Mortgage Loan Programs
There isn't a single or simple answer to this question. The right type of mortgage for you depends on many different factors such as:- Your current financial picture
- How you expect your finances to change
- How long you intend to keep your house
- How comfortable you are with your mortgage payment changing
For example, a 15-year fixed rate mortgage can save you many thousands of dollars in interest payments over the life of the loan, but your monthly payments will be higher. An adjustable rate mortgage may get you started with a lower monthly payment than a fixed rate mortgage, but your payments could get higher when the interest rate changes.
The best way to find the "right" answer is to discuss your finances, your plans and financial prospects, and your preferences with a mortgage professional.
Conventional and Jumbo Loans
Conventional loans are secured by government sponsored entities such as Fannie Mae and Freddie Mac. Conventional loans can be made to purchase or refinance homes with first and second mortgages on single family to four unit family homes
In general, Fannie Mae and Freddie Mac's single family, first mortgage loan limit is $417,000 in 2006. This limit is reviewed annually and, if needed, is changed to reflect changes in the national average price for single family homes. The current loan limit applies to all conventional mortgages delivered after January 1, 2006.
Current Conventional loan limits for First mortgages are:- Single family loans: $417,000
- Two unit family loans: $533,850
- Three unit family loans: $645,300
- Four unit family loans: $801,950
Loans which are larger than the limits set by Fannie Mae and Freddie Mac are called jumbo loans. Because jumbo loans are not funded by these government sponsored entities, they usually carry a higher interest rate and some additional underwriting requirements. A strategy to lower your overall interest payments if your purchase or refinance balance is above $417,000 is to use a combination of both first and second trust money, referred to as an 80/10/10, 80/15/5 or 80/20. Every situation is different, but it is one more option to consider.
Subprime Loans
If you have bad credit, you may not qualify for a conventional loan or a low down payment loan offered by FHA and VA. In this case, you may consider a subprime mortgage. Because of the higher risk associated with lending to borrowers that have a poor credit history, subprime loans typically require a larger down payment and a higher interest rate.
You should study the specific terms of a subprime loan that you qualify for to determine if it is a loan that will help your financial situation. Subprime loans are one way for you to get into the home you want at today's price. If you already own a home, a subprime loan can give you an opportunity to clean up your credit and ultimately refinance into a lower rate at a later time. If you have a mortgage, you can look at refinancing more than what you currently owe on the house and get cash back for the equity you already have in the home. This cash out could be used to pay off higher rate credit cards, bankruptcy, foreclosure or collections and liens. It could be a good way to clean up a troubled credit history, save money each month and start rebuilding your credit worthiness.
Whether for a purchase or refinance, subprime loans should typically be used as a short term solution, approximately 2-4 years. During that time, you can work to clean up your credit and qualify or a refinance into a lower risk, lower rate loan.
Subprime loans were developed to help higher risk borrowers obtain a mortgage. Many borrowers with bad credit are good people who honestly intended to pay their bills on time. Catastrophic events such as the loss of a job or a family illness can lead to missed or late payments or even foreclosure and bankruptcy. Now there are mortgage companies that take into consideration events outside the borrower's control, but not without a price.
Lenders are compensated for risk in the form of interest rates. The higher the lender perceived its risk to be, the higher the rate they will charge for the privilege of borrowing their money. The lower the risk, the lower the rate. Several risk factors are taken into consideration when evaluating a borrower for a subprime mortgage, the most important being your payment and credit history.
Your debt to income level, employment history, type of property and assets are other factors that are taken into consideration when determining if you qualify for a conventional, government or subprime loan.
FHA Loans
FHA's mortgage insurance programs help low and moderate income families become homeowners by lowering some of the costs of their mortgage loans. FHA mortgage insurance also encourages mortgage companies to make loans to otherwise creditworthy borrowers and projects that might not be able to meet conventional underwriting requirements, by protecting the mortgage company against loan default on mortgages for properties that meet certain minimum requirements, including manufactured homes, single-family and multifamily properties, and some health-related facilities.
Section 203(b) is the centerpiece of FHA's single family insurance programs and it has several important features:
Downpayment requirements can be low. In contrast to conventional mortgage products, which frequently require down payments
of 10 percent or more of the purchase price of the home, single family mortgages insured by FHA under Section 203(b) make
it possible to reduce down payments to as little as 3 percent. This is because FHA insurance allows borrowers to finance
approximately 97 percent of the value of their home purchase through their mortgage, in some cases.
