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Subordinate Financing

Subordinate financing means there is another loan on the property (or will be) when you close on the purchase of your condo.

Some buyers put only 5 percent down — and they get a higher rate than those who put 20 percent down. What's more, loans with less than 20 percent down require a mortgage insurance policy, which adds to the monthly payment. We'll look at mortgage insurance in detail in chapter 4.

To avoid mortgage insurance, a buyer can take out one loan at 80 percent of the sale price, and a second loan that is the difference between the down payment, the first mortgage, and the price of the condo. For example, on a $250,000 property the first mortgage would be 80 percent of that, or $200,000 — avoiding mortgage insurance. The down payment would be 10 percent, or $25,000, and finally the subordinated note would be at $25,000 as well. Loans with subordinate financing may have a higher rate than those without subordinate financing.

These rate adjustments can be slight — an adjustment in the amount of discount points you pay. It may increase your rate as well. The chart on page 75 shows the various combinations of score, loan, and subordinate financing.

This chart shows that a credit score of anything greater than 720 has no adjustments regardless of how much is put down. The <=60 percent is the loan amount compared to the value of the property. It means any loan less than 60 percent of the value of the property, for instance.

But look at credit scores between 680 and 699. Now move across to the loan-to-value column that is >85 percent. You can see that there is an increase in price by 0.500, which is 1/2 of a discount point.

This translates into an approximate increase in the mortgage rate by either 1/2 point or 1/8 percent in rate. The chart is a tad complicated for the consumer but is read every day by loan officers who quote rates.

Or at least they're supposed to read it. You can see how complicated a simple rate quote may be, but most mortgage programs have certain adjustments based on a variety of factors.

It's also important to note that although lenders' adjustments can be different from one company to another, there is no universal chart. They can be similar, but not exactly alike for all lenders.

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