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Fixed Rate vs. Adjustable Before discussing particular loan programs it is important to understand the difference between fixed rate and adjustable rate mortgages (ARM). While a fixed rate mortgage guarantees that your monthly payment and interest rate will not change during the term of the loan, ARM’s offer lower initial payments that adjust with the market in the future. Fixed rate loans are available in 15, 20, and even 30 year terms. Most buyers choose these loans because they offer a stable interest rate that allows you to budget accordingly. Adjustable Rate
Mortgages offer extremely attractive start rates, but can increase well
above the rate on a 30-year mortgage acquired at the same time. After
the initial fixed period, the note rate adjusts on a regular basis,
according to the movement of the financial index used to calculate the
interest rate. The major benefits to an ARM is that the payments are
usually considerably lower for the first year or so, and will always be
lower than current rates on a 30 year mortgage with the same terms. Some
ARM’s also allow you to qualify based on the initial interest rate
allowing you to qualify for a larger loan amount than you could with a
fixed period mortgage. 1.) Conventional Loans Conventional loans are the most common loan programs used for loan amounts up to $417,000.. These loans offer the lowest interest rates for those who qualify. Typically conventional loan require a minimum down payment of 5% although some programs allow for as little as $500 down. The standard conventional loan program requires an average credit history with no late payments during the past 24 months. These programs typically like to see the ratio of your total home payment as compared to your pre tax monthly income at 28% or lower. These programs also like to see your ratio of total debt to income ratio (minimum monthly debt payments added to proposed house payment) at 36% or lower. These ratios of 28% and 36% are used as a guideline. Most conventional mortgages are underwritten through an Automated Underwriting system, which allows much higher debt to income ratios for borrowers with strong credit histories, larger down payments, and strong employment histories. Conventional loans with loan to value ratios of over 80% also require you to pay for mortgage insurance. These policies protect the lender in case of default. The premium for these policies vary according to your down payment and credit worthiness: 5% down
payment
- Premium = Loan amount X .0078 per year. The
above MI chart assumes a borrower with an average credit history and the
down payment shown. The company providing the insurance decites mortgage
insurance premiums and the above figures are for example only, if you
get a loan that has mortgage insurance your rate may be different. It goes without saying that the larger down payment you make, the more eager lenders are to approve your loan, due to the fact that you have a larger financial investment in the property. A property owner that puts down $50,000 on a home is much less likely to allow a foreclosure than someone with only $5,000 equity. Lenders make loan approvals based on how much risk is associated with the loan. While lenders prefer to see a buyer put 20% down, most buyers don’t have the resources or desire to make such a large down payment. Fortunately there are loan programs that allow buyers to buy a property with as little as $0 down. Conventional loans offer the lowest interest rates due to the fact that there is a very competitive market for these loans. While the standard fixed rates conventional mortgages offer are very attractive, there are also various programs which allow you to have a lower introductory interest rate for a fixed period of 3, 5, or 7 years after which the interest rate fluctuates yearly according to prevalent rates at the time. These programs are geared to meet the needs of those who plan to own the home for a shorter period of time and then move up to a larger home or even to relocate at a later date. In addition to providing financing for owner-occupied homes, conventional loan programs can also be used to purchase non-owner occupied and investment properties. Typically these loans require a down payment of 20% due to the added risk from the owner not living in the property. These loans operate much like standard conventional loan programs except that some income from the subject property can be considered in the debt to income ratio if a rental survey is completed to indicate what the property will rent for. Bridge Loans - These loans allow those who currently own their home to utilize some of their home equity to purchase a new home before the current house is sold. This is much like a home equity loan except that the borrower does not have to make payments on the old home for 6 months while they try to sell the home. The lender will lend up to 80% of the home's appraised value to pay off the existing mortgage, pay for closing costs including 6 months pre-collected interest and use the remaining amount for down payment on the new home. 2.) Jumbo Loans Jumbo loans are essentially the same as conventional loans aside from the actual amount of the loan itself. Jumbo loans are needed for loans that exceed $417,000.. Some lenders will lend up to $4 Million or more on a single-family residence. Since these loans do not fall under the same requirements as conventional loans, each lender has the flexibility to create their own guidelines for debt to income ratios and credit worthiness and do not require mortgage insurance. Jumbo loans typically come with higher interest rates. On average, interest rates for jumbo loans are .25% to .375% higher than conventional rates. 3.) 97% Flex Loan Program The 97% flex loan programs assist borrowers with good credit and employment histories the opportunity to purchase a home with a low down payment of only 3%. These programs are fairly flexible in regards to the source of the down payment allowing it to come as a gift or unsecured loan from a family member or even to be borrowed from an employer or secured credit line. Interest rates for these programs are typically .50% to .625% higher than a conventional rate due to the higher risk to the lender. 4.) 100% VA Financing The Veterans Administration has created a special loan program for veterans of the US Armed Forces. These loans provide financing for veterans without requiring a down payment. These loans offer higher debt to income ratios than conventional loans and don’t utilize standard credit scoring thereby offering more flexibility. In fact VA loans are often given to those who have kept their credit in good standing for the past 12 months even if they have had major credit challenges in the past. While these loans charge a slightly higher interest rate than conventional loans, they are a wonderful option for those that qualify. Unlike most other loan programs, VA loans are only offered as 15 or 30 year fixed rate mortgages. 5.) 100% Conventional/Non-Conventional Loans The newest niche in the mortgage industry is higher risk, zero down payment mortgages. These programs allow buyers to purchase a home with no down payment and typically allow the seller to pay for most if not all of the closing costs. There are several of these programs ranging from conventional 100% first mortgages to a non-conventional combination approach that uses an 80% first mortgage along with a 20% second mortgage. Each of the programs have very different guidelines. The only similarity among the programs is that they all rely heavily on credit scores to determine the risk associated with making the loan. If you are thinking about one of these 100% loan programs, you should begin by having your credit report pulled to determine which type of program you could qualify for. 6.) Non-Income/Non-Asset Verification Loans No-Income - No-Asset Verification loans allow borrowers with good credit to secure a mortgage without proving income and in some cases assets. This is especially helpful for self employed or commissioned borrowers who use large deductions to reduce their income tax consequences. They also benefit those who can't or don't want to prove where the down payment and closing costs are coming from. These loans can be secured with as little as 5% down payment for those who qualify based on credit history. Naturally these loans come with a slightly higher interest rate due to the enormous amount of risk the lender assumes. |
