Buy now, refinance later at your own risk

October 16th, 2009, 1:00 am · 13 Comments · posted by Mathew Padilla

Randy Johnson, president of Independence Mortgage Co. in Newport Beach, author of “How to Save Thousands of Dollars on Your Home Mortgage” and a mortgage broker since 1983, answers questions…

Q. I’m interested in buying a house but I have little money for a down payment. I was wondering if I get an owner-financed mortgage, can I apply for a bank-financed mortgage in a year or two and would the money paid to the owner count as a down payment or would I still need a separate down payment with the bank mortgage?

A. That is a better strategy for a rising market. In today’s market, who knows where we are headed? The issue comes when you want to refinance to pay off the seller. Will you have enough equity? Here’s the problem. Our industry will treat your request as a cash-out refinance. Current rules say that your new loan cannot exceed 75% loan-to-value. Say you paid $300,000 for the home and had a $300,000 loan. Your home would need to appraise for $400,000 in a couple of years to make this work. In my view that is highly unlikely. If the seller will carry back for ten years, you would probably be safe with that.

These are times where the “old rules” apply and one of those rules is that you ought to set money aside for a down payment. Consider an FHA loan which will require only a 3.5% down payment.

Q. I bought my condo in Rancho Santa Margarita in 2005 for $305,000. It’s now at $170,000. I have a 1st and 2nd interest-only loan both at 7%, both adjustable, and with the second being at times as high as 11%. Both loans are current, never late, but I can’t get any help. I tried to refinance shortly in ‘06 but the banks told me times were bad and I would have to wait. The problem is I can afford my mortgages now as is, about $2,000/month, but after the second adjusts I will be paying close to $3,000/month — not a possibility for me. Also, I live in a one-bedroom condo which I have been told could take up to 10 years to rebound and that is not an acceptable time to live in that kind of space. Any advice? Short-sale or attempt to wait it out? After working so hard to keep everything in check, I refuse to ruin my credit just so I can get some help.

A. I really feel for you and I admire your determination to live up to your agreements and protect your credit score. You are a prime candidate for a mortgage modification. You have maintained a good credit record, you can afford your payment at current market rates, and you are willing to stay in the home and make payments. Your problem is that you have “toxic” loans. Not only are they substantially higher in rate than the current market, they can go even higher.

One would think that your lenders would be trying to work out an accommodation with you that would keep you in the home, even if they had to reduce your loan balance to give you some hope of recovery. Sadly, the mortgage industry seems short on common sense these days in spite of all the encouragement and cajoling from Washington.

Part of the problem is that your “lender” may not own your loan. They may just “service” it for some group of investors who are probably calling the tune. I hope that as these guys feel the crush of foreclosures, they are more willing to entertain realistic modifications for people like you who ought to receive prime consideration.

That’s it. If you want Johnson to answer a question, email it to Mathew Padilla at mapadilla(at)ocregister.com. Include your name or nickname and the city you live in — that information will be published with your question. Johnson will answer up to three questions each week, so keep checking back for a response.

Read prior questions and answers by clicking on the headlines below…

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mav says:

October 16, 2009 at 6:09 am

answer to question 2: you should walk….. in 2 years it will be worth $100K

Post Reply

Cyndi says:

October 16, 2009 at 6:51 am

“I tried to refinance shortly in ‘06 but the banks told me times were bad and I would have to wait.”

I’ve never heard of a lender declining a loan for this reason.

Bill-1a says:

October 16, 2009 at 9:54 am

The state of California should pass a law that requires lenders or the holder of the notes to approve loan modifications for people who fall under the following criteria: Have lost over 40% value in their homes, are employed, have made every payment on time, have FICO’s above 700 and have lived in the home as owner-occupied for the last three years. Terms of modification can be determined on a case-by-case basis, and is a one time procedure. This will help keep people in their homes and help to avoid people from just walking away. This could be a win-win for everyone.

Liar Loan says:

October 16, 2009 at 11:18 am

“The problem is I can afford my mortgages now”

Yes, that is the problem. Right now the industry is focused on helping those that cannot afford their loans. If they gave modifications to everyone who could afford their loans, but feel like they deserve a break, EVERYBODY would get a modification.

Since you are concerned about future payment shock on your second loan, you should start paying extra towards it right now, while your payments are low. I’m assuming the balance on the loan is 20% of your total balance, so $61,000. If you can pay an extra $500 per month, you will knock 10% of that loan balance in the first year, and more in each subsequent year. This strategy picks up momentum the longer you make extra payments, so each month more of your money goes towards knocking down principal and less goes towards interest.

October 16, 2009 at 12:20 pm

Liar, there are a lot of homeowners out there sitting on the fence that are way underwater on their loans. Value of home $300,000, loan amount $450,000……These people are not going to stay in their homes much longer, especially if values continue to fall….which means more foreclosures…..which means not good for anyone. My suggestion is a win-win for both homeowner and lender. Sure, the lender may take it in the shorts now, but over the long haul, by not having to go through foreclosure, they’ll save in the long term. It’s not feeling like they’re getting a “break”, it’s just good common business sense. Spend a little now, so I don’t lose a lot later, and that’s what’s going to happen (lose a lot later) if lenders don’t at least offer some relief to the thousands of homeowners that are in this with them and have a property that is hundreds of thousands upside down.

