YOUR MORTGAGE : MORTGAGE Q & A : Portfolio Lenders Loan Up to 40%
QUESTION: I want to thank you for advising several months ago to get a home loan from a “portfolio lender.” At first I wasn’t sure what that meant , but a real estate agent clarified that it means the originating lender won’t be selling the mortgage in the secondary market to Fannie Mae or Freddie Mac.
The real estate agent gave us the names of several local portfolio lenders. Since our only debt is a car loan, one lender prequalified us for a mortgage up to $250,000.
The loan agent said her bank approves mortgages that will take up to 40% of the borrower’s gross income, but if we had gone to a lender who sells their loans in the secondary market, we could only qualify for a loan that takes 28% of our income. Why is there such a big difference among lenders?
ANSWER: Let’s face facts. The big secondary mortgage market buyers, Fannie Mae and Freddie Mac, set their own stupid rules. They arbitrarily say home buyers shouldn’t spend more than 28% of their gross income for their mortgage payments. Thankfully, the more realistic portfolio lenders realize the foolish 28% rule makes absolutely no sense.
What really matters is the property security and the borrower’s ability, as well as desire, to live up to their obligations, as evidenced by their income and credit history. Unfortunately, not all lenders are in a position to keep their home loans in portfolio so they must act as mortgage bankers and immediately sell their loans in the secondary market with its nonsensical loan qualification rules.
Mortgage Refinance Money Is Best Kind
Q: I am thinking of refinancing my home loan and taking about $50,000 equity for a down payment to buy the house next door, which is for sale. If I refinance my mortgage, what will be my tax consequences?
A: Mortgage refinance money is the best kind because it is tax-free. Borrowed money is not taxable because it must eventually be repaid. You can deduct the interest on a home-equity loan up to $100,000, so you are well within the limits. Buying the house next to yours makes good sense because then you can determine who rents that house.
Terms of Mortgages Changed by Brokers
Q: Isn’t it about time you expose the mortgage brokers? As a real estate agent, it constantly amazes me how they survive. Although I recommend that my home buyers use local S&Ls; and banks, they somehow hear about better deals from mortgage brokers. But virtually every mortgage loan fails to close on the original terms that the mortgage broker quoted to the borrower. How do these guys survive?
A: Some of my best friends are mortgage brokers, so I must be careful. But I agree that too many mortgage brokers quote borrowers loan terms that they can’t deliver.
Another problem is that these middle people between lender and borrower are often misled by the lender as to the available loan terms, which the lender can change without notice until the borrower’s loan is locked in. My suggestion is to deal only with reputable mortgage brokers and warn your home buyers about the others.
Interest-Only Loan Good for Short Term
Q: I am buying a home where I plan to live for about four years. I found a home where the seller will finance my purchase with a 20% cash down payment. However, she wants an interest-only mortgage rather than an amortized mortgage. Do you think an interest-only mortgage would be dangerous for me?
A: No. An interest-only mortgage is good for both the borrower and the lender. From your viewpoint, your monthly payment is minimized and all your payment is tax-deductible interest. From the lender’s viewpoint, she keeps all her money invested earning interest with no principal reduction. Since you plan to own your home only a few years, principal reduction is unimportant, so that interest-only mortgage is a very good deal.
Consider After-Tax Cost of Home Mortgage
Q: I want to buy a home but am scared of adjustable-rate mortgages. With fixed-rate mortgages around 11% do you think I should wait six months or so until interest rates come down?
A: Even if you are absolutely certain mortgage interest rates will drop in six months how much do you think interest rates might drop? Perhaps 1% or 2%? However, if interest rates fall, that means more prospective buyers can purchase a home so demand will increase and home prices will rise unless supply increases.
Another factor to consider is your after-tax cost of a home mortgage. If you pay 11% interest and you are in a 28% income tax bracket your after-tax interest cost is only about 8%. Even if interest rates fall to 9%, your after-tax cost would be about 7%. Is it worth taking a chance and waiting to buy a home, just to save 1% interest after taxes?
Credit Unions Offer Mortgage Alternative
Q: You often mention banks, S&Ls;, and mortgage brokers as sources of home loans. But why don’t you recommend credit unions? Some of the larger credit unions, such as the one I belong to, now offer home mortgages and equity credit lines. Isn’t it about time you put credit unions in the same class as other home loan lenders?
A: Yes. Shame on me for forgetting credit unions are excellent sources of home loans and equity credit lines. For example, the one I belong to offers home loans up to $350,000. I understand some credit unions offer larger home loans. Their terms are very attractive and the loans are easy to get if you are a member, have good income, and have good credit.
Questions and comments may be sent to the Real Estate Editor, Los Angeles Times, Times Mirror Square, Los Angeles 90053.
