Loan Programs
Conventional Loans
Today’s definition of a conventional loans are home loans which are not insured by the Federal government and come in 2 categories – conforming and non-conforming real estate loans.
Most conventional loans are loans which qualify under Fannie Mae or Freddie Mac guidelines and these are called conforming real estate loans. HUD dictates the maximum loan amount that are allowed under the conforming category. Non-conforming loans are loans which are approved outside of these agency guidelines. An example are Jumbo loans which do not meet Fannie Mae/Freddie Mac standards and allow for higher loan amounts. Loan originators offering non-conforming loans either keep them for their own portfolios, collateralize them and issue their own securities, or sell them to entities other than Fannie Mae/Freddie Mac who manage them or securitize them.
Non-Traditional Mortgages
So what is the definition of a Non-Traditional Mortgage? It is defined as ANY mortgage other than a 30-year fixed rate loan. Let’s explore these loans further.
Interest-Only Mortgages
An interest-only mortgage or loan enables borrowers to put off or defer payments of principal and pay only monthly interest on a mortgage for a given period of time. This type of loan usually offers one, three, five or 10-year designations. After that time has been reached, the borrowers are required to pay down (amortized) mortgages at an accelerated rate. Some payment options, such as payment option ARMs, which will be discussed later) enable a borrower to choose the monthly payment structure that best suits their needs. Such choices include minimum payment, which are often lower than monthly interest payments, interest only, or amortizing. In some ways, these loans are similar to those provided by credit card companies, where minimum payments go mostly toward interest and do little to pay down principles on a loan.
Payment Option ARMs
A payment option ARM (adjustable rate mortgage) is one designed to enable borrowers to choose the amount paid every month. Payment options may range from interest-only payment, to a minimum payment lower than that, or a fully amortized payment. In the past, such options were only offered to individuals with a clear ability to repay loans as well as those who clearly showed their ability to manage risks and costs of such loans.
FHA-Insured Loans
FHA 203(b) Mortgage Insurance Program
The 203(b) mortgage insurance program provides insurance for fixed rate 30-year mortgages. The mortgages may be written with a down payment of as little as 3.5%.
FEATURES of FHA financing:
- Low Down pmt - 3.5% rate
- Low rates
- Primary residences only
- Can be for First Time Home Buyers OR repeat buyers
- FHA Loans types available: 30 yr fixed, 15 yr fixed, ARMS
- Can be combined with housing programs
- Readily available program from all lenders since it is backed by the Federal government, so less risk for lender
- Upfront MI premium – 1% of the base loan amount is added to reach the total loan amt. This amount is the upfront fee charged by FHA to obtain this loan. Can be added to the loan OR paid for by borrower or seller.
- Monthly MI premiums – The MI rate is 1.15% of loan amt for monthly MI with loans < 5% down. The MI rate drops to 1.10% of loan amt with loans having 5% down or more.
- FHA maximum loan limits varies between counties and states are found here: https://entp.hud.gov/idapp/html/hicostlook.cfm
- Can allow for energy efficient improvements to be financed into the mortgage - within FHA policy parameters.
FEATURES of FHA 203K financing:
- Up to 35K of home improvements can be financed into the mortgage
FEATURES of FHA Streamlined Refinance:
- Refinance program for borrrowers with a current FHA loan – must be current on loan payments
- No appraisal requirement available
- No income verification (paystubs, W2s, tax returns) required
- Verbal Employment verification is required to show still employed
- For eligibility, NET benefit of refinance MUST be at least 5% of PIMI pmts (Principle + Interest + MI pmts)
Other Financing Options and Loans
There are a variety of options when it comes to loans and financing. Fixed rate, adjustable rate mortgages, home equity loans, bridge and construction loans, fixed rate, negative amortization and rural and farm property loans are just a handful of the types of financing options that are available to home buyers as well as business owners.
The most common types of alternative financing options and loans for consumers today include but are not limited to:
- Home Equity Loans
- Construction loans
- Rural and Farm Property loans
- Fixed rate
- Alternative financing
- Negative amortization loans
Home Equity Loans
Home Equity Financing is a common option among many consumers who wish to receive a 2nd mortgage on their home. Home equity financing can come in 2 forms – as a fixed rate home equity loan OR variable rate home equity line of credit.
A home equity LOAN is similar to a fixed rate conventional loan – your rate is fixed for the life of the loan and commonly is amortized over 30 yrs.
A home equity line enables a homeowner to be approved for a certain amount of credit, which is most often based on a maximum of 80% of the appraisal value of the home. Lenders used to offer higher than 80% LTV, but have reduced this maximum in recent years due to declining home values. Interest pmts are usually a minimum of the interest only pmt but it is recommended for a borrower to pay more in order to pay down the principle..Using a home equity credit line is much like using a credit card. Homeowners will be able to borrow up to the amount allowed by the loan, repaying the loan according to predetermined interest rates and charges. The interest rate is usually based on prime rate plus a margin and when prime rate changes, the interest can change accordingly. To curb this insecure feature, many mortgage lenders also offer an option to convert variable interest rates to fixed rate loans.