Creative financing techniques for home buyers and sellers have just gotten their biggest boost in years. The federal government has flashed the green light to thousands of savings and loan associations to offer second and even third mortgages and deeds of trust.
That decision could open up billions of dollars of highly flexible loan funds that have been unavailable to consumers. It could also directly help you sell your current home, or buy a first home, despite today's high tough real estate market conditions.
The keys to using second mortgages or deeds of trust are to understand what they are and how they solve problems.
"Seconds" aren't half as complex as some people make them sound. They are simply loans secured by property that already secures an earlier loan -- the first mortgage or deed of trust. A first loan gets paid off first in the event of a foreclosure; seconds and thirds come next.
Until the Federal Home Loan Bank Board's regulation change last week, federally chartered S&Ls wouldn't make loans to home buyers unless they were applying for first mortgages or deeds of trust.
That meant that generally you couldn't ask your neighborhood thrift institution for "creative financing" help in a pinch. Now you can -- and if the answer from the loan officer at the S&L is still "no," it won't be because the federal government has tied his hands.
Here are just a couple of the innovative solutions that second loans can provide for sellers and buyers.
Let's say you've got a home that has risen sharply in value since you bought it -- from $50,000 to $95,000 -- and it's even got an assumable $35,000 mortgage at 8 percent on it. (Your loan is always assumble with no rate charge if its an FHA or VA mortgage, and it's likely to be so if it's one of the $56 billion worth of loans owned by the Federal National Mortgage Association.)
The problem is that almost no prospective buyer of your house can come up with the $60,000 in cash required to step into your shoes via an assumption of your mortgage ($95,000 price minus $35,000 loan). Theoretically you could assist a buyer on your own by deferring payment on some portion of the $60,000 -- that is, "taking back" a second mortgage of $30,000 to $40,000. But let's say you can't afford to. For your own financial reasons, you need to walk away from the sale with most or all of the $60,000 in equity due you.
Here's where some timely help from an S&L or savings bank could make your sale go. Under the new regulations, a federally chartered S&L could provide the "purchase money" second mortgage or deed of trust that cuts your buyer's down payment from $60,000 to perhaps $20,000.
The interest rate on the purchase-money second will be far higher than on the 8 percent first mortgage -- perhaps 16 percent or more. But the average interest rate paid on the two loans should be in the 13 percent range -- making your buyer's monthly payments considerably lower than he or she would be charged for a new, $75,000 first mortgage at 15 percent.
If your buyer didn't have the full $20,000 down payment needed for the transaction, he could consider borrowing $10,000 from a relative, an investor, or even from you. The note for the $10,000 could take the form of a short-term third mortgage secured by the property, but shouldn't be recorded as such until after the settlement of the "piggyback" assumption-plus-second mortgage transaction.
Some S&Ls might object to your buyer taking over the house with just $10,000 in equity up front; delaying formal recordation of the third for a week or two should avoid most hassles.
Here's another, related form of creative financing available from S&Ls which are shaking off their old, conservative lending policies: wrap-arounds.
The Milwaukee-based Mortgage Guaranty Insurance Corp. -- better known as MGIC or Magic -- says nearly 100 S&Ls around the United States now offer "wraps" to buyers and sellers at low interest rates.
For example, the Lincoln Service Corp. of Louisville, Ky., a S&L subsidiary, provides a 10 7/8 percent interest rate on specially structured new loans that require only 5 to 10 percent down payments. The loans "wrap-around" assumable, existing 8 and 9 percent FHA and VA mortgages.
The new buyer takes over the existing loan and gets additional down payment funds necessary to cover 90 to 95 percent of the house price. The purchaser pays the S&L 10 7/8 percent on the entire debt, just as he or she would with any new loan. The S&L sends regular payments on the assumed FHA-VA loan to the original lender.
However, since those payments are at an 8 to 9 percent rate and the S&L is collecting payments at 10 7/8 percent, the wraparound lender pockets the profits from the rate "spread" every month.
The only loser in the deal is the original FHA-VA lender.