Cash-strapped homebuyers receive a 103% break

Nation's Housing

December 28, 1997|By Kenneth R. Harney

TWO OF THE country's largest sources of mortgage money have created an unusual financing package for 1998 -- a loan for cash-strapped homebuyers that exceeds the cost of the house they purchase.

The extra money in the loan package -- up to 3 percent beyond the property's market value -- must be used for closing costs and escrows.

The package concept, which is being introduced by mega-investor Freddie Mac and Irvine, Calif.-based WMC Mortgage Corp., goes by the name "103 combo."

It is designed for buyers with at least moderately good credit histories who haven't been able to accumulate enough cash to pay for both a home down payment and the closing costs.

Here's how the concept works. The combo loan stretches the traditional rule that limits a mortgage to some fraction of the appraised value of the property, usually no more than 90 percent to 95 percent.

Most lenders require borrowers to pay 5 percent to 10 percent of the home price in the form of a down payment, plus additional cash for title insurance, title search, transfer taxes, loan-preparation fees and escrow items at settlement. Settlement-related charges can tack on thousands of dollars to the cost of a home.

Combo loans, by contrast, allow homebuyers to make a down payment of just 3 percent out of their own cash, and then to finance all closing costs and escrows up to another 6 percent of the home price.

The combination of a 97 percent-of-value first mortgage, plus a second loan up to 6 percent of the home value, produces a "103 percent-of-value" combined financing package.

The maximum mortgage amount allowable on the first mortgage is $227,150 -- Freddie Mac's current statutory limit. On the second loan, the ceiling is $13,629. The interest rate on the 97 percent-of-value, 30-year first mortgage is the prevailing market rate -- roughly 7.5 percent. The rate on the 6 percent-of-value second loan is 9.99 percent, with a term of 15 years.

The idea, according to WMC Mortgage Corp.'s Sule Cakmak, is to "reach out and remove the biggest obstacles that stand in the way of so many people who want to buy a home."

The combo loan essentially offers the following proposition to buyers short on cash: OK, we'll give you a large (97 percent-of-value) mortgage on your new house. You've got to come up with 3 percent down payment cash that you can prove is from your own resources -- not a gift or a loan. If you can do that, and you're an acceptable credit risk, we'll finance your settlement costs, reserves, escrows, and so on, plus any rate reduction "buy down" you'd like, up to the 6 percent-of-value limit. The extra financing will take the form of a second mortgage or deed-of-trust secured by the house.

Borrowers cannot have incomes in excess of 125 percent of their county's median income. That ceiling can be surprisingly high in some areas. The ceilings in the Baltimore suburbs: Howard County, $97,875; Anne Arundel County, $79,625; Carroll County, $74,500; Harford County, $73,625; Baltimore County, $71,250.

Borrowers' allowable debt-to-income ratios are also generous under the combo loan program compared with most conventional mortgages. There is no housing debt-to-income ratio whatsoever. But there is an overall 40 percent debt-to-income ratio limit on total recurring household monthly debts, including the combo loan, charge accounts and credit cards. Freddie Mac and WMC say they are willing to go higher than the 40 percent limit under certain circumstances, such as demonstrated long-term employment and stable income histories.

Your credit needs to be good -- but not perfect -- to qualify for a 103 combo. That means that your credit report should show minimal late payments -- generally no more than 30 days late on revolving consumer accounts twice during the past 12 months, and zero late payments on your rent or mortgage during the past year.

Other requirements: The house has to pass an inspection before closing to ensure that no major repairs are looming over the horizon. And all borrowers must undergo brief home purchaser educational training conducted by a nonprofit counseling organization.

Downsides to the new combo loan? Here are two: You begin your life as a homeowner with a negative equity position -- owing more to your lender than your house could produce at resale. Plus, you're going to pay a slightly higher composite rate on your total debt because of the 9.99 percent, 15-year second on top of the market-rate, mid-7 percent, 30-year first mortgage.

For information on this program, call WMC Mortgage Corp. at 1-800-743-4020.

Pub Date: 12/28/97

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