Many closing costs can be financed. With most conventional loans, the borrower must pay, at the time of purchase, closing costs
(the many fees and charges associated with buying a home) equivalent to 2-3 percent of the price of the home. This program
allows the borrower to finance many of these charges, thus reducing the up front cost of buying a home. FHA mortgage insurance
is not free: borrowers pay an up front insurance premium (which may be financed) at the time of purchase, as well as monthly
premiums that are not financed, but instead are added to the regular mortgage payment.
Some fees are limited. FHA rules impose limits on some of the fees that mortgage companies may charge in making a loan. For example, the loan
origination fee charged by the mortgage company for the administrative cost of processing the loan may not exceed one percent
of the amount of the mortgage.
HUD sets limits on the amount that may be insured. To make sure that its programs serve low and moderate income people, FHA sets limits on
the dollar value of the mortgage loan.
The down payment for an FHA mortgage can be 100% gift funds. This is one of the key benefits to the FHA program. Verification of the source of gift money is not required. However, it is necessary that the gift funds be deposited in the borrower's bank account, or in an escrow account, prior to underwriting approval. Proof of deposit is required. Gift donors are restricted primarily to a relative of the borrower. They can also be certain organizations, such as a labor union or charitable organization. Contact your local branch for complete information.
VA Loans - Eligibility
How do I apply for a VA guaranteed loan?
You can apply for a VA loan at any mortgage company that participates in the VA home loan program. At some point, you will
need to get a Certificate of Eligibility from VA to prove to the mortgage company that you are eligible for a VA loan.
How do I get a Certificate of Eligibility?
To get a Certificate of Eligibility, you need to submit form 26-1880, Request for Determination of Eligibility and Available
Loan Guaranty Entitlement. A copy of the form can be obtained by calling 800-827-1000. Send it to any VA Regional Office.
You must include a copy of your DD-214 with the form 26-1880. If you are on active duty, you must submit a statement of
service signed by, or by direction of, the adjutant, personnel officer, or commander of your unit or higher headquarters
showing date of entry on your current active duty period and the duration of any time lost.
I have already received one VA loan. Can I get another one?
Yes, depending on the circumstances. If you have paid off your prior VA loan and disposed of the property, you can have your
entitlement restored for additional use. To obtain restoration of entitlement, you must send VA a completed VA Form 26-1880,
along with evidence that the property has been disposed of and the loan repaid in full. This evidence can be in the form
of a payoff statement from the former mortgage company, or a copy of the HUD-1 settlement statement completed in connection
with the sale of the property. The application can be presented to any VA Regional Office. A veteran can also obtain
restoration of entitlement, on a one time basis, if the prior VA loan has been paid in full but the property has not been sold.
I have sold the property I obtained with my prior VA loan on an assumption. Why can't I get my entitlement restored to purchase a new home?
In this case the your entitlement can be restored only if the assumer is also an eligible veteran who is willing to substitute
his or her entitlement for that of your original entitlement. Otherwise, you cannot have entitlement restored until the assumer
has paid off the VA loan.
My prior VA loan was assumed, the assumer defaulted on the loan, and VA paid a claim to the mortgage company. VA said
it wasn't my fault and waived the debt. Now I need a new VA loan but am told that I am not eligible. Why not? or My prior
loan was foreclosed on, or I gave a Deed in Lieu of Foreclosure, or VA paid a compromise claim. I was released from liability
on the loan and/or the debt was waived. Can I get another VA loan?
Although the your debt was waived by VA, the Government has still suffered a loss on the loan. The law does not permit your
entitlement to be restored until the loss has been repaid in full.
Can I get a VA loan if I have had a bankruptcy in the last few years?
VA credit standards state that a veteran with a bankruptcy less than 3 years ago would generally not be considered a
satisfactory credit risk unless: the veteran or spouse has obtained items on credit since the bankruptcy and has paid the
obligations in a satisfactory manner for a continued period; and the bankruptcy was caused by circumstances beyond the
control of the borrower, which would have to be verified. A bankruptcy discharged 3 to 5 years ago must be given some
consideration in the underwriting of the loan. A bankruptcy discharged more than 5 years ago may be disregarded. These
are the minimum standards that mortgage companies must follow when making a VA loan. In 95% of the cases, companies make
the decision to approve a loan without VA's prior approval. Keep in mind that mortgage companies also have money at risk
in giving you a VA loan, so they may have stricter credit standards than those mandated by VA.
