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Loan
Programs FAQ
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Balloon Mortgages
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With
a balloon loan, at some point you'll be forced
to pay off the loan, refinance the loan, or
exercise a conversion option to get a new
loan on or before the balloon due date. Unlike
standard fixed or adjustable loans, balloon
loans are not amortized. The entire
loan balance is all due and payable in a relatively
short time.
One of the
most popular balloon programs is the 30/5,
commonly referred to as a "thirty-year due
in five." The interest rate is fixed and
the monthly payment is sufficient to pay
off the loan in thirty years, but the outstanding
principal balance is due at the end of five
years. Some 30/5s have a conversion
option which allows you to convert to a
twenty-five year, fixed rate at the time
the balloon becomes due. There may be a
minimal processing fee (typically $250)
to convert to the new loan. The conversion
rate is normally the FNMA sixty-day rate
plus .5 percent. The conversion option
may also be conditioned upon:
- Satisfactory
mortgage-payment history. If your payments
were late, the conversion may be denied.
- If the
loan was secured by an owner-occupied
dwelling, the dwelling will still need
to be owner-occupied. If the house is
a rental at the time of loan-conversion,
the conversion may be denied, or you might
be charged a higher interest rate.
- Secondary
financing may not be allowed. If you have
a second mortgage, the conversion may
be denied unless you pay off the second
mortgage.
Terms vary
by lender. More information can be found
in the loan obligation (promissory note).
This is a document the lender will require
you to sign at the time of closing.
Another popular
balloon loan program is the 30/7. This is
similar to the 30/5 except that the balloon
comes due at the end of the seventh year.
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| FHA
Loans |
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An FHA
loan is a mortgage loan insured by the Federal
Housing Administration . FHA is part of the
U.S. Department of Housing and Urban Development
(HUD). FHA insures loans made by banks, savings
and loans, mortgage companies, credit unions
and other approved institutions. FHA does
not originate loans. Since 1934, FHA has offered
mortgage insurance programs which help people
purchase homes with a modest down payment.
Title II, Section 203(b) is the most often
used single family program. Under this program
a borrower may obtain a ten, fifteen, twenty,
twenty-five or thirty year loan to purchase
an existing one- to four-family home in a
rural or urban area.
In recent
years, Fannie Mae and Freddie Mac have introduced
low down-payment programs also--the Community
Home Buyer program for example. Consequently,
FHA loans are less popular than they once
were. The loan limits for FHA loans vary
geographically.
FHA requires
a mortgage insurance premium (MIP) when
insuring a loan. Currently, the up-front
MIP is 2.25 percent of the base loan amount,
or 1.75 percent for a qualified first-time
homebuyer. The up-front MIP may be financed.
In addition, there is a monthly MIP payment
which is calculated by multiplying the loan
amount by .5 percent and dividing by twelve.
Condominiums do not require up-front MIP--only
monthly MIP.
Down Payment
Gifts: One of the key benefits
of an FHA program is that you do not have
to use your own funds for the down payment.
Under certain conditions, gifts are allowed
if the donor is a relative, a close friend,
an employer, or a humanitarian, welfare,
or charitable organization. A gift letter,
signed by the donor, is required stating
the amount given and specifying that no
repayment is expected, (See HUD Handbook
4000.2 REV-2)
Bridal
Registry: The Bridal Registry
Account allows couples who are getting married
to open a bridal registry savings account
with a participating Federal Housing Administration
approved bank. Family and friends may deposit
cash wedding gifts directly into the interest-bearing
account.
FHA Streamline
Refinance: FHA has made it
very easy for borrowers to refinance their
existing FHA loans. If your mortgage is
currently FHA insured, your payments have
not been late, you are not taking cash out,
and you are reducing your payment--you may
qualify for the FHA Streamline Refinance
Program. An FHA Streamline Refinance typically
does not require an appraisal
203(k)
loan: FHA insures rehabilitation
loans for owner-occupants, municipalities
and non-profit housing providers to finance
1) rehabilitation of an existing property,
2) rehabilitation and refinancing of a property,
and 3) the purchase and rehabilitation of
a property.
Investors
must have a 15 percent down payment and
can purchase (or refinance) and rehabilitate
properties for rental purposes or sell the
property (and get their profit using the
Escrow Commitment Procedure) to a qualified
Homebuyer (who assumes the loan).
203(k) can be used with one- to four-family
dwellings, condominiums and HUD homes that
require a minimum of $5,000 in repairs.
CO-OPS ARE NOT ELIGIBLE. Garden apartment
style row housing can be converted with
203(k) to fee simple or condominium with
the addition of fire walls every four units.
203(k) loans can be used to bring illegal
dwellings into code compliance.
Mixed use
residential property is acceptable provided
the property has no greater than 25 percent
for a one story building; 33 percent for
a three story building; and 49 percent for
a two story building of its floor area used
for commercial (storefront) purposes. The
rehabilitation funds can only be used for
the residential functions of the dwelling
and areas used to access the residential
part of the property.
Reverse
mortgages for seniors: Homeowners
sixty-two and older who have paid off their
mortgages or have only small mortgage balances
remaining are eligible to participate in
HUD's reverse mortgage program. The program
allows homeowners to borrow against the
equity in their homes.
