Loan Programs

FHA Loans

FHA home loans are mortgage loans that are insured against default by the Federal Housing Administration (FHA). FHA loans are available for single family and multifamily homes. These home loans allow banks to continuously issue loans without much risk or capital requirements. The FHA doesn’t issue loans or set interest rates, it just guarantees against default.

FHA loans allow individuals who may not qualify for a conventional mortgage obtain a loan, especially first time home buyers. These loans offer low minimum down payments, reasonable credit expectations, and flexible income requirements.

In 1934, the Federal Housing Administration (FHA) was established to improve housing standards and to provide an adequate home financing system with mortgage insurance. Now families that may have otherwise been excluded from the housing market could finally buy their dream home.

FHA does not make home loans, it insures a loan; should a homebuyer default, the lender is paid from the insurance fund.

  • Buy a house with as little as 3.5% down.
  • Ideal for the first-time homebuyers unable to make larger down payments.
  • The right mortgage solution for those who may not qualify for a conventional loan.
  • Down payment assistance programs can be added to a FHA Loan for additional down payment and/or closing cost savings.

Your loan approval depends 100% on the documentation that you provide at the time of application. You will need to give accurate information on:

Employment

  • Complete Income Tax Returns for past 2-years
  • W-2 & 1099 Statements for past 2-years
  • Pay-Check Stubs for past 2-months
  • Self-Employed Income Tax Returns and YTD Profit & Loss Statements for past 3-years for self-employed borrowers

Savings

  • Complete bank statements for all accounts for past 3-months
  • Recent account statements for retirement, 401k, Mutual Funds, Money Market, Stocks, etc.

Credit

  • Recent bills & statements indicating account numbers and minimum payments
  • Landlord’s name, address, telephone number, or 12- months cancelled rent checks
  • Recent utility bills to supplement thin credit
  • Bankruptcy & Discharge Papers if applicable
  • 12-months cancelled checks written by someone you co-signed for to get a mortgage, car, or credit card, this indicates that you are not the one making the payments.

Personal

  • Drivers License
  • Social Security Card
  • Any Divorce, Palimony or Alimony or Child Support papers
  • Green Card or Work Permit if applicable
  • Any homeownership papers

Refinancing or Own Rental Property

  • Note & Deed from any Current Loan
  • Property Tax Bill
  • Hazard Homeowners Insurance Policy
  • A Payment Coupon for Current Mortgage
  • Rental Agreements for a Multi-Unit Property

The main difference between a FHA Loan and a Conventional Home Loan is that a FHA loan requires a lower down payment, and the credit qualifying criteria for a borrower is not as strict. This allows those without a credit history, or with minor credit problems to buy a home. FHA requires a reasonable explanation of any derogatory items, but will use common sense credit underwriting. Some borrowers, with extenuating circumstances surrounding bankruptcy discharged 3-years ago, can work around past credit problems. However, conventional financing relies heavily upon credit scoring, a rating given by a credit bureau such as Experian, Trans-Union or Equifax. If your score is below the minimum standard, you may not qualify.

Your monthly costs should not exceed 29% of your gross monthly income for a FHA Loan. Total housing costs often lumped together are referred to as PITI.

P = Principal

I = Interest

T = Taxes

I = Insurance

Examples:

Monthly Income x .29 = Maximum PITI
$3,000 x .29 = $870 Maximum PITI

Your total monthly costs, or debt to income (DTI) adding PITI and long-term debt like car loans or credit cards, should not exceed 41% of your gross monthly income.

Monthly Income x .41 = Maximum Total Monthly Costs
$3,000 x .41 = $1230
$1,230 total – $870 PITI = $360 Allowed for Monthly Long Term Debt

FHA Loan ratios are more lenient than a typical conventional loan.

Yes, generally a bankruptcy won’t preclude a borrower from obtaining a FHA Loan. Ideally, a borrower should have re-established their credit with a minimum of two credit accounts such as a car loan, or credit card. Then wait two years since the discharge of a Chapter 7 bankruptcy, or have a minimum of one year of repayment for a Chapter 13 (the borrower must seek the permission of the courts). Also, the borrower should not have any credit issues like late payments, collections, or credit charge-offs since the bankruptcy. Special exceptions can be made if a borrower has suffered through extenuating circumstances like surviving a serious medical condition, and had to declare bankruptcy because the high medical bills couldn’t be paid.

VA Home Loans

The VA Loan provides veterans with a federally guaranteed home loan which requires no down payment. This program was designed to provide housing and assistance for veterans and their families.

