Mortgages

Conventional Loans

Conventional loans require borrowers have to higher down payments, better credit and lower income to debt ratios to qualify when compared to FHA loans.  In the past, you might have had trouble securing a conventional loan with less than 20 percent down, but today it only takes about 5 percent, which puts them in reach of many borrowers with outstanding credit.  Unlike FHA loans, conventional loans aren’t insured, but purchased directly by Fannie Mae or Freddie Mac.  Since banks don’t have to worry about keeping these loans on the books for any amount of time, they’re much more eager to make them.
There’s no upfront mortgage insurance, unlike an FHA product, but unless you have a 20 percent down payment, you will pay a monthly premium based on your loan amount and credit score.  However, you’ll be able to cancel your mortgage insurance after two years if your home’s value has increased enough to give you 20 percent equity.  In addition, you can avoid mortgage insurance if you borrow a second mortgage to cover the difference between your down payment and the 20 percent equity needed.
If you have problem credit, several different monthly debt payments or are fixated on interest rates, conventional mortgages might not be for you.  The underwriting process is very unforgiving and rates are often slightly higher than FHA products, especially if you’re borrowing a second mortgage in order to avoid mortgage insurance.

Federal Housing Administration (FHA) Loans

If you’re just getting started in the housing market and you don’t have much money in hand and a little more debt than you’d like, an FHA loan may be the right choice.  These loans are the most forgiving of credit problems, allow a borrower to finance up to 96.5 percent of the cost of their home and can be manually underwritten to stretch debt to income ratios in specific circumstances for those borrowers who qualify for exceptions.  You’ll find FHA loans through your local banks – brokers often shy away from them because they limit the fees lenders can collect.
Unlike a conventional loan, FHA loans require the payment of both an upfront and annual loan insurance premium, divided monthly.  The upfront portion can be financed into the loan, reducing the money required at closing, but you’ll be paying interest on that money for the life of the loan; before borrowing with an FHA loan, consider the implications of financing that extra chunk. Along with that large upfront premium, you’ll be required to make a monthly loan insurance payment, further increasing your overall costs over the life of the loan, unlike with a conventional mortgage.
If you have no other choice than to borrow using an FHA loan, you’re probably still better off buying than renting — after all, you can refinance your FHA loan without penalty when your financial circumstances improve.

Department of Veterans Affairs (VA) Home Loans

VA loans are another option for borrowers with little free cash but decent credit, provided they’ve served in the military.  You’ll need to obtain a Certificate of Eligibility through your lender or the VA Loan Eligibility Center before you will be able to close your loan, however.  Qualifying for a VA loan is a lot different than any other loan on the market – the Department of Veterans Affairs places no strict limits on the credit eligibility or debt to income ratios of the borrowers they insure.  Instead, most underwriting items are left to the discretion of the bank involved.  Most banks will lend with standards similar to FHA, but they’re under no obligation to do so.
The Department of Veterans Affairs may not provide a lot of guidelines on who to loan VA funds to, but they’re very strict on what fees can be paid by borrowers and how much they can pay for things like closing costs.  Items not reimbursed under “itemized fees and charges” on the HUD-1 form are limited to one percent of the loan amount in most cases, and those “itemized fees and charges” are tightly regulated.
Even though VA loans are an excellent option for many veterans, there are a few drawbacks.  If you have plenty of cash and excellent credit, you may be able to find a better rate with a conventional loan, plus you’ll avoid the VA funding fee.  In addition,some sellers may be nervous about accepting a real estate contract with VA financing attached, especially if they or their agent believe your loan may take extra time to close.

Jumbo Loans

It may seem too simplistic, but a jumbo loan is just that – a loan amount that’s much bigger than the norm.  Any loan that exceeds Fannie Mae or Freddie Mac’s cap for the area where the property is located is technically a jumbo, though there’s no real limit on how big a jumbo can get.  These are the loans that are used to buy mansions and estates, but they aren’t any easier to secure than they are to pay off.
The requirements are stiff — a credit score of 700 or better, high down payments of 20 to 30 percent and solid proof of very high income are just a few of the things that jumbo lenders look for before handing over this kind of money.  Since there is no insurance on a jumbo mortgage, lenders have to be extra careful who they lend to – one bad jumbo could break a small bank.
Unless you’ve just signed a lucrative movie deal or are shopping for an executive home, you’ll probably never rub elbows with the jumbo loan.  If you do happen to fancy that kind of lifestyle, remember that the interest rates will be very high, making the payments very high.  It may take some time to find a lender who will write the jumbo you’re looking for, so be sure to shop around.

United States Department of Agriculture (USDA)  Loans

Not everybody lives in an area that will qualify for a USDA home loan, but for those that do they can be a much better deal than any other mortgage product.  Rates are set by lenders, but they are typically fairly low and no down payment is required.  The main program used to lend to home buyers is the Guaranteed Housing Loan Program, which allows buyers to roll eligible closing costs, lender fees and any allowable repairs into the loan, up to the value of the home.

