All Forum Posts by: John Worley

The Truth About No Closing Costs Mortgages

You hear about them on the radio all day long. "We'll do your mortgage with no closing cost!" And you think to yourself, "Hey, that a good deal." Well you know what the wise man say, there is no such thing as a free
lunch. There is always a catch.

No closing cost mortgages are not a new concept. Mortgage brokers have been doing them for years. It is a perfectly legal way of doing business, so long as the borrower understands exactly what they are agreeing
to. The way this works is the borrower agrees to accept a higher interest rate than they would normally qualify for in order to not have the pay any of the closing costs. The broker earns what is known as "yield
point spread" or YSP for originating the loan at the higher rate and then simply pays for the closing costs out of their commission, leaving enough left to make doing the loan worth their time. The real winners in this
scenario are the lenders, who are now making considerably more money off of the loan in interest.

Now this strategy is a good one for borrowers who are not going to hold that loan for very long. Landlords or real estate investors who only plan to hold a property for a year or two, might find it worth while to take
the higher payment and interest rate to keep from having to put out $4000 or more every time they do a mortgage transaction. Likewise for military or corporate individuals who move around every few years.

However for the average homeowner, who may keep a loan for 10, 15, or even 30 yrs or more, this strategy doesn't make much financial sense. Let look at the following example.

Take a $150,000 mortgage where the borrower qualifies for an interest rate of 7.0% The closing costs for the mortgage will be $6,000, however this borrower is offered a no closing cost deal at 8.25% interest. Now
our borrower plans to live in this house and keep this loan for at least 10 to 15 years until all of his children have gotten out of college. He could certainly use that $6,000 towards things for his family and so the deal
sounds appealing. But let's see what his benefits would be (if any) for accepting the no closing cost deal.

Option #1
Loan Amount: $150,000
Closing Cost Paid: $6,000
Interest Rate: 7.0%
Loan Term: 15yrs fixed rate
Monthly Payment: $1,348
Total interest over the life of the loan: $92,684

Option #2
Loan Amount: $150,000
Closing Cost Paid: $0
Interest Rate: 8.25%
Loan Term: 15yr fixed rate
Monthly Payment: $1,455
Total interest over the life of the loan: $111,938

By accepting the no closing cost deal, our borrower would be paying $107 more a month in a monthly payment and over $19,000 more in interest over the life of the loan. All to keep from having to make a $6,000 investment in his home when he bought it. Had he paid the closing costs upfront and taken the loan at 7.0% interest, then he would have made back his initial investment in about 57 months.

So is a no closing cost mortgage right for you? That's up to you and your current situation. Just understand that there is no free ride. You are paying for it, one way or another.

I write little articles like this one for my monthly newsletter, but I thought I'd post them on the forums I visit as well. If you like what see and would like to recieve my newletter, then you can sign up for it on my web site (shameless plug, I know :D ). Anyway hope you enjoy the articles.

What is Hard Money?

This is a source of ongoing debate throughout the real estate investment community. What is hard money financing and why isn't what real estate investors expect it to be? The source of all of the confusion is a lack of understanding of what hard money lending really is.

In a nutshell, hard money lending is equity based lending. This means that the lending decision is based mostly or entirely on the amount of equity within a particular piece of property. The lender is
taking their risk on the ability to sell the property at a discount price and still make back the money that was loaned on it, should foreclosing on the property becomes necessary. Hard money is designed as a last resort financing for borrowers with severe credit issues that even sub prime lending can't help. This includes borrowers with sub 500 credit scores, facing foreclosure, trying to avoid foreclosure, etc.

What hard money is not designed for is investment properties and investment property rehabs. While some hard money lenders will provide investor rehab products, they will typically require minimal credit
scores, no foreclosure history, an appraisal, a property inspection, etc. Any one of a number of different requirements that are designed to protect the lender from a very risky transaction. As a matter of fact, 7 or 8 out of every 10 hard money lenders won't even touch investment property deals, simply because they are considered to be much too risky.

