"GETTING RICH IS SIMPLER THAN YOU THINK"-MSN

[Patler]

But, the fact remains. If you put 20% down on a house, you are not likely to EVER lose that house in foreclosure. If you put down less money, the odds of having a crisis related to ownership of that property go up exponentially the less down payment you had.

I just spoke with a woman today. In her early 50's. Husband got sick, lost his job. They owe 115,000 on a 110,000 house, and their income got cut by 2/3rds... They HAD good credit. Their dream turned into a nightmare.... They WILL lose this house. He has no insurance, no job, no money and won't likely return to work. IF they had equity, at least they had something to sell. Now they have to beg the 2nd mortgage lender to let them short sale it....

It HAPPENS.

Whether or not a forclosure will happen isn't necessarily affected by how much equity you have in it. It becomes a cash flow problem. If you do not have the cash to make the mortgage payment for X months, the lienholder will foreclose. If the lady you mentioned and her husband have no income, it wouldn't matter if they only owed $50,000 on the house. If they don't make the payments thay will still lose the house eventually. The difference is that after the lienholder sells the property and recovers their costs, there MIGHT be something left for the original owner. Alternatively, the couple could make a quick sale themselves, to get out from under the mortgage, but they still would not have the house. Its lost either way.

What I did was as a young couple with my wife. If we made a mistake, we had time to recover. For us, buying the first two houses was not unlike starting a business. Both were undertakings to make money, and we really were careful in how we did it, even though it stretched us financially..

It strikes me that the people in your example have more problems than just the lack of equity in their house. Negative equity in their house, no insurance and apparently no savings of any sort, even though their best earning years may have passed. I'm not blaming them, because I have no idea what the causes may have been for the situation they are in, but they seemed to have piled risk upon risk upon risk. That is never wise, and it becomes less wise the closer you get to retirement.

I'm surprised the lender(s) didn't require mortgage payment insurance with the negative equity situation.

[retailguy]

Hear this very clearly - THERE IS NOTHING IN THIS WORLD THAT YOU HAVE THAT I WANT IF I HAVE TO BORROW MONEY TO GET IT. NOTHING.

Wait 'til your car blows up (literally--thank goodness no one was hurt), you live a couple miles from a bus stop, you have to get to work, and the insurance company gives you crap for a claim settlement. You can only borrow Dad's car for so long before he gets a little testy about it.

I've heard this excuse a thousand times. Reality - a $100 car will get you to work. There are dozens of cars just outside the city limits on an old highway with a for sale sign in them.

You can "justify" any spending if you really want to do that.

[Bretsky]

I just spoke with a woman today. In her early 50's. Husband got sick, lost his job. They owe 115,000 on a 110,000 house, and their income got cut by 2/3rds... They HAD good credit. Their dream turned into a nightmare.... They WILL lose this house. He has no insurance, no job, no money and won't likely return to work. IF they had equity, at least they had something to sell. Now they have to beg the 2nd mortgage lender to let them short sale it....

It HAPPENS.


Maybe I'm dead wrong here, but I'd be surprised if that picture was ever perfect credit wise. Owing 115,000 on a 110,000 house goes against the common sense of a solid credit borrower. It sounds like bad decisions were already made. When they go over 100% they are probably going to a high risk broker with high rates and are already in trouble.

Banks will not loan over 100% at time of purchase; these warning signs could possibly have been seen before getting into the negative.

I've did over a couple hundred home purchase loans; two have went bad. Both due to mitigating personal circumstances beyond ability to pay.

Most first time homebuyers are doing 100% financing these days. I have not had one of those go bad in five ......knock on wood....years.

[retailguy]

Whether or not a forclosure will happen isn't necessarily affected by how much equity you have in it. It becomes a cash flow problem. If you do not have the cash to make the mortgage payment for X months, the lienholder will foreclose. If the lady you mentioned and her husband have no income, it wouldn't matter if they only owed $50,000 on the house. If they don't make the payments thay will still lose the house eventually. The difference is that after the lienholder sells the property and recovers their costs, there MIGHT be something left for the original owner. Alternatively, the couple could make a quick sale themselves, to get out from under the mortgage, but they still would not have the house. Its lost either way.

What I did was as a young couple with my wife. If we made a mistake, we had time to recover. For us, buying the first two houses was not unlike starting a business. Both were undertakings to make money, and we really were careful in how we did it, even though it stretched us financially..

It strikes me that the people in your example have more problems than just the lack of equity in their house. Negative equity in their house, no insurance and apparently no savings of any sort, even though their best earning years may have passed. I'm not blaming them, because I have no idea what the causes may have been for the situation they are in, but they seemed to have piled risk upon risk upon risk. That is never wise, and it becomes less wise the closer you get to retirement.