OC Pro says:

October 16, 2009 at 1:32 pm

So if you were a lender/servicing entity, Bill-1a, your strategy would be to modify performing loans either in addition to or in lieu of modifying non-performing loan. That is NOT good business sense. In fact you would be fired from your job and likely sued.

What you seem to be missing is that a 30-day late is not immediately a foreclosure. In fact, a 180-day late isn’t even necessarily a foreclosure. You can’t force a servicer/lender to foreclose on an asset. If it is crap, and everyone knows it is crap, then the lender would only foreclose if destroying the collateral was the most cost effective strategy.

What makes no sense at all is for the lender to do nothing. If a borrower is behind, I would think the best strategy would be to determine (quickly and efficiently) the best exit strategy out of the loan, and act accordingly. If that strategy happens to be modification, then great. If it is selling the loan to a company better equipped to deal with it, thats better for the borrower anyway. If it is foreclosure, then so be it.

You lose your rights to decide what happens to your house when you stop paying the mortgage. Unless you are fine with the worst case scenario (FC), you shouldn’t walk away. You are not entitled to anything.

Awesome says:

October 16, 2009 at 1:34 pm

No wonder we’re in this mess. Look at these idiots.

#1 If you can’t afford a down payment, you can’t afford a house.
#2 11% are you kidding me? You have made some terrible financial decisions, just walk.

October 16, 2009 at 3:41 pm

OC Pro…I’m not advocating walking away, but it’s happening, look around you. People realize that without help, it’ll be many many years before their value meets their loan amounts. Finger pointing is not the answer, finding a solution is. Can you honestly tell me you know of no one who has lost 100,000’s in equity, making their payments on time, just simply walking away from their homes. If you say no you don’t, then you’ve been living in a closet for the last two years. Remember, I don’t advocate this, it’s just what is happening in many neighborhoods. People realize this and say, I might as well do it now vs 10 years down the line when and if values ever regain the actual loan amount on the property. Well old OC Pro, the bailout (and loan modifications) have been going on for about a year now…..how are the banks doing? How are home values doing? How are the homeowners doing? How are foreclosures going?

OC Pro says:

October 16, 2009 at 4:38 pm

If you have 20 homes, and never have a chance of re-selling them some of them for profit, and can’t use the interest as a write-off anymore, then yes, I agree it makes sense to walk away from only those investments you have no chance of profiting on. But, notify your tenant immediately and stop charging rent. That is just plain stealing.

If you have 1 home, where you and your family/loved ones live, sack up and pay the mortgage. This is a business decision, but walking away from a home is NOT as simple as you and others make it out to be. It makes me sick to my stomach that people think you can just stop making the payment, live care free, continue your outlandish spending that likely caused the problem in the first place, and then beg a landlord to let you rent from them despite your “past credit issues”. How is that a good decision? It seems like everyone is clear on how to get back at their lender, but no one is clear on how to better their own situation. Sad.

As far as the lenders and their inefficiencies, you’re right they could be doing a lot better. But the day you start modifiying performing loans en masse, you are inviting millions of dollars in future litigation from investors to whom you didn’t prove a risk of imminent default, and that will cost far more than the realized costs of even a large wave of foreclosures.

I wish I could just walk away from my upside down rental property and sleep well at night… but that just isn’t who I am.

Post Reply

OC House says:

October 16, 2009 at 4:16 pm

I personally know 3 families having to walk away in the past few months. It is a painful decision for all of them. On top of that, 2 out 3 lost all of their equity gains from their previous properties when they traded up. Unfortunately, they have all bought into the “housing price will never go down” hype… It just doesn’t make sense to continue throwing good money after bad

Steve says:

October 18, 2009 at 11:14 am

To the person living in Rancho Santa Margarita. Is your loan owned by Fannie Mae or Freedie Mac? If so, you might be able to refinance up to 105% Loan to Value withouth paying any PMI. You would have to subordinate the 2nd but with lowering your rate on the first mortgage you can take that money that you would be saving on your first and be able to make the payment on your second much easier when it goes up. I can look into that for you if you like. you can email me at barlow@hfiloans.com

Jc says:

October 18, 2009 at 4:59 pm

I’m reading words like painful/Unfortunately, and so forth. Everybody is sorry now, and playing the victim-card.

Hey wake Up!! All these scenaries happen because they were all at fault. They all were mortgaging their homes, they all were “Flip-Flapping” they were all running like bandits to the banks.

They all destroyed the System because their own greed.

And I can see here all the “Mother-Theresas” Or perhaps all ready “In” their own mess. Trying to acommodate their situation to their best “Whishfull” thinking…?

I’m quite sure that many of them were saying, “oh well when we get there. we will figure this out”
They never figured out.

Susan says:

October 26, 2009 at 10:15 pm

It’s a scary time indeed. I thought 2009 would show slowing of short sales but that’s not happening.

If you’re going to buy, buy if you have the cash and go in knowing that things may not look brighter for another couple of years at best.

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