How large of a loan can I get? If my guaranty entitlement is $36,000, does this mean I am limited to a $36,000 loan?
VA guaranteed loans are made by private lenders, such as banks, savings & loans or mortgage companies to eligible veterans
for the purchase of a home which must be for their own personal occupancy. To get a loan, a veteran must apply to a lender.
If the loan is approved, VA will guarantee a portion of it to the lender. This guaranty protects the lender against loss
up to the amount guaranteed and allows a veteran to obtain favorable financing terms. There is no maximum VA loan but lenders
will generally limit VA loans to $417,000. This is because lenders sell VA loans in the secondary market, which currently
places a $417,000 limit on the loans. For loans up to this amount, it is usually possible for qualified veterans to obtain
no down payment financing. A veteran's basic entitlement is $36,000 (or up to $104,250 for certain loans over $144,000).
Lenders will generally loan up to 4 times a veteran's available entitlement without a down payment, provided the veteran
is income and credit qualified and the property appraises for the asking price.
Second Mortgages and Home Equity Lines of Credit
If you need to borrow money, home equity lines may be one useful source of credit. Initially at least, they may provide you with large amounts of cash at relatively low interest rates and they may provide you with certain tax advantages unavailable with other kinds of loans. (Check with your tax advisor for details.)
At the same time, home equity lines of credit require you to use your home as collateral for the loan. This may put your home at risk if you are late or cannot make your monthly payments. Those loans with a large final (balloon) payment may lead you to borrow more money to pay off this debt, or they may put your home in jeopardy if you cannot qualify for refinancing. If you sell your home, most plans require you to pay off your credit line at that time. In addition, because home equity loans give you relatively easy access to cash, you might find you borrow money more freely.
Remember too, there are other ways to borrow money from a lending institution. For example, you may want to explore second mortgage installment loans. Although these plans also place an additional mortgage on your home, second mortgage money usually is loaned in a lump sum, rather than in a series of advances made available by writing checks on an account. Also, second mortgages usually have fixed interest rates and fixed payment amounts.
You also may want to explore borrowing from credit lines that do not use your home as collateral. These are available with your credit cards or with unsecured credit lines that let you write checks as you need the money. In addition, you may want to ask about loans for specific items, such as cars or tuition.
Length of Your Second Mortgage
Some second mortgage loans may extend for as long as 15 or 20 years; others may require repayment in one year. You will
need to discuss the repayment terms with us and select one that offers terms that best suit your needs. For example, if
you need to borrow $20,000 to make repairs on your home, you may not want a loan that requires you to repay the entire
amount in one or two years because the monthly payments may be too high.
Second Mortgage Costs
Lenders and Mortgage Brokers may charge you a fee for lending you money. The fee is usually a percentage of the loan and is
sometimes referred to as "points." One point is equal to one percent of the amount you borrow. For example, if you were to
borrow $10,000 with a fee of eight points, you would pay $800 in "points." The number of points charged varies and it is usually higher
than the number of points charged on First mortgages.
Fixed Rate Mortgages Loans
The most common type of mortgage program where your monthly payments for interest and principal never change. Property taxes and homeowners insurance may increase, but generally your monthly payments will be very stable.
Fixed rate mortgages are available for 30 years, 20 years, 15 years, 10years and even as of lately 40 years. There are also "biweekly" mortgages, which shorten the loan by calling for half the monthly payment every two weeks. (Since there are 52 weeks in a year, you make 26 payments, or 13 "months" worth, every year.)
Fixed rate fully amortizing loans have two distinct features. First, the interest rate remains fixed for the life of the loan. Secondly, the payments remain level for the life of the loan and are structured to repay the loan at the end of the loan term. The most common fixed rate loans are 15 year and 30 year mortgages.
During the early amortization period, a large percentage of the monthly payment is used for paying the interest. As the loan is paid down, more of the monthly payment is applied to principal. A typical 30 year fixed rate mortgage takes 22.5 years of level payments to pay half of the original loan amount.
Adjustable Rate Mortgages (ARMs)
These loans generally begin with an interest rate that is 2-3 percent below a comparable fixed rate mortgage, and could allow you to buy a more expensive home.
However, the interest rate changes at specified intervals (for example, every year) depending on changing market conditions; if interest rates go up, your monthly mortgage payment will go up, too. However, if rates go down, your mortgage payment will drop also.
There are also mortgages that combine aspects of fixed and adjustable rate mortgages - starting at a low fixed rate for seven to ten years, for example, then adjusting to market conditions. Ask your mortgage professional about these and other special kinds of mortgages that fit your specific financial situation.
