|
 |
| Loan Programs |
|
Conforming vs Jumbo
Conventional/Gov't (FHA, VA, Cal Vet, others)
Portfolio vs FNMA/FHLMC
Fixed rate mortgages
ARM's (Adjustable Rate Mortgages)
Payment caps:
Hybrid ARMs
5/25 and 7/23 programs
ARM convertible to fixed
Negative amortizing loans
Balloon loans
First time home buyers programs
No point no fee programs
Buy down loans
Graduated payment mortgage
Seller financing
Assumption of existing loan
Buying property subject to existing loans
Pre-payment penalties
Second loans/home equity loans
Credit Scoring
Streamlined underwriting - 1 Hour approvals
|
|
Conforming vs Jumbo
This distinction refers to the loan size. Loans below the threshold are typically sold to FNMA (Fannie Mae), FHLMC (Freddie Mac), or others as ultimate investors for the loans. Loans above this threshold are sold to different investors. The rates for jumbo loans are typically a bit higher than for conforming ones, but the spread between the two varies with the economy.
The cutoffs between conforming and jumbo are currently $300,700 for single family dwellings, $351,950 for two units, $425,400 for three units, and $528,700 for four units. In Alaska and Hawaii, these numbers are currently $412,500 for single family dwellings, $527,925 for two units, $638,100 for three units, and $793,050 for four units. Properties with five or more units are considered commercial properties and are handled by different lenders under different rules.
Please call us directly at 415-247-1825 for information regarding commercial loans.
[ top ]
Conventional/Gov't (FHA, VA, Cal Vet, others)
This distinction clarifies the source of the funds or whether they are insured under a government program. The main effect to you, the borrower, is in the guidelines. VA and Cal Vet still allow you to finance 100% of your purchase price if you are eligible for the program. FHA used to be a prime source for high LTV (Loan to Value) loans, but conventional lenders have stepped in to grab the majority of that market. Different areas of the country are better served by different programs - this is just one more alternative in deciding how to structure your loan.
[ top ]
Portfolio vs FNMA/FHLMC
Many lenders (most) make loans that they will resell to other lenders and investors in the market place. In order to be sold, those loans need to meet stringent guidelines and conform to a specific profile. This is often limiting because perfectly good loan scenarios may have one aspect that does not meet FNMA guidelines. In those cases, the lender of choice would be a portfolio lender, or one that holds its loans in its own portfolio. These lenders can make or break their own rules without having to please someone else.
[ top ]
Fixed rate mortgages
Fixed rate mortgages are loans that have an interest rate and payment that are fixed for the entire life of the loan. You know today exactly what your payment will be 25.3 years from now - the same as today's payment. These are the most conservative loans available given the certainty that they bring, but they come with a small price: the interest rate is higher than for some of the other programs.
The lenders are guessing at what the financial markets will be doing 15 and 30 years from now. As this is a long time off, and the lender does not want to be caught with a loan too far below market rates, the rate is set somewhat higher than for a loan which will allow the lender to reset the interest rate sooner (an adjustable rate mortgage for example). The longer the lender is locked in, the higher the rates.
[ top ]
ARM's (Adjustable Rate Mortgages)
ARM's are loans with an interest rate that readjust periodically based on some economic index. These loans are priced based on the lender's cost of funds to make your loan, plus a predetermined margin. No matter what the economy does, the lender maintains that profit margin. As this is less risk for the lender to take, the interest rates are typically slightly lower than for fixed rates, but this is not the case at the present time (as of mid 1997). There are many varieties of ARM's, all different combinations of the following parameters.
- Index:
- The index is the economic indicator that your lender has chosen as a basis for the loan, usually because the lender's funds cost them a rate based on that index. Different indices track the economy in different ways and will thus affect your loan differently. The most common indices (but by no means the only ones) are the 1-year Treasury Bill rate, the 6-month LIBOR rate, the COFI (Cost of Funds Index), 1-year CMT rate (Constant Maturity Treasury - average of the 1-yr T-Bill for the last year), the prime rate, and the 6-month CD rate. Each index has its advantages and drawbacks, and is used in different situations.
-
- Margins:
- The margin is the amount of interest above the index rate that the lender charges, i.e. the true rate is made up of the index plus the margin. Given the same index, therefor, the more attractive loan is usually the one with the lower margin, though a higher margin loan may have less fees or a lower start rate. Margins between indices are more difficult to compare, and the best guess would be in looking at historic data for each index.
