The lending industry has a lot of products including energy-efficiency, interest-only and VA and FHA loans to make homebuying easier for first-timers. Almost all mortgage loans are related to the value of the house, yet most refinance products are used by homeowners not to put back into their houses, but to eliminate credit card debt, send kids to college, and pay other expenses.
It's easy to understand that refinancing is a different kind of loan and a purchase loan, except that the same lenders offer both kinds of loans.
That begs the question -- why can't lenders consolidate debt into purchase loans?
This may be the next step as the industry watches the fragile first-time homebuyer struggle to qualify for a mortgage loan with a mountain of student debt on their backs.
Finding accurate figures for student debt loads is frustrating. A 2002 survey of recent graduates by student loan company Nellie Mae found that the average student loan burden for a bachelor's degree was $18,900, up 66 percent from five years earlier. Yet, another survey found that the average cost of college increases at twice the rate of inflation, which means that public colleges cost an average of about $13,000 a year and private schools cost about $28,000. Add medical, law or other post-graduate studies, and student debt can reach the six figures.
That's a concern, but not one for mortgage lenders, suggests David Reed, author of Mortgages 101 and Who Says You Can't Buy A Home!
"Well ... at first glance, a refinance will typically have some equity in the property," says Reed, "and most only allow up to 80 percent of the value of the home to be refinanced into a new mortgage. Equity is important for first lien lenders for lots of reasons and one of them has to do with the ability to recover their asset should the borrowers default."
Value: + $100,000
Current loan amount: - $50,000
Max cash out loan amount: - 80 percent of $100,000 (or $80,000)
"The lender still has some breathing room, albeit reduced to only a 20 percent equity position," says Reed.
Now look at this scenario:
Sales price: $100,000
Student loans: $20,000
Loan amount: $120,000
"The lender has no equity, and if something bad happens like foreclosure ... ," says Reed.
"Granted, there are equity lines that can go up to 100 percent of the value of the home, but they're in a second lien position. Should a foreclosure occur, the original lien holder would get first dibs at recovering their equity. Even still, both liens are secured by real property, typically up to 100 percent of the sales price of the home. A loan issued above the value of the house against secure and non-secure property is a horse of well, a different color."
Bottom line? "If I were a loan designer at a mortgage operation, I would not make a purchase loan above the sales price," says Reed. "On the other hand, I might not have a problem with a loan that had 20% down payment, the lender paid off the student loans with that amount and issued a 100 percent loan."
Published: February 7, 2006
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