Tuesday, March 2, 2010

Financial Matters

Several people have recently asked how we managed to finance the Delaney and Cheney house purchases, and what kinds of mortgages we have set up.  As with everything else on 62nd Street, it is an interesting story.

When we bought the McGahey House back in 2003 (the one that was infested with rats), we got what we later learned was called a NINA loan (No Income, No Assets).  Basically, we said to the bank "We want to borrow $300,000" and the bank sent us a check. It was literally that easy - no verification of income, no checking of our assets, no proof that we actually owned the Fulton Street house.  When the mortgage crisis hit, it made sense to me how so many people could have gotten in over their heads - Tom and I had been very careful to make sure the numbers pencilled out, and that we could afford to do what we were doing - but we could easily have borrowed way more than we could have afforded.

Fast forward 7 years to the Dealney House purchase, and it's an entirely different environment.(I'm leaving the Cheney Cottage out of this, since we paid all cash for that house - all $17).    Banks wouldn't even talk to us.  It seems that, in the present environment, bansk refuse to finance any house purchase where the house is sub-standard.  We were told that we couldn't get a loan until the Delaney House had new plumbing, new wiring and a new foundation.

So our mortgage broker introduced us to Spartan Mortgage in Sacramento - a private mortgage lender.  This company specializes in financing privately financed deals.  We knew that, with private financing, we would pay a higher interest rate - but we figured we could buy the house, then do the restoration and move, and then refinance with a traditional mortgage, and pay off the private financing.

We couldn't get the terms sheet form them for quite some time, though, but we finally did get it.  The terms of the loan they proposed were unbelievable to me:
  • The loan rate was 13%
  • There wer 10 points on the loan
  • There was a pre-payment penalty amounting to $50,000
  • Additionally, they wanted us to borrow enough to cover both the purchase price as well as enough to cover ALL the improvements.  We asked why: we are doing the work ourselves. They sid that, if something happened to us, they needed enough to complete the house. We said, no, the house is ALREADY worth what we're paying for it, so you could easily sell it and recoup your money, but they said they didn't work that way.
So the total loan they were going to give us was for close to $500,000.  But we wouldn't actually get that money - we would "draw it down" as we needed it - but we would pay full interest on it from day one.  I asked, "So wait, you keep the money in your account, earning interest, and we pay interest on it too?" And they said "yes"

Whatever happened to usury laws?

We got pretty close to walking away from the whole deal - there is no way we could afford this type of financing.  But then, like the final scene of It's a Wonderful Life, our friends stepped forward. We asked several people if they might be interested in doing a private loan, and surprisingly, several people said yes.  Then one mystery benefactor said that he could, in fact, lend us what we needed to complete the purchase.  

We're pretty lucky.  We have each other, great kids, and wonderful friends who are willing to help us out when we needed them.  It's yet another gift we've been giving by the 62nd Street project - a reminder of how much love we have in our lives.

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