-
- Start Rate:
- The start rate is the rate during the initial period of the loan, which could be one month or a year or more. Most ARM's have teaser rates at the beginning, rates that are artificially low (below market prices) to ease the transition into a mortgage and to make their loan more attractive. After their initial period, the interest rate goes toward its fully indexed value, i.e. index + margin, but the rate adjustment is usually limited by periodic caps. Periodic caps and lifetime caps Caps are preset limits on how much your rate or payment may adjust in any given period.
-
- Typically a 1-year T-Bill based ARM would adjust a maximum of 2% per year and maybe 6% over the life of the loan. So if your loan started at 6.5%, the maximum it could go to next year would be 8.5%, and over the next 30 years, it would never go beyond 12.5% (a scary enough number, I recognize...)
Payment caps:
- Some loans do not have caps on the interest charged but rather on your monthly payment adjustment. A 2% adjustment in your rate could change your payment substantially, but if your payment can change no more than 7.5% you are better able to handle the increase. This can be a very attractive option and is a great tool, but there is a caveat: the interest that you would normally be paying on your loan but are not because of the payment cap is being added to the balance of your loan.
-
- For example, if your payment is $1,000 per month and interest rates rise, your new payment would normally be $1200/mo (for example). But your capped payment is only $1075. The other $125 get added to your loan balance, to be paid off over time, unless of course you decide to pay that additional amount now. This type of loan is called a negatively amortizing (or neg. am.) loan.
-
- Adjustment Periods:
- The initial rate and subsequent changes can shift every month, every 3 months, 6 months, 12 months, 3 years, or other combinations. In order to compare loans, find out how long the teaser rate is in effect and how often the rate changes after the teaser period.
-
- Fees:
- Just like with any other loan, the higher the rate on a specific program, the lower the fees ( actually, the fees are the same, but the lender is paying for them in exchange for the higher interest rate). In order to compare loans, you will have to choose a likely holding period for your property and evaluate the options based on that time frame.
-
- Pre-payment penalty or not:
- If you accept a pre-pay penalty, up front rates (points) will be more attractive because the lender knows they will make this up later. Some prepayment penalties are based on points, others want 6 months of interest as a penalty. Look before you leap.
-
- Loan guidelines:
- Every lender sets up their own guidelines as to what properties they will loan on and what limits they will lend within. Ask your mortgage broker for help tracking down the right combination.
[ top ]
Hybrid ARMs
Hybrid ARMs are a combination of fixed and ARM loans, starting with a fixed rate for 3,5,7,or 10 years, then rolling into an ARM after the fixed period. These loans are often referred to as a 5/1, or a 3/1, i.e. fixed for 5 years, then adjustable every year, or fixed for 3 years, the 1-yr ARM. The advantage of these loans is that the interest rate is lower than for a 30-year fixed (the lender is not locked in for as long so their risk is lower and they can charge less) but you still get the advantage of a fixed rate for a period of time. If you plan to move to a larger house in 5-7 years, you should look at a 5 or 7 year fixed term, etc.
A good way to decide whether you want to go this route is to compare the payment on a 30-year loan and the payment on a 5-year. Multiply this monthly difference by 60 months (5 years). The resulting number can be considered the amount you will pay for insurance on interest rates beyond the 5-year time frame. Is it worth it to you to pay that extra money for the peace of mind?
[ top ]
5/25 and 7/23 programs
These loans are fixed for 5 or 7 years, adjust once (with no cap to the adjustment), and are then fixed for the remaining 25 or 23 years. The pricing on these is similar to the hybrid ARMs with similar advantages over the fixed. Different lenders use the notations differently, so inquire as to the specific meaning of the label: some lenders call a 5/1 a 5/25.
[ top ]
ARM convertible to fixed
Convertible ARMs start as ARMs but have an option to convert to a fixed loan if you see interest rates starting to rise. The conversion is typically done for a nominal fee and requires almost no paperwork. The disadvantage is that the conversion interest rate is typically a little higher than the market rate at that time. In other words, if you were to refinance into a fixed loan rather than convert, you would get a better rate. In order to decide, look at the difference in monthly payments, what it would cost to refinance vs convert, and see how long the better rate takes to pay off the additional fees (and aggravation of refinancing). Then look at how long you plan on living in the house...
