Combo Loans Are Available Again

When the mortgage industry was going wild, one
of the most useful tools was the combination
first loan and second loan.

As originators, we could use this combo loan
structure strategically, to help borrowers avoid
jumbo loan pricing, or to avoid private mortgage
insurance.

But when so many loans started to have problems,
the appetite from investors, including Fannie Mae
(FNMA) and Freddie Mac (FHLMC), diminished
for these types of loans.

We saw many loan programs evaporate, including
loans with deferred interest, many interest-only
programs, stated income loans, and the combo
loan products.

After retreating to the old standbys, the 30-year
and 15-year fixed rate loans, lenders have begun
to find acceptance of other lending programs.
These would include adjustable rate loans,
featuring fixed-rate periods of 3-, 5-, 7- and
10-years. We are also seeing some lenders
offering interest-only payment loans again, and
the combo loans.

The big difference in today's market is that
instead of the lenders pushing the envelope to
high loan-to-value ratios, we are seeing that
the combined loans are generally capped at 75%
of the value or sales price. This allows the
lender to keep the risk lower, especially since
the second loan is the most vulnerable to any
decreases in market value.

These programs can still be an effective tool
for a number of situations:

1. Sometimes a borrower is expecting to have
funds available after closing and wants to pay
down their loan balance.

If they get a fixed rate, amortized loan they
are allowed to pay extra toward their principal
balance. But the limitation is that it will not
allow their monthly payment to be recast,
which is often the goal for paying down the
loan balance. It will shorten the term of the
loan, but the payments will remain the same.

If we structure a combo loan between what
can best be described as the permanent loan
and the temporary loan, we can split the
amount that needs to be borrowed. The
advantage is that the borrower can retire the
temporary, second loan, and the first loan
can continue with payments that are appropriate
for that balance.

2. When loan request exceed the conforming
limit of $417,000, or the high-balance conforming
limit of $697,500 (in San Diego County), they
are subject to different terms, interest rates and
fees.

Many times, we can structure the loan request
so that the first loan stays at or below the
$417,000 limit, and combine it with a second loan.
The blended terms can often be more beneficial
than the terms for the high-balance loan up to
$697,500.

Alternatively, if a borrower needs a loan that
commonly falls into the jumbo loan category
(those loans that would be higher than $697,500
in San Diego County), we can structure the first
to fall within the high-balance limit and combine
it with a second loan. Again, the blended terms
may be better than the jumbo offerings.

3. You can have choices regarding the second
loans.

One choice is the fixed-rate, fixed-term second.
These are also called closed-end second loans,
and once they are originated, the payments
are designed to retire the loan over the specified
period of time. There is no flexibility to the
payment plan.

The other choice is the line-of-credit second.
These are commonly called HELOCs for home
equity lines of credit.

These are distinguished by having a maximum
loan amount approved, that may or may not be
drawn fully at time of origination. They feature
a flexible payment system, allowing for interest-
only payments or more. Also, once they are
paid down, they principal can be re-drawn again
within the maximum loan amount. In many
ways, it is like a credit card secured by your
home's equity.

It is always beneficial to have many choices to
help borrowers structure their loan requests,
and the re-introduction of the combo loan
products gives us more tools to work with.