I have an acquaintance who heavily touts his down payment assistance programs in order to lure in first-time buyers – only to then aggressively push those buyers into FHA loans with high rates (and high profits for my acquaintance).
My acquaintance says: “down payment assistance loans don’t work for most borrowers, and I can’t make any money from them either…”
But – his razzle dazzle advertising works – even though it misleads borrowers into thinking they can easily buy homes with no money down.
I tell this story because deceptive advertising like that always proliferates when rates go up and loan officers get more desperate for business.
Seasoned Agent Mislead By “No Doc” Flyer
Today’s environment is case in point, as a seasoned agent recently forwarded a very deceiving flyer she received from a loan officer and asked me: “Are ‘no doc’ loans back?”
I said no (and will explain why below), and she said this:
“….the information is deceiving and can lead to delays which as we all know can, will and have lead to losing the deal.
It can be especially deceptive when working with first-time-buyers who have put their trust in you, but who lack the understanding of the lending process and only see what is “advertised” – when as an agent you know it’s deceiving; [these lenders] can be a lose-lose for an agent trying to support their client.”
No Doc” vs. “No Tax Return” vs. “DSCR” vs. “Bank Statement” vs. “Hard Money”
Here are some different categories of “documentation requirements” for mortgages. Typically, the more docs required, the lower the rate.
- NO DOC LOANS. There are no “no doc” loans available other than good old fashioned “hard money,” with high down payments (25% or more), high rates and high fees (several points at best). Hard money lenders consider only the property and the down payment – and nothing else.
- NO TAX RETURN LOANS. Fannie and Freddie offer these loans for certain “W2” (salaried) borrowers with clean files, and the rates are the same as they are for any other borrowers. I should add that most “non-QM” (Non-Qualified Mortgage/quasi subprime) loans, set out below, do not require tax returns as well, but their rates are much higher.
- DEBT SERVICE COVERAGE RATIO (DSCR/RENTAL INCOME) LOANS. These are non-QM loans that allow investors to use only future rents against the property to qualify. They are better than hard money loans when it comes to terms, but not by much.
- BANK STATEMENT LOANS. These are loans that allow borrowers to use only the deposits into their bank accounts for income documentation (total deposits over 12 months/12 = monthly income). These too are non-QM loans and the terms are better than those associated with DSCR and hard money loans.
- FULL DOC LOANS. “Full doc” generally means that borrowers have to provide two years of tax returns, W2s, all investment and bank account statements, paystubs, P&Ls (if self-employed) – and more. All FHA and VA loans are “full doc,” as are most jumbo loans. Full doc jumbo loans offer the lowest rates of all – for strong borrowers.
The rate spreads for the above loans range from the high 2% range for “full doc” jumbo loans all the way up to 9% for “hard money” loans – depending on down payment, points and fees. But, the main takeaway is that borrowers should know that every loan other than “full doc” and the Fannie/Freddie “No Tax Return” loan will come with higher rates, higher fees and larger down payment requirements.
Beware Of Interest Rate Quoting Manipulations!
Something else I see loan officers do all the time (and the flyer I mention above is no exception) is use every trick in the book to make their rates seem much lower than they are.
These include using lower “start rates” (with shorter fixed periods) as the advertised rate, and also quoting rates that are artificially low because they require substantial points and fees.
Yes, the “Annual Percentage Rate” (APR) requirements are supposed to reflect the actual rate, but lenders are very skilled at employing start rates and high fees in a way that can make very expensive loans seem compelling at first.
I will do an entire blog on this next week, but leave it at this for now.
In any case, borrowers and agents alike should be particularly careful when evaluating advertising in a market like this.
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