[ top ]
Negative amortizing loans
Negative amortizing loans are designed to stabilize your payment at the expense of the loan balance. By capping the payment adjustment rather than the interest rate, you will always control your cash flow, and the lender will collect all their interest (no interest rate caps), though not necessarily until you sell your home or pay it off years from now. See information about payment caps.
The margins tend to be rather attractive (low risk to the lender). If the interest rates rise to the point that your payment does not cover the interest due, any unpaid interest will get added to you loan balance. Eventually, you will pay this off.
The great advantage of this type of loan is that you can control cash flow (relatively stable payment), take advantage of low interest rates relative to the market at any given time, and pay back the money borrowed today at a depreciated value years from now (because of natural inflation). This loan makes a great tool for investors and homeowners as long as you understand the mechanics of what's going on.
[ top ]
Balloon loans
Balloon loans are loans that have a lump sum payment at the end of its term. Most loans are amortized over 15, 30, or 40 years. In other words, your monthly payment is set such that if you make your payment for 30 years, at the end of that time the loan balance would be zero. If however the loan is due after only 5 years, you will not have paid off the entire loan amount, but only a portion of it. At that point then, you will have to come up with a lump sum to pay off your lender, either through a refinance or from your own savings.
Who would want to live with that over their heads?? Someone with a solid job and qualifying easily can get rates that are even better than hybrid-ARM rates with a balloon loan.
[ top ]
First time home buyers programs
These are programs tailored specifically for a first time buyer, typically being more lenient on the qualification guidelines and often designed with lower upfront fees (though the interest rate is slightly higher to compensate for this). Also, there are often loan assistance programs offered at the local or state level such as MCC (Mortgage Credit Certificate) which allows you a tax credit for part of your interest payment (as opposed to a deduction) or down payment assistance programs. In California, if you are a state employee, Cal Pers may also loan you your down payment money, making your purchase a no money down deal. Other states may have similar programs.
[ top ]
No point no fee programs
In obtaining any loan, there are fees involved. The question is who pays them. In a no point no fee loan, the lender is paying all of your fees. Why? Because they are getting a higher interest rate on your loan. Every loan program offers a tradeoff between up front costs and long term interest rate. You can pay extra (additional loan points) in order to lower the rate, or you can get the lender to pay you (rebate points) in exchange for a higher interest rate. These rebate points are then used to pay your closing fees.
BEWARE - there is no such thing as a no cost loan - no points and no fees up front mean that you are trading off for a higher interest rate - run the numbers or have your loan broker help you figure out your best option.
[ top ]
Buy down loans
A buy-down is literally what it says - you are buying down the interest rate on the loan in order to qualify at a lower interest rate. This allows you to qualify for more house with the same income. Here's how it works: assume your loan normally has an 8% (fixed) interest rate. You can buy it down to 6% and qualify at 6% on a 2/1 buydown. Your interest rate will be 6% the first year, 7% the second year, and 8% thereafter for the remaining 28 years of the loan term.
3/2/1 and 1/0 buydowns are also available, though less common. In order to actually buy the rate down like this, you need to prepay the difference in payments between the 6% and 8% rates the first year, and between the 7% and 8% rates the second year. So if your payment drops $200/mo the 1st year (at 6% vs 8% interest), and the second year you are saving $100/mo (at 7% vs 8%), you will need to come up with (12x200)+(12x100)=$3600 up front to qualify at the lower rate.
In other words, this program does not save you any money, but does allow you to qualify for more house. If you do not have the cash to pay for the buydown, you can do a lender funded buydown, going higher on the interest rate but having the lender pay the buydown fee. Following the example above, you could go with an interest rate of 8.625% and qualify at 6.625% with no out of pocket cost for the buydown. Buydowns are available on fixed loans and some hybrid ARMs.
[ top ]
Graduated payment mortgage
GPM's are another option that allow you to start at a lower payment and qualify for more house (larger loan amount). These loans have payments that start low and increase at predetermined times. The monthly payments will eventually be higher in order to catch up from the lower payments. In fact, your loan will be negatively amortizing during the early years of the loan, then pay off the principal at an accelerated pace through the later years. These loans are best used in a rising market where the property value will stay ahead of the loan balance. I would also recommend that your income be on the rise beyond cost of living adjustments in order to handle the future increases.
