Review of Yahoo! Finance Article “Alternatives to putting down 20%”

We wanted to post a couple of comments and corrections on an article that recently appeared in the finance section of Yahoo!.

Our first small issue arises when the author claims that Mortgage Insurance (MI) can be cancelled at any moment once a borrower reaches 80% loan-to-value. Usually FHA-insured loans can never be canceled, and if they can, MI loans require a minimum of 11 years.

A more serious disagreement with the article occurs when a quoted opinion of Ms. Amanda Monette of Rockford Bank and Trust was not qualified. She was quoted with saying that a potential borrower can expect preferential treatment because a lender  “knows you and your family and knows that you will be a good risk”. While this may work with smaller banks that only have a few branches, it is extremely naive and misleading advice for those borrowing from giants like Bank of America or Wells Fargo. These banks sell loans on the secondary market and make underwriting decisions based on their investors’ guidelines. Anyone at Chase bank “making exceptions” due to personal relationships will most likely lose their job. Seeing as most readers of Yahoo Finance will be dealing with the bigger banks of the world the author of the article should probably have clarified this point and offered more practical advice. Here is a suggestion of how Ms. Monette’s interview should be presented:

Try your own bank first. This is advisable only if you have a good relationship with a small bank, says Amanda Monette, a real estate lending officer with Rockford Bank & Trust in Rockford, Ill. “You may have a better shot of getting a loan, even if you don’t have the money for a down payment.”

If you do all of your banking at your local bank, including investments and a savings account, Monette says this will work in your favor. “Extra points,” she says, “if your parents, grandparents and other relatives bank with the same institution as you do. A banker may be more willing to go the extra mile because he or she knows you and your family and knows that you will be a good risk.” It is important to understand that this strategy only works if your bank keeps the mortgages on their books and does not follow Fannie Mae or Freddie Mac guidelines. Unfortunately this approach to banking (commonly referred to as “common sense banking”) is virtually extinct and you may have a hard time finding a bank like Rockford Bank and Trust near you but it will be worth the effort to find one.