Turns out he had signed on for a negative amortization loan. Not just any neg am loan, but one with a margin of 3.75%! So each month that margin was added to an index to calculate the interest rate. In his case, the index was the CODI (Certificate of Deposit Index). And by the time he came to me, the index was at 5.3%. Add the margin of 3.75% and his interest rate was over 9%!  This at a time when interest rates were FAR LOWER.

His monthly payment was $1929…but the amount he owed that month was $4,713! The difference of $2784 was added to the balance of his loan. If the margin stayed the same (unlikely), his balance went up over $38,000+ the first year. Now, add in the cost of the refinance…and he was in deep neg territory!

That’s the difference between a mortgage salesman and consultant.

A salesman is out to profit at your expense. The higher the margin, the more the lender pays.  So, a salesman will hike up the margin to line his pockets. The salesmen who suckered my client charged a 1% origination fee, a $595 processing fee, a $350 administration fee, and pocketed a 3% premium from the lender. He made out like a bandit while my client took a bath. In addition, my client had a 5% prepayment penalty for the first 3 years. Had he gone to a mortgage consultant instead, he would have had a margin of 2% or less…attached to a lower index…with a zero broker’s fee. In short, a loan he could live with.

So when a customer asks me for a neg am loan, I only give it to him if I feel the circumstances are right.  He has to be a savvy borrower. The upside of the transaction needs to be good. And, it has to be refinanced after a year or two. I also make sure it has the best possible terms: A low margin. No prepayment penalty. And, bi-weekly payments.  (The 25^th and 26^th payments help eat up a portion of the interest accrued.)

I’ve occasionally seen investors who do well with a neg am loan as long as they get out of the market at the right time.  But with loans as with life, timing is everything!

PLEASE! I have 20-odd years of mortgage experience. But I would NEVER tell a client that. Having worked both sides of the market (Realtor® & mortgage broker), I know all too well what happens to amateur investors and people with too little equity in their homes. We all do. They’re dropping like flies out there right now.

The reality is, that man had a not-so-hidden agenda. He wanted all the refi money he could “reasonably” make. And the buyers who listened probably aren’t feeling too secure right about now. A heavy mortgage in this market is a killer. You wind up paying for the house several times over in interest. Your biggest asset can be easily lost if you get hit with a job loss or a heavy medical expense. And the stock market is a crapshoot if you don’t know what you’re doing.

My bottom line: be careful who you listen to. All too frequently mortgage “consultants” are interested in selling not consulting. And “financial advisors” are frequently securities pushers with a fat commission in sight.

Unlike the days of 100% financing with no income or asset verification, there’s no question loans are tougher to get these days. But they’re still available if you can document your income, down payment, closing costs and cash reserves. If you know what to watch for and know how to play the game.

If you’re self-employed, you have to show two years tax returns (1040’s if it’s a sole proprietorship—1120’s if you’re incorporated).  If it’s mid-year, you’ll need a year-to-date profit & loss statement and a balance sheet.

The self-employed borrower is more likely to have problems getting approved.   While the salaried borrower is qualified on gross income, the self-employed borrower is qualified based on net income. In a nutshell, an employed person with an annual salary of $45,000 can qualify for more than a self-employed borrower grossing $100,000+ a year!

No-income verification loans are still available, though the guidelines have changed. The days of the 80/10/10 are gone (where you could put down 10%, get a first mortgage for 80% and a 2^nd for 10%.)  Now, most lenders are looking for a down payment of 20%-30% and want asset verification to boot.

If you can document that your income doesn’t exceed the debt ratios (36% for FNMA & 43% for FHA), you could qualify for a ‘full doc’ loan with minimal payment requirements. But you must prove that the money is yours or the lender won’t let you use it.  (It’s called ‘source of funds.’)

Lenders now want to see your complete bank statements for the past two months. If you’re getting a gift from a family member, you have to show the funds debited from the donor’s account, then credited to the borrower’s account or escrow. Lenders want to see cash reserves of two to six months after down payment and closing costs. So if your total payment of principal, interest, taxes, insurance, and association fees totaled $3000/month, the lender could require up to $18,000 remaining after the transaction!

And if you own other properties, make sure your i’s are dotted and your t’s crossed. That’s a huge red flag in today’s lending market — and a sure way to get your loan declined! If you own a rental property, have the lease handy. A lender can require proof of the monthly amount deposited to your account for the past 12 months.  If the rental property is within 55 miles of the property you’re buying, it has to make sense. If you’re buying a $250,000 townhouse to live in, don’t want to have a $1,000,000 rental!

Although lending guidelines are tough, interest rates are at historic lows.  And there are great deals out there. It’s an ideal time to buy. Yes, the days of the amateur investor are gone. But if you know what you’re doing…and have the proper guidance…you can really make a killing in this market!