Although it’s fairly easy for a borrower to qualify for this type of loan, there are several catches.  First, the borrower must not have income exceeding 115 percent of the median income for their area.  Secondly, the home must be located in an area targeted for rural development – these are typically very out of the way places that may suffer from aging infrastructure.  Third, the home itself has to meet the USDA’s exacting standards, which can be difficult to meet if the home wasn’t built with USDA financing in mind.

 

Reverse Mortgage

 

A reverse mortgage is still a loan with your house as the collateral, but it is entirely different from the kind of mortgage you got when you bought your first house. These are the major differences:

The Lender Pays You

That’s correct. You do not make a monthly payment with a reverse mortgage. The lender pays you, and the loan can be set up so that you can get paid in a lump sum, you can get paid regular monthly amount, or you can get paid at the times and in the amounts you request.
The terms of the loan determine what each of these amounts would be. The primary determining factors are your age, the value of your house, and the prevailing interest rates at the time.

You Continue to Live in Your House

Staying in your house is really the whole purpose of reverse mortgages when you get down to it. The twist is that instead of paying somebody else to live there, you get paid while you continue to live there.

You are actually required by the terms of the loan to continue to live in the house as your principal residence. You can spend any amount of time visiting your children and grandchildren, you can travel for pleasure, and you can continue to spend summers at the lake so long as the house remains your principal residence.

You Retain Ownership of Your House

A reverse mortgage is not a sale. You keep all the rights of ownership that you had before the reverse mortgage loan. You do not need the lender’s permission to paint the house a different color or to remodel. You can put your house on the market and sell it to the highest bidder. You can will it to your children.

If there is a change in ownership, such as by sale or through the death of the last surviving owner, the reverse mortgage will have to be paid off at that time. The lender would be entitled to receive from the proceeds of the sale only the amount you actually received from the lender plus all accrued and unpaid interest to date. Any amount remaining after paying off the reverse mortgage lender would go to you, to your surviving spouse, or to your estate.

The Principal Amount of the Loan Increases With Each Payment

Another way of saying this is that you control the amount that must eventually be paid back by controlling the amount of money you actually get from the lender. A reverse mortgage is still a loan, and the money plus interest has to be paid back at some time, usually from the sale of the house after you and your spouse no longer live there.

Because the principal amount of a reverse mortgage cannot be determined until after you no longer live at the property, neither can the maturity date of the loan. This can a difficult concept to wrap your mind around because it is so different from conventional mortgages.

You Can Never Owe More Than the Value of Your House

This is true for the two reverse mortgage products sponsored by the Federal government (HECM and Home Keepers) although it may not be true for privately created reverse mortgage programs.

The benefit of the Federal programs is that you, your surviving spouse, or your estate, can never owe more than the loan balance or the value of your house, whichever is less. Your reverse mortgage lender cannot require repayment from you, your surviving spouse, or your heirs, or from any asset other than your house.

Interest Only

The main feature of an interest only mortgage loan is that during a specified initial period of time – usually three, five, seven or ten years – you may choose to make a payment of the interest portion of the loan only. The option is flexible. One month you may choose to make an interest only payment, another you may choose to make an interest-plus-part-of-the-principal mortgage payment, or a full, standard monthly mortgage payment. Needless to say, an interest-only payment will be significantly less than a traditional mortgage payment.

The flexibility of an interest-only mortgage allows you to adjust your mortgage cost on a month by month basis, giving you more control over your monthly cash flow. In any given month during the interest-only period, you have the flexibility to pay as much or as little on your mortgage as you can.

Interest only mortgages aren’t right for everyone. While you have the option of paying interest only each month during the early years, the principal repayment on your mortgage loan is accumulating. At the end of your interest only period, your mortgage payment will take a dramatic jump.

Financial experts recommend interest only mortgages for specific types of borrowers: those whose income is supplemented by large commissions or bonuses throughout the year, those who can reasonably expect to be making considerably more income in a few years than they are now, and those borrowers who actually WILL invest the difference between their interest-only payment and their full mortgage payment in profitable investments.

The power of an interest-only loan, according to most experts, is that you can ‘afford to buy more house’. Because you’ll have the choice during the early years of paying only the interest each month, you can effectively afford the monthly payments on a house that’s as much as 30% more expensive than you could with an amortizing (typical) mortgage payment.

You also, however, have the choice each month of paying the interest plus as much on the principal as you wish. If you’re a salesman, for instance, whose standard income is supplemented quarterly and semi-annually by large commissions or bonuses, you could pay interest-only during lean months, saving yourself up to $350 in those months. In the months that you get a large commission though, you could choose to pay down several thousand dollars on the principal.

An interest only mortgage also makes sense if you have a solid investment plan. If a typical mortgage payment would be $900 monthly, and your interest-only payment for the month is $625, then the best financial strategy according to many financial experts is to invest the remaining $275 in a solid, money-making stocks program.

Interest only loans are not for everyone, but they can be a valuable financial tool that can help you control your spending and give your investment more power.