So what about the lenders that offer investors loans with no credit check, no appraisal, and LTV's between 70% and 80%? Almost without exception, you will find that these programs are limited to
local, private lenders. These are usually investor wholesalers who have several lines of credit available that they can lend against. Private lenders will only cover a small geographic area and are more inclined to do business with minimal paperwork (I've even known a couple of private lenders that would do business on a hand shake and nothing more.) These types of lenders protect themselves by getting to personally know the borrower and the project they are working on, hence why they usually only work a very small geographic area. For private lenders, the prospect of foreclosing on a property is a win-win situation, because all they are doing is adding another property to their wholesale
inventory. They have very little risk of losing the property once they gain it through foreclosure because that was lent out against the property is secured by different collateral.

So why can't the hard money lenders provide the same programs as the private lenders. The answer to this boils down to risk management. All lenders (hard money, private, or conventional) will protect
themselves in some way. Conventional lenders will have strict guide lines based solely on a borrower's personal credit. Hard money will base their lending decisions or a mix of property equity and borrower's credit. Private lenders cover a small enough geographic area that they can become personal involved in the individual borrower's projects. Many of them will also based their decisions based upon whether or not a particular deal is something they would be themselves, because they
know that they may very well get stuck with it. Most hard money cover very large geographic areas, including multiple and some are even nation wide. They simply cannot be involved in every deal to the level that a private lender can, so the compensate for the increased risk, they offer lower LTV's and require credit checks, appraisals, etc.

So the next time you want to find some rehab financing, consider looking into your local private lender community. They are a great way to leverage your purchasing power. Just remember that these lenders provide for very short term financing, so plan your exit strategy accordingly. And if you plan to hold your newly rehabbed investment for a rental, remember that you will need to plan for the conventional financing. This means keeping track of your cancelled mortgage payment checks (as private lenders almost never report to the credit bureaus) and keeping track of your contractor invoices and repair receipts (to document the work completed to the property). I recommend having
an appraiser do a "subject-to" appraisal of the property before buying it (even if your private lender doesn't require it). There are a couple of reasons for doing this. First, it gives you a very good indicator of what the FMV of the property is (instead of you and the lender just guessing at the comps) and second it gives you a good comparison tool for the appraisal that the conventional lender will have done when you refinance. "That's $800 out my pocket", you say. Well which situation would you rather deal with, $800 out of pocket (average $400 x 2 appraisals) or being short several thousand dollars because you misread the comps when you bought the property?

Very good point Wesley.

Aside from the usual stuff (IE..collection accounts, judgements, foreclosures, bankrupties), two things that will drag your credit score down in a hurry are a history of late payments and maxed out credit lines.

So like takleberry said, pay your bills on time and keep your current credit card balances below about 40% of your available credit. Those two things along with keeping any of the other stuff listed above off your report will help keep your score high.

As a former appraiser myself, let me say NO...that color of your siding isn't going to make to least bit of difference in your appraised value. As a general rule, any cosmetic changes to the property will not affect the appraised value. Now the appraiser may make note of siding that needs replacing and painting that needs to be done in the report and plus an estimated cost to cure, by that should be as far as it goes. If you get an appraisal who starts making adjustments based on cosmetic appearences, then get another appraisal.

Now I don't know about Pinnacle in particular, but I can tell you from living and working in Atlanta that the entire RE market here is still pretty hot. High returns are very possible in various parts of town. Just make sure you check these guys out very well because there are always people looking to rip someone in this business and Atlanta sees more than our share of them.

Tyril,

You're better off deciding what exactly you want to do first. Then start looking into what loan programs are out there. Thousands of programs doesn't even begin to scratch the surface.

boywonder,

That varies from state to state. Some states are allowed no pre payment by law. But most lenders will allow you to buy out the pre payment for a hit to the interest rate.

I was really referred more to the non MLS sites and packages. The MLS is cool and everything, but I am looking more at the completely non Realtor assoicated sites (IE.. ForSaleByOwner.com, Owner.com, etc.).

The reason I bring this up is I see all sorts of Flat Fee MLS sites and then the sites like FSBO.com and ByOwner.com where those of us can list our properties without using a Realtor, but what I had in mind was a REI FSBO kind of site. Still open to the public, but focusing on REI transactions in particuar (IE list your rentals for sale, your wholesale properties, etc.)

Steve, look to the left of your post under Real Estate Tools and click on Forms and Contracts.