The Mortgage Brothers Show
What You Need to Know About Combo Mortgages
*The following transcript has been edited for clarity.
Eddie Knoell — I’m Eddie.
Tom Knoell — And I’m Tom.
Eddie — Welcome everyone. This is the Mortgage Brothers Podcast and today we’re talking about combo loans.
Tom — Hey, make that a combo, would you? Give me a combo loan. What does that mean?
Eddie — About 10 years ago people would call up asking for a mortgage and they’d say, “Yeah, I’ll take an 80, 10, 10, yeah, I’ll take 80, 15, 5 right? And actually, seriously, I just got this. I’m working on a borrower’s file. It was two days ago. And do you know what they’ve got, and it’ll be a 5% down program, they’ve got mortgage insurance. And she’s like, “Hey my, my relative, I can’t forget what state she’s in. Said I had to ask you for like a, what was it like an 80, 15, 5 you got one of those?
Yeah. 80, 15, 5. So back in the day they were lot more prevalent. But trying to avoid private mortgage insurance, and so they were, you could go up to, you can do an 80, 20 which was, you know, no more, no down payment. It was 80. So again, folks, when you’re listening to us talk about this, these combo loans, for many of you, you remember those days of doing second mortgages.
For those of you who don’t know what we’re talking about there’s a first mortgage that we do and there is second mortgages, which we haven’t talked about for a long time. Second mortgages aren’t as popular.
Tom — So can I just throw this out? So the first and seconds, the reason why people heard about the first and seconds for so many years, many years ago was because of getting around down payments or private mortgage insurance.
And that’s kind of gone away. So really, what we’re talking about seconds for is when we start getting into higher loan amounts.
Eddie — Most cases when we talk about this is when someone needs a loan above the maximum conventional loan limit of $484,000.
Tom — Yeah, otherwise, because we’re not talking seconds for down payments or to alleviate private mortgage insurance anymore, we’re talking about seconds because you’re trying to bridge a gap. You’re trying to get a little bit more money. That’s why we’re talking seconds.
Eddie — Correct. Now that being said, if anyone has a loan below $484,000 we can go right into that this product, the combo loan product. We basically have two different ways to do the loan. This is a second mortgage behind a first mortgage.
Tom — So can we just give it a give an example.
So a borrower, Bob, comes to us and he has a house that he wants to buy for $550,000, okay. He wants to put a, actually, let’s just make it $600,000 and he wants to put 10% down. Okay, so six, that’s sixty thousand, so what’s left is $540,000.
Eddie — So because the maximum conventional loan limit, let’s just for easy math say is $484,000 he’ll need to have a second mortgage of $56,000 so we’ll do a first mortgage at $484,000, this is a conventional loan. Then we’ll do a small second mortgage, $56,000 and he brings $60,000 for down payment. Okay, so that’s someone who’s looking for that high loan amount, which is in most cases, someone who’s looking for 550, 600, 700, 800, someone who really looking for the second mortgage. You know what? You and I are talking today. It works well for someone who has below a million.
There’s two different cases that we’ll use this loan. It’s either we are going to close your loan, like we did in that scenario, we’re going to do the first mortgage and then we’re going to put that second one behind it.
If a borrower wanted… well let’s just say a borrower didn’t need the home equity line of credit when they actually went to buy the house, but they wanted a home equity line of credit open afterwards. Let’s just say that they buy it and afterwards they wanted to have the ability to have a home equity line available. We can actually tee it up, get it all ready, get it pre-approved, we’ll close on the loan and the second mortgage would be actually activated and opened either days, or a week or two after we closed the mortgage.
So anyway, those are the real two complications that we encounter when doing this.
Tom — Okay. So, case number one is that they actually need the second in order to purchase the home, they’re buying it for $600,000 they’re putting $60,000 down and you’ve got a first and a second. They close on their house and the minimum down is 10% down. Now they could’ve gone jumbo. So when we talk about first and second mortgages, what we’re really talking about, you know, over conforming loan limits AKA jumbo. But as you were joking Ed, this isn’t like jumbo jumbo. Jumbo jumbo can get you, you know, 1 million 2 million, 3 million. I don’t know how much more it goes beyond that, but this product is a really good product for those that are probably under a million and that have a credit score of 680. This then has the ability to have a HELOC, or a home equity line of credit option afterwards.
So, if this is a bit confusing you can call us to get some of those details, but I just wanted to make sure I threw that out there.
Eddie — Yeah. And I’m going to add that one of the things I like about the loan is that the rules are less strict on this product than on a jumbo loan. One of the reasons why someone would do a second mortgage with us is because the second mortgage we have will not follow the normal conventional rules in regards to foreclosures, short sales, and bankruptcies. Jumbo loan financing rules are so strict. In some cases, you can never have a foreclosure or short sale in your history ever.
Tom — Okay. So that’s a very, very key point that this is not only a great product pricing wise but it’s also a great product because of the way that it handles people’s credit events.
You don’t have to be perfect like you do in a jumbo loan scenario. You can have a flaw here or there. You’re not getting dinged pricing wise, you’re just following a much, not much, but you know, a less strict underwriting standard just like they do in the conforming loan limit world. So I think that’s a very, very big point.
Eddie — And this can be done on a refinance as well. So it’s purchases and refinances.
Tom — I like it. Okay. Any little tidbits about important things to know there? There is a limit on this second, right?
Eddie — $500,000.
Tom — You can’t go above $500,000.
Eddie — So, you mentioned the 680 credit score requirement, 90% loan to value. So, everybody the banks want to have, they want 90% or they want 10% of equity to be in the home.
Tom — And just to give someone a real quick snapshot of what it would look like today, if you were buying that $600,000 house you would have a conforming loan, a $484,000 probably at about 3.8% interest.
Yeah. And for the second of $64,000 I think you said it’d be probably close to, you know, 44 depending on the interest. I was going to say 5.7% to maybe 6%, yeah, something like that. That’s right. It depends on your credit score. So when you look at the weighted average, you know of that, you know you’re going to be low fours, which is great if you’re in that, you know, call it five, six, $700,000 range. And we have borrowers today that we’re talking to about this. So this was something exciting, nothing earth shattering but exciting enough for us to be able to offer this up to you.
Eddie — That’s right. Of course, if anyone who has questions about combo loans let us know. That’s what we’re here for. We do this every day and we’re here to help.
Tom — That’s right. I was trying to think of something funny to say. You remember the old convenience store. Hey, if we don’t got it, you don’t need it.
Eddie — All right. Very good.
Tom — Awesome let’s call it a day. All right. See ya folks.
Eddie — Hey guys, thanks for listening to The Mortgage Brother Show. Please let us know if you have any questions you’d like us to answer on this podcast. You can email your questions to TOM@AZMORTGAGEBROTHERS.COM or yours truly at EDDIE@AZMORTGAGEBROTHERS.com and be sure to ask us for a free quote on your next mortgage. Tom and I will personally work with you and help you through the whole process.
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