Real Estate Financing

There has been a great deal of change in the financing area during the current economic crises.  The federal government now insures almost all residential real estate loans through it's government sponsored enterprises GSE.  The best known GSE include Fannie Mae and Freddie Mac.  The market for privately funded mortgages is almost nonexistent.

With the government scheduled to end it's emergency support of the residential mortgage market at the end of April 2010 we will see what develops.  The private mortgage market is expected to respond favorably to the stability created by the government intervention.

The Old Way

There used to be one way to borrow money to buy a home. You marched down to your local bank put 20% cash down and the balance would be financed at a fixed rate for thirty years.  These financing terms are back now for loans that are not backed by the GSE's.

Financing Today

Low down payment loans with fixed interest rates are still available.  Federal Housing Administration FHA loans are available with as low as 3% down payments.  There are a limited number of loans under special programs whit the FHA where the down payment can be made by a third party.

In San Diego the best known home loan program that does not require a down payment is the Veterans Administration (VA) loan.  VA loans are available to veterans and active duty military personnel.  VA loans are intended to be used only once or twice.  The costs rise rapidly the more times this benefit is used.

  There are even a limited number no down payment loans



and adjustable rate loans, cost now no and no cost loans, lender and seller financed loans, portfolio lenders and hard money lenders, low documentation and no documentation loans. I think you get the picture. Today there is a home loan for almost everyone who has income and that you get the some history their bills.of paying

Sources for real estate financing generally fall into three categories, Banks and Credit Unions, Mortgage Brokers and alternative sources.

Banks and Credit Unions

These have been a traditional source of financing real estate purchases for years. They are typically very rigid in their underwriting requirements, any deviation from their prepackaged offerings can result in long delays. As a result of the consolidation in the banking industry many banks have centralized their real estate loan operations with your local branch doing nothing more than stuffing paperwork into an inter-office mail pouch. The days of sitting down at your local bank branch, talking it over with the branch manager and reaching a decision are over. Today you'll have to wade through the paperwork alone and play voice mail tag with your loan processor.

Mortgage Brokers

Mortgage brokers have a distinct advantage over most institutional lenders. They have access to many different loan programs available from many sources. A broker is able to take the time to counsel you to help determine what loan best meets your needs. . Mortgage brokers are also a good choice for those with less than perfect credit histories. The broker is able to work with the client to “clean-up” their credit report so they can qualify for a loan.

Many in the real estate business hold mortgage brokers in contempt and I'm sure the feeling is mutual. A bad broker (real estate or mortgage) can ruin a transaction and a good one goes unnoticed. The problem lies in the fact that most consumers use these brokers services infrequently and are unaware if they have receiving good service or bad.

Your best source for home loan information is to contact a reliable mortgage broker. Don’t rely on just your bank or credit union for a home loan, shop around. Today there are so many choices that even lending professionals have to scramble to keep up with all the new loan programs. Your mortgage broker will be able to find the best loan available to meet your needs and if one lender doesn't want your loan you won’t have to start all over from square one. In order for your mortgage broker to do the job right he’ll require all sorts of information about your life, job and finances. But, contrary to what you might hear they don’t always ask for a pint of blood. The secret to success in the loan application process is to provide as much information as quickly as possible to the mortgage broker. Once the broker has your completed application he can shop around from hundreds of mortgage sources to find the loan that works for you.

As with any professional service, experience counts. Get a feel for the broker's knowledge by asking questions. Get involved in the process. Always do a reality check before committing to any financing package, call a couple of other brokers to verify that the terms of the proposed loan match up well with what they have to offer. The real estate loan business is very competitive, and like all others, competition keeps everyone honest. If your being offered 7% in a 9% world, get very suspicious.

With the advent of “One Stop Shopping”, obtaining real estate financing will be revolutionized. Computerized Loan Origination reduces the costs to originate loans for lenders. The lenders could be passing these savings along to their clients, time will tell if this become common practice. Many brokerages may choose to use loans as “loss leaders” in order to stimulate sales business, others may simply make more profit.

Fixed or Variable Rate Loans

This decision shouldn’t be made without careful consideration of your tolerance for risk. The advantage of fixed rate loans is the predictability. Your P&I payment will not change for the life of the loan. The primary disadvantage is the same, your P&I payment will not change for the life of the loan.

In a time of falling rates the fixed rate borrower must incur additional costs to refinance their loan at a lower rate. The adjustable rate borrower automatically takes advantage of lower rates as their loan payments will be reduced. Their problem lies in a time of rising rates.

