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80/20 Loan Question


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I have been preapproved through a broker for two 80/20 loans. The broker has said that he believes that with my credit I may be turned down for the better of the two loans because of collections from three years ago that I settled earlier this year but he submitted it to see if it goes through. My credit scores are 650, 662, 665. I have about 5 open lines that are current without any delinquency that have all been open for at least a year. I have a mortgage loan for a vacant lot that I purchased in May of this year with the intent to build on it but decided not to.

The first loan he preapproved me for is a standard 30 year fixed rate of 6.25% for the 80% first loan and 9.375% for the 20% second. The other loan that he submitted is one that is composed of a 2/28 ARM with a 1 year prepayment penalty and a rate of 7.25% for the 20% loan along with a 10 year I/O with an interest rate of 11%. He says that this is not a bad loan and that in a year when the collections are older I will be able to refi and get a better loan product. He feels this loan is a sure bet and wanted me to submit it in order to make sure I get financed.

My questions are: Is there any truth to what he is saying and is this about where my loan rate should fall?

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A credit requires that Charge offs be four years old...

Pre-approved means nothing. What counts is what the underwriter says when it is time to approve the loan. They will not approve an A-credit loan with charge-offs less than four years old.

He is giving you a song and dance. (Also known as bait and switch.)

Talk to a reputable broker. He is not being honest with you or he is incompetent.

Good luck.

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If he is trying to get you a Fannie Mae loan you would have to pay all collections, charge offs, and judgements in full. It is quite simple to find out if you are approved. He needs to just run the loan through DU and get an approval. Unfortunately the requirements to become a loan officer/ broker are very lax in most states and it results in unqualified, uneducated morons being in charge of your most important financial transaction. Talk to another broker.

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Here's some additional info:

I had about 7,000 in collections from 2001 and 2002 which I finished paying settlements for in April of this year. The largest was with Sherman for about 3,000 (it was a credit card from Aria) many others were medical payments. He says that he got approvals from 2 conventional lenders through automated underwriting but was rejected by one of them when the prequal was reviewed by one of the lender's reps because of these recent derog's. He says that the last one might have the same result when it goes for manual underwriting, which he says all 80/20's must have.

I have also talked to two other brokers who have said I was approved through their auto underwriting, but I am concerned that the same problem will occur when the loan goes to their manual underwriting.

Anyone know anything about this?

Also, I have applied for the previously mentioned loans through this broker before talking to the others, is there a way to get out the broker's agreement and try for the better loans? I have not gotten a conditions sheet back yet...

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First of all, your first broker is playing salesman instead of consulant. He is giving you a rate on a loan that you don't qualify for, but sounds good. This type loan is called a conforming loan, and the rates and program are the best. Depending on a lot of factors, like $ of assets etc, you may qualify for a conforming type loan, but not the lowest rates.

The 2nd scenerio he has is more realistic, and will probably work.

Depending on your financial situation, I would suggest that you not do 1)an adjustable rate mortgage at this time. Also 2) I would suggest that you don't do an Interest Only loan.

1) rates seem to be going up at this time, and two years from now you may not qualify for a better loan. Hard to tell what the future might bring. If you can afford a fixed 30 year mortgage, and let's say in 2-3 years your credit/financial situation is such that you can get a loan with a better rate, it would be your choice, not because your adjust rate mortgage was going up 1% every 6 months or so.

2) Interest only. Same starting thought as before. Your plans at this time may be to refinance in 2-3 years, but you may not be able to or want to. National average is that borrowers refinance or purchase another home every 5-7 years, but you might not want to do that. The major downside to an I/O loan is that they are amortized (the payments are set up to be paid so that the mortgage is paid off in) 30 years. If the first 10 years are interest only, then starting the 11th year, your loan is recast (refigured) so that the payments are large enough to pay off the loan in the balance of the 20 years left on the loan. The net effect is that your payments not only go up because you are paying principal in the 11th year, but they go up because there are only 20 years left to pay off the loan.

This is why you want to work with a broker that will explain all of the options to you, not to a salesperson that is just trying to sell you on what seems to be the lowest payments/rate at this time. It can very well be that you live in an area that in 2-3 year the home values will go up 20%. then you can refinance to a loan that is much better for you, for the main reaso that your total loan will be only 80% of the value of your home. At this time I would suggest that you lock in a loan program that is safe. Payments staying the same for the life of the loan.

Charles

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