The Veterans Administration provides insurance to lenders in the case that you default on a loan. Because the mortgage is guaranteed, lenders will offer a lower interest rate and terms than a conventional home loan. VA home loans are available in all 50 states. A VA loan may also have reduced closing costs and no prepayment penalties.

Additionally there are services that may be offered to veterans in danger of defaulting on their loans. VA home loans are available to military personal that have either served 181 days during peacetime, 90 days during war, or a spouse of serviceman either killed or missing in action.

The Veteran Administration’s Loan originated in 1944 through the Servicemen’s Readjustment Act; also know as the GI Bill. It was signed into law by President Franklin D. Roosevelt and was designed to provide Veterans with a federally-guaranteed home loan with no down payment. VA loans are made by private lenders like banks, savings & loans, and mortgage companies to eligible Veterans for homes to live in. The lender is protected against loss if the loan defaults. Depending on the program option, the loan may or may not default.

Wartime/Conflict Veterans

  • Veterans who were NOT Dishonorably Discharged, and served at least 90 days
  • World War II – September 16, 1940 to July 25, 1947
  • Korean Conflict – June 27, 1950 to January 31, 1955
  • Vietnam Era – August 5, 1964 to May 7, 1975
  • Persian Gulf War – Check with the Veterans Administration Office
  • Afghanistan & Iraq – Check with the Veterans Administration Office
  • Veterans Administration website www.va.gov

Peacetime Service

At least 181 days of continuous active duty with no dishonorable discharge. If you were discharged earlier due to a service-related disability you should contact your Regional VA Office for eligibility verification.

  • July 26, 1947 to June 26, 1950
  • February 1, 1955 to August 4, 1964, or May 8, 1975 to September 7, 1980 (Enlisted), or to October 16, 1981 (Officer)
  • Enlisted Veterans whose service began after September 7, 1980, or officers who service began after October 16, 1981, must have completed 24-months of continuous active duty and been honorably discharged

Reserves and National Guard

  • Certain U.S. Citizens who served in the Armed Forces of a government allied with the United States during World War II.
  • Surviving spouse of an eligible Veteran who died resulting from service, and has not remarried.
  • The spouse of an Armed Forces member who served Active Duty, and was listed as a POW or MIA for more than 90-days.

A VA home loan must be used to finance your personal residence within the United States and its territories. You have choices for the type of home you purchase:

  • Existing Single-Family Home
  • Townhouse or Condominium in a VA-Approved Project
  • New Construction Residence
  • Manufactured Home or Lot
  • Home Refinances and Certain Types of Home Improvements

  • 100% Financing & No Down Payment Loans
  • No Private Mortgage (PMI)
  • No Penalties for Prepaying the Loan
  • Competitive Interest Rates
  • Qualification is Easier than a Conventional Loan
  • Sellers Pay Some of the Closing Costs
  • Can be combined with additional down payment assistance to reduce closing costs

You can apply for a VA Loan with any mortgage lender that participates in the program. In addition to the application requirements from your lender, you will need the following at application time:

Yes, your eligibility is reusable depending on the circumstance. If you have paid-off your prior VA Loan, and disposed the property, you can have your eligibility restored again. Also, on a 1-time basis, you may have your eligibility restored if your prior VA Loan has been paid-off, but you still own the property. Either way, the Veteran must send the Veterans Administration a completed VA Form 16-1880 to the VA Eligibility Center. To prevent delays in processing, it’s advisable to include evidence that the prior loan has been fully paid, and if applicable, the property was disposed. A paid-in-full statement from the former lender or a copy of the HUD-1 settlement statement must be submitted.

  • VA Loans made prior to March 1, 1988 can be assumed with no qualifying of the new buyer. If the buyer defaults the property the Veteran homeowner may be liable for the funds.
  • Some sellers are hesitant to work with someone obtaining a VA Loan because it takes longer than a conventional loan to process.
  • Sellers are often asked to pay a portion of closing costs and therefore less likely to negotiate the sales price of the home.

Conventional Mortgages (FRM)

The traditional fixed rate mortgage, or conventional mortgage, is the most common type of loan program, where monthly principal and interest payments never change during the life of the loan. Fixed rate mortgages are available in terms ranging from 10 to 30 years and in most cases can be paid off at any time without penalty. This type of mortgage is structured, or “amortized” so that it will be completely paid off by the end of the loan term.

Even though you have a fixed rate mortgage, your monthly payment may vary if you have an “impound account”. In addition to the monthly “principal + interest” and any mortgage insurance premium (amount charged to homebuyers who put less than 20% cash down when purchasing their home),  some lenders collect additional money each month for the prorated monthly cost of property taxes and homeowners insurance. The extra money is put in an impound account by the lender who uses it to pay the borrowers’ property taxes and homeowners insurance premium when they are due. If either the property tax or the insurance happens to change, the borrower’s monthly payment will be adjusted accordingly. However, the overall payments in a fixed rate mortgage are very stable and predictable.

