Tuesday, September 18, 2007

The 80/20 gets 86'ed

Word on the street is that Wells Fargo is no longer offering the 80/20 loans that many first time buyers use.
(For those of you that don't know what an 80/20 is: It is a first mortgage that pays for 80% of the house and a second mortgage that pays for the other 20% of the hosue. It is used to avoid paying the pesky mortgage insurance.)

That's not such good news. Getting a mortgage is getting harder. Other lenders are still offering 80/20s, so that's still a possibility, but options are drying up.

I think one of the reasons Wells Fargo stopped offering this is that it is actually a pretty risky kind of loan. They are financing the house 100%.
If the buyer goes into foreclosure, the first mortgage gets paid off first and the second mortgage gets extinguished. So all banks that do second mortgages take a risk-- the loan is tied to the property, but if the first mortgage goes bad, they take the house and the second mortgage is left with nothing.

How did we get here? Well, they started doing 80/20s in the past 5-10 years. They started doing them because who in the heck can save up $40,000 as a downpayment on a $200,000 house? No one.

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