I'm surprised the lender(s) didn't require mortgage payment insurance with the negative equity situation.

Yes it's a SERIES of bad decisions. If they only owed $50k they could sell PRIOR to the foreclosure, and pocket cash. Unfortunately, they "thought" they could pay their way out of debt with yet another loan. They never had "much" equity in the home, but they were not required to purchase disability insurance (another bad move).

Patler, I've experienced financial decisions on both sides of the fence. No one prepared me for the downside. Most of my clients would say the same.

I've handheld dozens of people through bankruptcy and losing everything. Not many have gone back into consumer debt, and most own a home now that is LESS than 25% of their take home pay.

There is a reason that the turtle usually wins the race.

[retailguy]

Maybe I'm dead wrong here, but I'd be surprised if that picture was ever perfect credit wise. Owing 115,000 on a 110,000 house goes against the common sense of a solid credit borrower. It sounds like bad decisions were already made. When they go over 100% they are probably going to a high risk broker with high rates and are already in trouble.

Banks will not loan over 100% at time of purchase; these warning signs could possibly have been seen before getting into the negative.

I've did over a couple hundred home purchase loans; two have went bad. Both due to mitigating personal circumstances beyond ability to pay.

Most first time homebuyers are doing 100% financing these days. I have not had one of those go bad in five ......knock on wood....years.

perfect? NO, but probably good enough for a loan from your bank. You wouldn't have done the second refi, but otherwise, you'd have been proud to have them as a client.

You have just emerged from one of the best 5 year track records for real estate in a long time. As I said before, you deal with the "cream of the crop" in terms of borrowers. If this market continues, you'll see a rise in your late pay rates, and an increase in foreclosure activity. Yours will never be very high though, for the credit risk reasons we've discussed.

New Century did go broke though, it's NOT a mirage. The secondary market does foreshadow to a small degree what happens in the rest of the industry.

Lets check back with this discussion in a year or two. We'll see what happens.

[Bretsky]

Hear this very clearly - THERE IS NOTHING IN THIS WORLD THAT YOU HAVE THAT I WANT IF I HAVE TO BORROW MONEY TO GET IT. NOTHING.

Wait 'til your car blows up (literally--thank goodness no one was hurt), you live a couple miles from a bus stop, you have to get to work, and the insurance company gives you crap for a claim settlement. You can only borrow Dad's car for so long before he gets a little testy about it.

I've heard this excuse a thousand times. Reality - a $100 car will get you to work. There are dozens of cars just outside the city limits on an old highway with a for sale sign in them.

You can "justify" any spending if you really want to do that.

completely agree

[GrnBay007]

There is a reason that the turtle usually wins the race.

There's NO reason to bring Ted Thompson into this discussion!!
:P :P :P :P


Interesting points of view, btw.

[Bretsky]

perfect? NO, but probably good enough for a loan from your bank.


You are probably right; I'm surprised at some of the no money down stuff that gets approved these days. And I'm the eternal optimist so if I'm surprised then the deal has some hefty risk.

[i]You wouldn't have done the second refi, but otherwise, you'd have been proud to have them as a client.


Anybody who goes over 100% equity is making a huge mistake; that's why I questioned the credit as I'm surprised good credit people would get roped into this. It's a recipe for disaster nearly all of the time.


You have just emerged from one of the best 5 year track records for real estate in a long time. As I said before, you deal with the "cream of the crop" in terms of borrowers. If this market continues, you'll see a rise in your late pay rates,

I'll openly admit that I already have seen the raise in late pays. And I've did more counseling of customers in helping them make it the past year as opposed to the first four

[retailguy]

These people, not surprisingly are not bright (intellectually). HS diploma's, worked blue collar their whole career, but very hard workers. They rely on, and believe, the advice they are given.

Friends told them, debt consolidation was a great move. Friends and their banker told them they could buy a house with 5% down. But, NO ONE, told them how to budget, or that they couldn't go out to eat, or that borrowing for a washer/dryer was not smart.

Reality - If they had put 20% down, and not refinanced for debt consolidation, they could liquidate the house and probably would be ok. However, now, they have to fight because they didn't plan. Hey, I'll be the first to admit that life happens, but good planning helps with that. Bad planning ruined that and leaves them with no options.

This is the danger of not putting 20% down. The downside doesn't compensate for the risk. That's my main point....

[retailguy]

There is a reason that the turtle usually wins the race.

There's NO reason to bring Ted Thompson into this discussion!!
:P :P :P :P


Interesting points of view, btw.