Adjustable Rate Mortgages (ARM)

Adjustable Rate Mortgages (ARM)s are loans whose interest rate can vary during the loan’s term. These loans usually have a fixed interest rate for an initial period of time and then can adjust based on current market conditions. The initial rate on an ARM is lower than on a fixed rate mortgage which allows you to afford and hence purchase a more expensive home. Adjustable rate mortgages are usually amortized over a period of 30 years with the initial rate being fixed for anywhere from 1 month to 10 years. All ARM loans have a “margin” plus an “index.” Margins on loans typically range from 1.75% to 3.5% depending on the index and the amount financed in relation to the property value. The index is the financial instrument that the ARM loan is tied to such as: 1-Year Treasury Security, LIBOR (London Interbank Offered Rate), Prime, 6-Month Certificate of Deposit (CD) and the 11th District Cost of Funds (COFI).

When the time comes for the ARM to adjust, the margin will be added to the index and typically rounded to the nearest 1/8 of one percent to arrive at the new interest rate. That rate will then be fixed for the next adjustment period. This adjustment can occur every year, but there are factors limiting how much the rates can adjust. These factors are called “caps”. Suppose you had a “3/1 ARM” with an initial cap of 2%, a lifetime cap of 6%, and initial interest rate of 6.25%. The highest rate you could have in the fourth year would be 8.25%, and the highest rate you could have during the life of the loan would be 12.25%.

Hybrid ARMs

Hybrid ARM mortgages, also called fixed-period ARMs, combine features of both fixed-rate and adjustable-rate mortgages. A hybrid loan starts out with an interest rate that is fixed for a period of years (usually 3, 5, 7 or 10). Then, the loan converts to an ARM for a set number of years. An example would be a 30-year hybrid with a fixed rate for seven years and an adjustable rate for 23 years.

The beauty of a fixed-period ARM is that the initial interest rate for the fixed period of the loan is lower than the rate would be on a mortgage that’s fixed for 30 years, sometimes significantly. Hence you can enjoy a lower rate while having period of stability for your payments. A typical one-year ARM on the other hand, goes to a new rate every year, starting 12 months after the loan is taken out. So while the starting rate on ARMs is considerably lower than on a standard mortgage, they carry the risk of future hikes.

Homeowners can get a hybrid and hope to refinance as the initial term expires. These types of loans are best for people who do not intend to live long in their homes. By getting a lower rate and lower monthly payments than with a 30- or 15-year loan, they can break even more quickly on refinancing costs, such as title insurance and the appraisal fee. Since the monthly payment will be lower, borrowers can make extra payments and pay off the loan early, saving thousands during the years they have the loan.

2-1 Buydown Loans

A 2-1 buydown is a type of financing that lowers the interest rate on a mortgage for the first two years before it rises to the regular, permanent rate.

The rate is typically two percentage points lower during the first year and one percentage point lower in the second year.

Sellers, including home builders, may offer a 2-1 buydown to make a property more attractive to buyers.

2-1 buydowns can be a good deal for homebuyers, provided that they will be able to afford the higher monthly payments once those begin.

For more information, visit Investopedia.com.

Interest Only Mortgages

A mortgage is called “Interest Only” when its monthly payment does not include the repayment of principal for a certain period of time. Interest Only loans are offered on fixed rate or adjustable rate mortgages as wells as on option ARMs. At the end of the interest only period, the loan becomes fully amortized, thus resulting in greatly increased monthly payments. The new payment will be larger than it would have been if it had been fully amortizing from the beginning. The longer the interest only period, the larger the new payment will be when the interest only period ends.

You won’t build equity during the interest-only term, but it could help you close on the home you want instead of settling for the home you can afford.

Since you’ll be qualified based on the interest-only payment and will likely refinance before the interest-only term expires anyway, it could be a way to effectively lease your dream home now and invest the principal portion of your payment elsewhere while realizing the tax advantages and appreciation that accompany homeownership.

As an example, if you borrow $250,000 at 6 percent, using a 30-year fixed-rate mortgage, your monthly payment would be $1,499. On the other hand, if you borrowed $250,000 at 6 percent, using a 30-year mortgage with a 5-year interest only payment plan, your monthly payment initially would be $1,250. This saves you $249 per month or $2,987 a year. However, when you reach year six, your monthly payments will jump to $1,611, or $361 more per month. Hopefully, your income will have jumped accordingly to support the higher payments or you have refinanced your loan by that time.

