Is creative financing a thing of the past?

After revisiting Elizabeth Warren's writing, I return to the topic of lending. There are ways to borrow for a house with less than 20% down. You can, but should you?


Some people seem to have never heard of the mortgage meltdown of 2007. They show up in my practice  (usually on the phone) upset and unhappy because they can’t borrow as much money as they thought they could, and the &^%*# lender wants so much documentation. They ask whether I have a reasonable lender for them to talk to.

Today, I write to the people who just walked into the world of real estate and are wondering why lending is the way it is:
In the book, The Big Short, Michael Lewis explains the details of the conversion of mortgage notes into a bond commodity. At some point in the Bubble years, the way that the bonds were rated became strongly weighted on the credit score of the borrower and less weighted on the borrower’s income and ability to repay. This created a market for mortgages with borrowers who had high credit scores. Their ability to repay the mortgage didn’t much matter. When everything collapsed around this questionable valuation of notes, the banking industry tightened their standards.

Some think they went overboard. Have they gone overboard, or are they simply protecting their investor’s assets? The truth about lending lives somewhere in between the free-for-all of the mid 00s and the tightening that started in 2007.

Yes, today there are mortgage programs for people with less than 20 percent down. There are programs with as little at 3 percent down. There are several programs available. Two examples are FHA and Mass Housing. The requirements for each of these low down payment loans vary. For example: Mass Housing has income restrictions. All of these programs have credit score requirements as well as some other underwriting requirements. Check with your lender for details. Mass housing has just introduced a 3 percent down payment loan program with no MI (mortgage insurance). Rates on all these programs are at typical market rate.

Other “creative financing” is still available, too. For example, there are combo loans available. This allows the home buyer purchasing a high end property to get a conventional fixed rate mortgage instead of a jumbo rate mortgage (which is higher.) It is done by getting two loans on the property -- a 1st and a 2nd mortgage. This way, neither loan will surpass the jumbo loan limit.

To do any of this fancy footwork, you need to have excellent credit and steady employment. You also need to be buying a property that isn’t distressed in some way (low owner-occupied condo complex, very poor condition.) Special programs, like FHA, scrutinize the condition of a property and frequently fail something that needs work. (I’ve had sellers need to repaint a garage to pass FHA muster.)

Some of you think the only way to regain sane pricing is to require 20 percent down. Yet would-be buyers have been frustrated by the immensity of a 20 percent down payment at these high prices. Are you one of those would-be buyers?