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Posted: Tuesday, Jun. 09, 2009

Low Introductory Payments: Higher payments later

Published in: 'Nightmare' archive

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The Rule: In general, the FHA allows borrowers to spend 41 percent of pre-tax income on debts including a mortgage. A person's maximum monthly payment determines how much they can borrow.

Sidestepping the rule: Beazer qualified buyers for larger loans by paying part of their monthly bill during the first and second years of the loan. The deal, called a buydown, allowed Beazer to calculate the maximum loan based on the combination of its payment and the borrower's payment.

How buyers got hurt: The FHA allowed buydowns only if the lender documented the borrower likely could afford the increased payments. For example, a couple moving to a new city for the wife's new job could get a larger loan before the husband found a job. But borrowers in Southern Chase often struggled. By the third year, some were spending more than 50 percent of their income on debts.

Postscript: The FHA closed the loophole in 2004. Lenders can no longer increase the size of an FHA loan by helping with the borrower's payments. Beazer's use of buydowns in the Charlotte area dropped from 82 percent of loans in 2004 to 6 percent by 2006.

A 2006 government audit of some Beazer loans in the Charlotte area included a 2004 loan from Southern Chase. The government said Beazer failed to document the borrower could afford the payments in the third year.

Buydowns remain a common feature of subprime loans, and are advertised by several local builders.

Beazer said: Buydowns "provide people, who otherwise may not qualify, the opportunity to purchase a home. Beazer Homes may have, on aggregate, offered more buydowns ... as we were focused on serving the first-time buyer."

A BUYER'S STORY: Marian, who asked that her last name not be printed, made $2,885 a month before taxes in 2003 and paid $515 on debts, documents show. That limited her monthly mortgage payment to $673, and her maximum loan to $97,000. That wasn't enough to buy the house she wanted. So Beazer chipped in.

Marian paid $632 a month during the first year of her loan. Beazer paid $139. The combination allowed her to buy a home for $115,000 in July 2003.

Marian's income did not grow during the two years Beazer helped with the mortgage. By the third year, her monthly payment reached $864. Debts consumed 48 percent of her income, far more than the FHA intended. She is struggling to make payments and to keep her home.

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