Isn't this site becoming a dissertation on the "turtle"? :P

[retailguy]

Anybody who goes over 100% equity is making a huge mistake;

I'd just change one thing - Anyone who goes over 80% equity is making a huge mistake. :P

[GrnBay007]

I'll put my two cents in....no need to borrow for that!! :P

I think it'd be great to be in a position to put 20% down. When purchasing my second house.....first on my own, I didn't have 20% to put down on the purchase. I don't think it's a must in order to succeed. I think it's all in what you do and how you handle things after the purchase. I took a 30 year loan and now have a plan in place to have it paid in 15 years...no later than 18 yrs. One thing I don't think has been mentioned for homeowners and I'm a firm believer in it is having a certain amount of cash on hand for large repairs/expenses. That is an area people don't like to think about and don't plan for.....who wants to? But if something should happen it prevents from using credit or taking a home equity loan out.

[MJZiggy]

That's very true 007. When you least expect it definitely applies. I already have an inventory of the only things in this house that haven't broken yet and am putting aside the money to fix them now so I won't have to put repairs on the credit card later.

[oregonpackfan]

I'll put my two cents in....no need to borrow for that!! :P

I think it'd be great to be in a position to put 20% down. When purchasing my second house.....first on my own, I didn't have 20% to put down on the purchase. I don't think it's a must in order to succeed. I think it's all in what you do and how you handle things after the purchase. I took a 30 year loan and now have a plan in place to have it paid in 15 years...no later than 18 yrs. One thing I don't think has been mentioned for homeowners and I'm a firm believer in it is having a certain amount of cash on hand for large repairs/expenses. That is an area people don't like to think about and don't plan for.....who wants to? But if something should happen it prevents from using credit or taking a home equity loan out.

007,

As you probably know, many financial planners recommend people keep an emergency fund worth 3-6 months salary to handle unexpected financial emergencies be it job loss, loss of car, etc.

It sounds like you and MJZiggy are already observing those guidelines.

[Bretsky]

Anybody who goes over 100% equity is making a huge mistake;

I'd just change one thing - Anyone who goes over 80% equity is making a huge mistake. :P

That we will never never agree on. Too extreme IMO and most benefit from howe ownership and reality is very few have 20% down til second home

[Bretsky]

I'll put my two cents in....no need to borrow for that!! :P

I think it'd be great to be in a position to put 20% down. When purchasing my second house.....first on my own, I didn't have 20% to put down on the purchase. I don't think it's a must in order to succeed. I think it's all in what you do and how you handle things after the purchase. I took a 30 year loan and now have a plan in place to have it paid in 15 years...no later than 18 yrs. One thing I don't think has been mentioned for homeowners and I'm a firm believer in it is having a certain amount of cash on hand for large repairs/expenses. That is an area people don't like to think about and don't plan for.....who wants to? But if something should happen it prevents from using credit or taking a home equity loan out.

Good points

[Partial]

Anybody who goes over 100% equity is making a huge mistake;

I'd just change one thing - Anyone who goes over 80% equity is making a huge mistake. :P

That we will never never agree on. Too extreme IMO and most benefit from howe ownership and reality is very few have 20% down til second home

What constitutes equity?

[MJZiggy]

Equity is how much you owe vs. how much the house is worth. The market value of the house goes up, you have more equity.

[GrnBay007]

The difference in what you owe on your home and what it's worth.

[Bretsky]

Anybody who goes over 100% equity is making a huge mistake;

I'd just change one thing - Anyone who goes over 80% equity is making a huge mistake. :P

That we will never never agree on. Too extreme IMO and most benefit from howe ownership and reality is very few have 20% down til second home

What constitutes equity?

When you buy a home equity would constitute the difference between the purchase price and what you owe on the home loan.

So if you buy a house for 120,000 and put 20% down (24,000) you have a loan for 96,000 and a beginning equity position of 24,000.

Now if you own a home for a few years, your equity position increases as you pay the loan down and the value of the home goes up.

What RG was referring to is he feels it's a mistake for anybody to buy a home with a Loan (96,000 in above example) to Value (120,000 in above example) Ratio of over 80%.

He believes people should save up enough to put 20% down on a home and should not buy one sooner. Once you get to that level the odds of a person losing their home are very very minimal.

I've seen too many people succeed by putting either no money down or 5% down and then sell the home and use the sale proceeds to buy their next home to agree with his belief there.

But RG correctly points out I'm mainly dealing with strong buyers

Of course I'd argue if they are strong buyers than the 20% down rule should be tossed right out the window.

Cheers,
B