Most adjustable rate loans (ARMs) have a low introductory rate or start rate, some times as much as 5.0% below the current market rate of a fixed loan. This start rate is usually good from 1 month to as long as 10 years. As a rule the lower the start rate is the shorter the time before the loan makes its first adjustment.
ARMs with different indexes are available for both purchases and refinances. Choosing an ARM with an index that reacts quickly lets you take full advantage of falling interest rates. An index that lags behind the market lets you take advantage of lower rates after market rates have started to adjust upward. The interest rate and monthly payment can change based on adjustments to the index rate.
The index of an ARM is the financial instrument that the loan is "tied" to, or adjusted to. The most common indices are the 1-Year Treasury Security, LIBOR (London Interbank Offered Rate), Prime, 6-Month Certificate of Deposit (CD) and the 11th District Cost of Funds (COFI). Each of these indices move up or down based on conditions of the financial markets.
The margin is one of the most important aspects of ARMs because it is added to the index to determine the interest rate that you pay. The margin added to the index is known as the fully indexed rate. As an example if the current index value is 5.50% and your loan has a margin of 2.5%, your fully indexed rate is 8.00%. Margins on loans range from 1.75% to 3.5% depending on the index and the amount financed in relation to the property value.
6-Month Certificate of Deposit (CD) ARM
This program has a maximum interest rate adjustment of 1% every six months. The 6-month Certificate of Deposit (CD) index
is generally considered to react quickly to changes in the market.
1-Year Treasury Spot ARM
This program has a maximum interest rate adjustment of 2% every 12 months. The 1-Year Treasury Spot index generally reacts
more slowly than the CD index, but more quickly than the Treasury Average index.
6-Month Treasury Average ARM
This program has a maximum interest rate adjustment of 1% every six months. The Treasury Average index generally reacts
more slowly in fluctuating markets so adjustments in the ARM interest rate will lag behind some other market indicators.
12-Month Treasury Average ARM
This program has a maximum interest rate adjustment of 2% every 12 months. The Treasury Average Index generally reacts more
slowly in fluctuating markets so adjustments in the ARM interest rate will lag behind some other market indicators.
Balloon Mortgages
Balloon loans are short term mortgages that have some features of a fixed rate mortgage. The loans provide a level payment feature during the term of the loan, but as opposed to the 30 year fixed rate mortgage, balloon loans do not fully amortize over the original term. Balloon loans can have many types of maturities, but most balloons that are first mortgages have a term of 5 to 7 years.
At the end of the loan term there is still a remaining principal loan balance and the mortgage company generally requires that the loan be paid in full, which can be accomplished by refinancing. Many companies have other options such as a conversion feature at the end of the term. For example, the loan may convert to a 30 year fixed loan at the thirty year market rate plus 3/8 of a percentage point. Your conversion can be guaranteed based on certain criteria such as having made your last 24 payments on time. The balloon mortgage program with the conversion option is often called a 7/23 Convertible or 5/25 Convertible.
Interest Only Loans
"Interest only" products are an easy way to save money and a very popular alternative to traditional fixed rates but they are not without risk. An "Interest Only" loan can offer consumers greater purchasing power, increased cash flow and a number of other benefits. With Interest only loans the borrower has the flexibility of paying only the interest due on the mortgage. Most of these products allow you to pay extra if you choose.
The positive aspects of these loans are as follows:
1) They work well for borrowers that are restricted by a tight budget, and the savings can be as much as $300-400 per month!
2) "Interest Only" loan can allow you to qualify for a bigger home. If the underwriter considers only the "Interest Only"
payment, you may be able to upgrade to a nicer or larger home.
3) This type of loan works well for people who only want to stay in a home for a just a few years. During the first couple
of years with a conventional 30 yr mortgage, most of your mortgage payment is being applied directly to the interest of
the loan. If you want to stay in the house for only 3-5 years, an "Interest Only" loan may be the right loan for you.
You can receive a lower payment and have almost the same principal balance as the borrower who chose a 30 year, conventional
mortgage if you choose to sell in 3-5 years.
4) You want to buy a very expensive home. Most people who buy very expensive home have no desire to pay off their home
completely, and the rate of appreciation on the house is usually very good. An "Interest Only" loan allows these borrowers
to deduct their interest payments, and the money they save can be directed to other investments.
5) You want to buy a rental property. The lower payment can help improve cash flow on a rental property.
