- The Washington Times - Thursday, November 11, 2004

Q: I want to buy a house for $500,000 with no money down on a stated-income loan. One

lender is giving me a no-points, interest-only loan at 5.50 percent. Another lender is offering a first-and second-trust combo with negative amortization.

The rate on the first trust is 6.50 percent. The rate on the second trust is 1.90 percent.

I am new to this subject and find it quite confusing. Can you explain this to me?

A: Unfortunately, I cannot. I receive many similar e-mails. The writer outlines a scenario and asks for my opinion or an explanation. The problem is that because the writer doesn’t have a sufficient understanding of the program, he cannot possibly give me enough information to form an opinion or provide a reasonable explanation. Your description of these programs is insufficient and very probably inaccurate.

But I am usually able to deduce enough to make some general comments, and I can certainly do that for you. Let’s start from the beginning.

The first red flag: Why do you want to buy a home with no money down and a stated-income loan? For those who are unfamiliar, a stated-income loan requires that the borrower state his income on the application but does not require any sort of outside income verification.

I bet I know the answer. You want a loan that allows no down payment because you don’t have sufficient savings to make a down payment. You want a stated-income loan because you are unable to verify that you have enough income to make the monthly mortgage payment.

If I’m right, my initial reaction is that you are not ready to buy a house, especially one that sells for $500,000. Before you begin to talk to real estate agents, you need to establish a personal household budget that would include an affordable housing payment. Don’t assume that just because a lender is prepared to make you a loan it means you can actually afford it.

Let’s talk about these two mortgage programs that have apparently been offered to you. A stated-income 100 percent loan at 5.50 percent is surely some kind of adjustable rate. My guess is that 5.50 percent is a teaser rate that’s just going to jump up in the future.

The other program really makes me nervous. Negative amortization with 100 percent financing? This means the mortgage balance will exceed the property’s value.

What if the market turns and property values drop? It may be already starting to happen. I received an e-mail this week from a mortgage broker in California who arranged a stated-income loan for her friend. Her friend lost her job and defaulted on the mortgage. She tried to sell the house, only to receive offers for far less than the mortgage balance. That’s big trouble.

My advice: If you truly can afford to service a mortgage loan of $500,000, you should be able to save at least enough money for a 5 percent down payment in short order. If not, re-evaluate your household budget and come up with a more compatible plan of action.

But, if you’re dead set on obtaining stated-income 100 percent financing, be prepared to pay for it. I can tell you that the terms you describe are not how they really are.

Henry Savage is president of PMC Mortgage in Alexandria. Contact him by e-mail ([email protected]).

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