Home buyers with high credit scores but minimal down payment cash are about to get a new, potentially helpful mortgage option.
It comes with a catchy name -- the SingleFile low-down-payment mortgage. But it also comes with some wrinkles you need to know about up front. SingleFile loan down payments can go low, all the way to zero. Maximum mortgage amounts can extend well into the jumbo category: $650,000.
However, you need to have a Fair Isaac Corp. (FICO) credit score of 700 or higher, a tough hurdle for some buyers short on cash. You also need to have your overall credit picture in good order, with a total monthly household installment debt-to-income ratio no higher than 45 percent. The SingleFile plan is targeted solely at the credit elite.
Now for some complexities: SingleFile loans all carry private mortgage insurance (PMI). But rather than paying monthly premiums to the lender that aren't deductible against your federal income taxes, the cost of the insurance is built into the interest rate on the mortgage itself. This renders the premiums fully deductible -- as interest -- at tax time.
That feature, in turn, raises the rate you pay on the mortgage by one-quarter of a percentage point or more. It also negates one of the key consumer protections associated with most private mortgage insurance: Your federally guaranteed right in many circumstances to stop paying premiums when your equity in the property equals or exceeds 20 percent. On a SingleFile loan, there is no insurance policy to cancel.
So what is so intriguing about this new loan concept? Why even consider it? The answer is that a SingleFile mortgage may well be less expensive for people who have little or no down-payment money and who are considering a "piggyback" plan combining a first and second mortgage to swing the purchase of a home.
Piggyback plans, which are extremely popular in many markets, generally provide a conventional first mortgage or deed of trust equal to 80 percent of the cost of the property. On top of that the lender extends a second mortgage or home equity credit line of 10 to 20 percent of the house price.
The most common version is the "80-10-10 piggyback," which combines an 80 percent first mortgage with an equity loan equal to 10 percent of the cost of the home. Buyers make a 10 percent down payment; the lender charges no private mortgage insurance premiums. Normally, mortgage insurance is required by lenders whenever the down payment on a home loan is less than 20 percent.
But piggyback plans come with their own drawbacks. Two separate loans on a house, with two separate monthly payments, are more cumbersome than a single loan. The interest rate on the second mortgage often is higher than what a consumer with excellent credit could locate independently in the market. The interest rate may be variable and subject to unpredictable increases. Piggyback second loans also frequently carry unfavorable terms such as balloon payments and prepayment penalties.
The SingleFile mortgage plan, scheduled to be rolled out to hundreds of lenders nationwide this month by Milwaukee-based Mortgage Guaranty Insurance Corp. (MGIC), is designed to underprice most piggyback plans. MGIC is the largest-volume home mortgage insurer in the country, and thus its regular PMI competes directly with piggyback loans.
Consider this example: You want to buy a $200,000 home, but can only afford a 5 percent ($10,000) down payment. Using a typical piggyback plan, you might opt for a $160,000 (80 percent) 30-year conventional fixed-rate mortgage at 6.25 percent. The lender might also provide a $30,000 piggyback second loan at 7.75 percent, bringing the total debt on your property to $190,000. You would make a $10,000 cash down payment. The combined monthly principal and interest payments on the two loans would come to $1,268. Despite the small down payment, the lender would not require you to take out mortgage insurance.
Now look at how the new SingleFile plan stacks up. There would only be a single 30-year, fixed-rate first mortgage of $190,000. The rate on the note would be higher than the competing piggyback first mortgage -- 6.625 percent. But since there is no higher-rate second note attached to the deal, your monthly principal and interest payments are $51 lower -- $1,217, vs. $1,268.
MGIC claims its program underprices directly competitive piggyback plans in part because the company has cut its rate premiums by 40 to 65 percent for borrowers with high credit scores. Where do you come out? If you fit the high-credit, low-down-payment profile, check out both programs and crunch the numbers for your specific situation. At the very least, SingleFile should give you an alternative to both piggyback plans and loans with standard, nondeductible mortgage insurance -- possibly at a lower monthly cost.
Kenneth R. Harney's e-mail address is email@example.com.