[ top ]
Seller financing
Sellers will sometimes agree to or even prefer to finance the property for you. Instead of borrowing money from a lender to pay off the seller, you will be paying off the seller over time. This can be a great option if you do not qualify on paper for a regular loan, or if the terms offered are attractive. One major benefit is that you will avoid all the fees usually associated with a loan. The terms on a seller financed loan are subject to negotiation and will be directly related to the other terms of the purchase. Work with your real estate agent to come up with an attractive package.
[ top ]
Assumption of existing loan
In some cases, the sellers existing loan on the property can be more attractive than the loans available on the market. Study the options carefully to make sure this is really the case. If the loan is assumable, you may still have to qualify for the loan, but the fees may be less than originating a new loan. If the loan is not assumable, don't try to sneak it by the lender - it's not worth it.
[ top ]
Buying property subject to existing loans
Some buyers will offer a down payment to a seller and take over the existing loans, without formally assuming them. This often happens when a seller must sell or is in dire need of the money. But this is a very dangerous situation - proceed with caution. As a buyer in this situation, you may get a good deal, or you may have just bought yourself a bunch of trouble: additional liens against the property that you did not know about; the lender may ask you to pay off the loans immediately if they find out about the transfer; etc...
As a seller, your problems may seem over, or just starting. The lender still holds you liable for the loan. If your buyer does not make mortgage payments on time, your credit is affected, not theirs, so they have no incentive to pay on time. Also, if the buyer decides to let the house go into foreclosure, you will be the one responsible even though you do not own the house anymore (in signing your loan papers when you bought your house, you agreed to pay off the loans upon sale,...) Bottom line, if you consider playing in this arena, work with someone you trust absolutely and who really knows what they are doing.
[ top ]
Pre-payment penalties
Pre-payment penalties are added to certain loan programs in order to price them more aggressively. The lenders are basically saying: we'll give you a great deal, but you need to stay with us long enough for us to make some money on your loan. If you think you may move or refinance within the time period of the penalty, choose another loan program. Also, look at the penalty to be charged. Some are just 2 points (2% of the loan amount), some are 6 months worth of interest. Look before you leap. The lenders charging a 6-month prepayment penalty may be giving themselves a better deal than yours, and they want to lock you in there.
[ top ]
Second loans/home equity loans
In order to fund certain purchases or refinances, or in order to get a better rate or avoid mortgage insurance, we will often combine a first and second loan. We may also add a second loan behind an existing loan if you need cash to consolidate debt, remodel, pay for college, buy a car, etc... A second loan is simply one that is added behind another new or existing loan. A third loan can be added behind a second, and so forth, but not many institutions will consider being in anything less than 2nd position. Seconds can be either a mortgage for a fixed amount or a line of credit which you can draw on or pay down at will, up to a credit limit. The loans can be fixed or adjustable. The loans can go up to 100% of the value of your home, and in some cases up to 125% of the value of your home (refinance only).
[ top ]
Credit Scoring
Credit scoring is a new phenomenon that seems to be taking the industry by storm. The credit agencies have devised mathematical formulas to score people's credit. Each of the three credit reporting agencies has their own formula and resulting score, which sometimes differ substantially. The resulting number is starting to determine whether you are eligible for a loan or not. In some cases, the scoring is beneficial (the score seems higher than the credit warrants), in some cases quite the opposite. For now, there are still lenders that are not credit score driven so in essence there is an opportunity to get a better loan in some cases (use surprisingly high score to get loan from score driven lender, go with non-score driven lender in the opposite case), but I do not know how long this will last.
[ top ]
Streamlined underwriting - 1 Hour approvals
With the advent of credit scoring, and computer and communications technology, automated analysis of loans is becoming more commonplace. If your loan fits within all the guidelines (plain vanilla with no toppings), your loan can likely be approved within an hour, subject to verifying the information you provided. The speed can obviously be an advantage in certain situations, and the documentation involved is often less than with the conventional underwriting. Please let us know if you would like us to run you through the automated system (conforming loans only for now). If you are not eligible for the streamlined system, we can still run you through regular underwriting - not being eligible for the system is not in any way a reflection of your credit-worthiness.
[ top ]
|
|