As with every loan program, with positives there are always negatives.
1) You are not paying down your principal on your mortgage. If your property doesn't appreciate in value over those 3-5 years,
you may even have to pay money if you choose to sell the home. While the likelihood of this happening is high, it is a risk
that must be considered when thinking about using "Interest Only" loans.
2) Most "Interest Only" products have a specified term. For example, on most 30 year fixed "Interest Only" loans, most lenders
allow interest payments for 10 years, and then you must repay the loan during the last 20 years. This loan now must be amortized
over a 20 year period, and this will carry a higher payment than a 30 year fixed mortgage. These loans may be a good option
for you as a borrower, but each person's situation is unique.
3) Lastly, when in a period of incredibly low fixed rates "Interest Only" products will be very attractive. But, if you are
planning on staying in your home for an extended period of time, you may want to consider a traditional fixed product.
Reverse Mortgages
A reverse mortgage is a special type of loan made to older homeowners to enable them to convert the equity in their home to cash to finance living expenses, home improvements, in home health care, or other needs. With a reverse mortgage, the payment stream is "reversed." That is, payments are made by the lender to the borrower, rather than monthly repayments by the borrower to the lender, as occurs with a regular home purchase mortgage.
A reverse mortgage is a sophisticated financial planning tool that enables seniors to stay in their home or "age in place" and maintain or improve their standard of living without taking on a monthly mortgage payment. The process of obtaining a reverse mortgage involves a number of different steps. The first most widely available reverse mortgage in the United States was the federally insured Home Equity Conversion Mortgage (HECM), which was authorized in 1987.
In general, reverse mortgages are limited to borrowers 62 years or older who own their home free and clear of debt or nearly so, and the home is free of tax liens.
Borrowers usually have a choice of receiving the proceeds from a reverse mortgage in the form of a lump sum payment, fixed monthly payments for life, or line of credit. Some types of reverse mortgages also allow fixed monthly payments for a finite time period, or a combination of monthly payments and line of credit. The interest rate charged on a reverse mortgage is usually an adjustable rate that changes monthly or yearly. However, the size of monthly payments received by the senior doesn't change. Some reverse mortgage products also involve the purchase of an annuity that can assure continued monthly income to the senior homeowner even after they sell the home.
The size of reverse mortgage that a senior homeowner can receive depends on the type of reverse mortgage, the borrower's age and current interest rates, and the home's property value. The older the applicant is, the larger the monthly payments or line of credit. This is because of the use of projected life expectancies in determining the size of reverse mortgages.
Seniors do not have to meet income or credit requirements to qualify for a reverse mortgage.
Unlike a home purchase mortgage or home equity loan, a reverse mortgage doesn't require monthly repayments by the borrower to the lender. A reverse mortgage isn't repayable until the borrower no longer occupies the home as his or her principal residence. This can occur if the sole remaining borrower dies, the borrower sells the home, or the borrower moves out of the home, say, to a nursing home. The repayment obligation for a reverse mortgage is equal to the principal balance of the loan, plus accrued interest, plus any finance charges paid for through the mortgage. This repayment obligation, however, can't exceed the value of the home.
The loan may be repaid by the borrower or by the borrower's family or estate, with or without a sale of the home. If the home is sold and the sale proceeds exceed the repayment obligation, the excess funds go to the borrower or borrower's estate. If the sales proceeds are less than the amount owed, the shortfall is usually covered by insurance or some other party and is not the responsibility of the borrower or borrower's estate. In general, the repayment obligation of the borrower or borrower's estate can't exceed the value of the property.
In general, a borrower can't be forced to sell their home to repay a reverse mortgage as long as they occupy the home, even if the total of the monthly payments to the borrower exceeds the value of the home.
Commercial Loans
A partial list of properties that require commercial financing is:
Multi family - Garden Apartments, Hi-Rise Apartments, Mid-Rise Apartments, Low/Mod Income, Student Apartments,
Senior Apartments and Underlying Coop.
Retail - Regional Enclosed, Strip Center, Outlet Mall, Free Standing, Single Tenant and Regional Unenclosed.
Office - Single Tenant, Hi-Rise Tower, Mid-Rise Office and Office Over Retail.
Health Care - Congregate Living, Nursing Home, Rehabilitation and Ambulatory Care.
Office - Heavy Manufacturing, Light Manufacturing, Warehouse/Distribution, Owner Occupied, Multi-Tenant, Self Storage and Special Purpose.
Thank you!