Alternative Forms of Financing

These are not the "No-Money Down" late-night cable infomercial scams. Alternative forms and sources of financing include; Seller "Carry-Backs", Pensions and Defined Benefit Plan Sources, Pledged Assets and Employer Contributions.

Seller "Carry-Backs"

A Carry-Back is when the seller finances part of the purchase price by "carrying" a note. A popular form of this is the "80-10-10". The buyer qualifies for an eighty percent loan to value loan from a bank with a ten percent cash down (typically a First Trust Deed) and the seller carries a note for the remaining ten percent (typically a Second Trust Deed).

This method offers several advantages to the buyer, he is able to purchase the property with a lower cash down payment, more favorable terms can be obtained on the First Trust Deed since the lender has adequate security for their loan, the buyer can avoid Private Mortgage Insurance (PMI) (which isn't tax deductible) by paying interest on the Second Trust Deed (which is generally deductible).

The advantage to the bank is that they can make a loan that they otherwise wouldn't. Never forget that the banks business is not handling your checking account, they make money by LENDING money. No loans, angry shareholders and regulators.

The advantage to the sellers is that they are able to sell the property and can defer taxation on part of the gain (payments to them are taxable in the year received) and they earn higher rate on making the loan than they could earn in other investments. Also, once the loan becomes seasoned (the buyer has made several payments on time) it can be sold at a discount to generate cash if necessary.

The disadvantage is that the risk is born entirely by the sellers. If the buyer cannot make the payments (defaults) the sellers must foreclose and then resell the property.

Pensions and Defined Benefit Plans

Can you borrow against your pension to buy real estate? For a surprising number of people the answer is yes. Check with your benefits department at your work. Be persistent, especially if your in a satellite office. Call the home office and talk with your human resources director. Many employers and unions have these types of plans in place but they aren’t advertised.

Defined benefit plans are typically used by self-employed professionals. Check with your CPA for more information.

Pledged Assets

Pledged assets are a method to help family members (typically) purchase homes without selling appreciated assets to provide cash to the family member. A brief explanation, a person has an asset (say common stocks) that they “pledge” towards a down payment. Rather than selling the asset and paying taxes on the gain and then giving cash to the people they want to help, the asset is pledged, the owner cannot sell the assets until certain circumstances are met (a certain LTV, for instance). These programs are generally available through stock brokerages.

Employer Contributions

Enlightened employers are realizing that happy, secure employees are far more valuable to them than the “I’m only here to pump up my resume” types. It takes a good deal of nerve to ask an employer to help with a down payment, or even originate a loan, but the results are worth the risk. The terms can be very favorable to the employee. This type of arrangement obviously requires some legal and tax guidance.

All this talk of financing wouldn’t be complete without some discussion of refinancing.


Refinancing is simply replacing your existing home loan with a new loan or placing a loan on property that is owned "free and clear."

Why Refinance?

Reasons for refinancing go far beyond simply lowering the monthly mortgage payment, in fact refinancing can also raise the monthly mortgage payment. It is a tool that also allows homeowners to unlock some of their equity in the home. A quick refresher course, equity is the value that’s left when you subtract the loan balance from the fair market value (e.g. the owner of a $100,000 home that has a $60,000 loan against it has $40,000 in equity). Taking some of the equity out of your home when refinancing is called a "cash out refi." This money can be used for all sorts of reasons: college tuition, new car, a down payment for acquiring more real estate, consolidating credit card bills, travel and the list goes on and on. There is also another benefit to borrowing against your principal residence. The interest that you pay is generally tax deductible compared to other types of loans. The deductibility of the interest helps to reduce the overall cost of credit.

When To Refinance

For years and years the rule was to refinance when market rates were two points below the rate of your current loan (e.g. 13% to 11%). The reason for this was that your refinance would cost you cash that you would have to recoup with the lower payments. As with most things, this rule has changed. Lenders currently offer "No cost, No fee" refinance loans to borrowers. It isn’t that these loans are free, the borrower is charged a higher interest rate than that for a loan with more "up front" costs. You must consider how long you plan to stay in the property (studies reveal that this amount of time is almost always understated), how many years are left on your current loan, any prepayment penalties that may be involved, if you want to "cash out", how soon do you need the money, do you want to trade the ups and downs of your adjustable rate for the stability of a fixed rate loan, and many other factors before you decide to refinance.

A word about timing your refinance, rates move more slowly when going down than going up. When you have a loan that makes sense and achieves your objectives, close it! As a broker I hear tales of woe all the time about "If I had only closed the loan last week." Don’t be greedy, it can cost you a bunch.