and one slight change in the market creates another homeowner who now owes more than the house is worth from the 1st day!!
New Construction: Only real possible good option for him. He wants to be in St. Cloud so DR horton has a good product over there that may be an option (Although I would have liked to take him to Avatars Bella Pointe). Builder pays cc and some incentives and he has a new home.
Regardless of the ability to get him one I have to believe that homeownership should be a financial investment. One that has the potential to set up someones future along with emotional joy rather than simply being an emotional roof they haphazardly jumped into.
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Permalink Reply by Tara Semtner on -
Just an interesting tidbit I came across this week on HUD's website: when the FHA was created in 1935 buyers had to put down 50% to get a mortgage. The loan had to be repaid within 3 years with a balloon payment at the end. 4 out of 10 were renters in this country.
I recently had buyers close on a USDA loan, and they got over 200 back at closing.
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Permalink Reply by Kimberley Kelly on -
Anyone with only $800 to his name cannot afford to buy a home..period. You were right to see what's going on here..greed.
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Permalink Reply by Brian Avery on -
USDA is an OK program where buyer's have to fit into an income model to qualify in certain rural areas that are designated. Yes they can go to 102%. USDA does allow up to 6% in NRCC's. So the broker does understand USDA's lending guidelines. But if the 6% NRCC is the only way the buyer can move forward it does limit the properties they can expect to purchase. Always one of the biggest problems in the mortgage/Real Estate world have been the divide between lending and Realtor. We are moving into a world where you really need to know both sides.
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