Mortgage loans at 110% of the value of the home?

[Sheepshank]

Locally on the radio, I've been hearing this announcement every morning. They tout you can buy a real fixer upper and use the extra money to fix it up. What the frack...I thought this was one of the problems with the lending industry and is not longer allowed.

[dionysus]

1. i don't think it's uncommon. it's sometimes done during refinance as a way to consolidate debt.

if you had a 100k house at 6% interest, and 10k or credit card debt at say, 30% interest, it you refinanced your mortgage and made it 110k at 5%, you'd save money on the credit card interest.

the option is available but it's not for everyone. i looked into that when i refinanced my mortgage, but i didn't do it.

[jtuck004]

2. It is one of the problems and it is still allowed. n/t

[Kurt_and_Hunter]

3. If the money is used for improvements it is self collateralizing, and is fine

The security of the mortgage can even be increased thereby.

If it is not used for improvements to the property that' s a whole 'nother matter.

[itsrobert]

4. If it's a fixer upper and you put the 10 percent into the home

The value of the home goes up to what the value of the loan is or maybe more. But maybe less if the market keeps falling.

[Xithras]

5. The problem was those "zero down" 110% loans.

The big problem, in the past, was that you had people taking out 110% loans, and then immediately using that 10% as their down payment. They were walking into homes without spending a dime, often with little to no verification of income, and creating situations where buyers had no financial investments in their "instantly" upside-down homes.

Things have changed a LOT. You can still get 110% loans, but you'll need a good 10% down to get the bank to give it to you. You can also expect to have your credit scoured, and your job history thoroughly checked.

Technically, putting 10% down and then getting 10% back is still a financial wash for the home buyer, but requiring the money up front ensures that the buyer actually has money to pay back. The other background checks ensure that the buyer will have the money to KEEP paying it back.

Besides, ideally, if a 110% loan is being pulled for a fixer-upper, spending that 10% on repairs should increase the value of the home. If you do it right, the real LTV should only end up at 102% to 103% when finished.

[FBaggins]

6. It doesn't have to be a bad thing.

If, for instance, the "fix up" portion is a mandatory part of the deal. Lots of foreclosed properties have issues that, if fixed, would add far more to the value of the home than the cost of the work. So the final loan/value ratio could be reasonably conservative.

It's similar to an FHA Title 1 home improvement loan.

It could also make sense if the home is a foreclosed property owned by the lender. They may be willing to take the risk implied by the excess leverage because they already have a loss on the books.