Mortgages with interest only payment options may save you money in the short-run, but they actually cost more over the 30-year term of the loan. However, most borrowers repay their mortgages well before the end of the full 30-year loan term.

Borrowers with sporadic incomes can benefit from interest-only mortgages. This is particularly the case if the mortgage is one that permits the borrower to pay more than interest-only. In this case, the borrower can pay interest-only during lean times and use bonuses or income spurts to pay down the principal.

Reverse Mortgages

A reverse mortgage is a type of home equity loan that allows you to convert some of the existing equity in your home into cash while you retain ownership of the property. Equity is the current cash value of a home minus the current loan balance.

A reverse mortgage works much like a traditional mortgage, except in reverse. Instead of the homeowner paying the lender each month, the lender pays the homeowner. As long as the homeowner continues to live in the home, no repayment of principal, interest, or servicing fees are required. The funds received from a reverse mortgage may be used for anything, including housing expenses, taxes, insurance, fuel or maintenance costs.

To qualify for a reverse mortgage, you must own your home. You may choose to receive the reverse mortgage funds in a lump sum, monthly advances, as a line-of-credit, or a combination of the three, depending on the reverse mortgage type and the lender. The amount of money you are eligible to borrow depends on your age, the amount of equity in your home, and the interest rate set by the lender.

Because the borrower retains ownership of the home with a reverse mortgage, the borrower also continues to be responsible for taxes, repairs and maintenance.

Depending on the plan selected, a reverse mortgage is due with interest either when the homeowner permanently moves, sells the home, dies, or the end of a pre-selected loan term is reached. If the homeowner dies, the lender does not take ownership of the home. Instead, the heirs must pay off the loan, typically by refinancing the loan into a forward mortgage (if the heirs meet eligibility requirements) or by using the proceeds generated by the sale of the home.

Non-Qualified Mortgages (Non-QM)

A non-QM (Non-Qualified Mortgage) loan is a type of mortgage that does not meet the qualified mortgage guidelines set by the Consumer Financial Protection Bureau (CFPB). These guidelines were established as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010 to ensure that lenders offer safer and more stable mortgage products to borrowers.

While qualified mortgages have specific requirements regarding the borrower’s ability to repay the loan, non-QM mortgages are designed for borrowers who may not meet those standard criteria. Non-QM loans are typically used for unconventional situations or borrowers with unique circumstances that make it difficult for them to qualify for traditional mortgage products.

Here are some key characteristics and features of non-QM mortgages:

  • Flexible eligibility criteria: Non-QM loans provide more flexibility in qualifying criteria compared to qualified mortgages. Borrowers who are self-employed, have non-traditional income sources, or have low credit scores may find it easier to qualify for a non-QM loan.
  • Alternative documentation: Non-QM lenders may accept alternative documentation to verify a borrower’s income and assets. This can be beneficial for self-employed individuals or those with complex financial situations who may have difficulty providing traditional proof of income, such as tax returns or pay stubs.
  • Interest-only loans: Some non-QM mortgages offer interest-only payment options, where borrowers have the choice to pay only the interest on the loan for a specified period, typically 5 to 10 years. After the interest-only period ends, the borrower will need to start making principal and interest payments.
  • Higher debt-to-income (DTI) ratios: Non-QM loans may allow higher DTI ratios compared to qualified mortgages. DTI ratio is the percentage of a borrower’s monthly gross income that goes towards debt payments. A higher DTI ratio means a borrower can allocate a larger portion of their income towards debt repayment.
  • Jumbo loans: Non-QM mortgages are often used for jumbo loans, which are loans that exceed the conforming loan limits set by Fannie Mae and Freddie Mac. Jumbo loans are typically larger than the standard loan limits and are used for high-value properties.
  • Higher interest rates: Non-QM loans generally carry higher interest rates compared to qualified mortgages. This is because non-QM loans are considered riskier for lenders due to the relaxed eligibility requirements and potentially less documentation. Borrowers should be prepared for higher borrowing costs when considering a non-QM mortgage.
  • Portfolio lending: Non-QM loans are often held by the lender or placed in their own portfolio rather than being sold to government-sponsored entities (GSEs) like Fannie Mae or Freddie Mac. Portfolio lending gives lenders more flexibility to offer loans that don’t conform to the strict guidelines imposed by GSEs.

It’s important to note that non-QM loans are not subprime mortgages, which were a major contributor to the 2008 financial crisis. Non-QM loans have stricter underwriting standards compared to subprime mortgages and are designed to provide access to credit for creditworthy borrowers who don’t fit into the traditional mortgage box.