Homeowners can receive payments in a lump
sum, on a monthly basis, or on an occasional
basis similar to a line of credit. Under
certain circumstances, homeowners may restructure
their payment options.
Unlike ordinary home equity loans, a HUD
reverse mortgage does not require repayment
as long as the borrower lives in the home.
The reverse mortgage is repaid in one payment,
after the death of the borrower, or when
the borrower no longer occupies the property
as a principal residence. Upon sale of the
home, any remaining equity goes to the homeowner
or to his or her survivors. If the sales
proceeds are insufficient to pay the amount
owed, HUD will pay the lending institution
the amount of the shortfall.
The maximum
amount of the reverse mortgage is determined
by multiplying the maximum claim amount
by the factor corresponding to the age of
the youngest borrower and the expected rate.
It is beyond the scope of this document
to present the factorial tables required
to calculate your particular maximum loan
amount.
Home Improvement
FHA Title 1 loans: Under
Title I, FHA insures loans obtained for
repairs, alterations, and improvements to
existing structures, and for the building
of small new structures for nonresidential
use. The property can be non-residential,
multi-family, or single-family. Interest
rates on these loans are set by HUD-approved
lenders.
For answers
to your FHA questions, call 1-800-CALLFHA.
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| Fixed-Rate
Mortgages |
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Fixed-rate
mortgages are very popular because the interest
rate and monthly payments are constant. Fixed
loans are generally amortized over ten, fifteen,
twenty or thirty years.
A fixed-rate
mortgage is generally preferred when the
interest rate is relatively low and one
intends to keep the property for more than
five to seven years. When rates are relatively
high, or if one intends to sell the property
in fewer than five to seven years, adjustable
loans are generally preferred.
The most
common fixed rate mortgage is the thirty-year
fixed. Borrowers who want to pay off their
loan sooner may opt for a fifteen-year mortgage.
If you are trying to decide between a thirty-year
and a fifteen-year loan, consider the following:
- Paying
your loan over fifteen years can save
you thousands of dollars in interest.
Paying less interest results in less of
a tax deduction. Determine in advance
if a larger tax deduction (with a thirty-year
loan) will offset the benefits derived
from paying less interest (with a fifteen-year
loan).
- The payment
on a thirty-year loan can be substantially
less than the payment on a fifteen-year
loan of the same amount. You could
obtain a thirty-year loan and invest the
difference in mutual funds, stocks, CDs,
etc. If you could earn a higher, after-tax
rate on your investment than the rate
you pay on your mortgage, it may be advantageous
to invest the difference.
The final
decision you make will depend on your preferences.
If your goal is to live debt free, then
a fifteen year mortgage may be right for
you. If you goal is to maximize your tax
deductions, a thirty year loan may be best
for you.
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| Loan
programs with less than perfect
credit |
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Are there
loan programs available for borrowers with
less than perfect to extremely poor credit?
Absolutely. Fundamentally, all the
lender wants to be assured of is that 1)
one has the ability, and 2) the desire to
repay the debt. The worse one's credit,
the more evidence of one and two one will
need to muster.
If you think
you may be "credit challenged",
one of the first things you'll want to know
is, just how "less than perfect"
is your credit? Fortunately, many
bright people have dedicated their professional
lives to creating methods for answering
such questions. Statistical models
which balance numerous credit factors provide
methods for determining credit ratings.
The models generate a single number—a
credit, or FICO score—which provides
lenders with a starting point for making
decisions about lending money.
How do you
get your credit score? Currently there
is no law requiring that consumers be given
their credit scores. Lenders aren't
required to give you your credit score—but
some will if you ask them. The lender should,
however, tell you what factors contributed
to your credit score if your score was a
factor in delaying or denying your loan
application. Credit bureaus don't include
credit scores on consumer credit reports.
Assuming
you know your credit score—what does
it mean? Credit scores fall between
approximately 375 to 900. Anything
over 670 is considered good credit.
Borrowers with good credit are able to get
the best financing rates and terms available
to the general public.
Lenders classify
borrowers into the following credit categories
based upon their credit scores. These categories
can vary slightly among lenders. For example,
a credit score of 620 could be a "B"
with one lender, but a "C" with
a different lender. The lower your score,
the more expensive and restrictive your
potential financing choices.
Credit
Rating |
Credit
Score |
| A+ |
670 |
| A- |
660 |
| B |
620 |
| C |
580 |
| D |
550 |
| E |
520 |
It would
be confusing at best to present general
underwriting guidelines in an attempt to
interpret credit ratings and scores as they
relate to individual borrowers. In A- through
E credit scenarios, dozens of factors are
considered in the decision-making process.
Your best assurance of getting the best
possible loan is to shop among several lenders.
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| Loan
Categories |
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The major
loan categories are conventional and government.
Conventional loans can be further categorized
into conforming and non-conforming.
Government loans primarily refer to FHA and
VA loans.
Conforming
Loans
A conforming loan adheres to the guidelines
established by Fannie Mae or Freddie Mac.
These guidelines establish maximum loan
amounts, down payment, credit and income
requirements and acceptable property types.
Lenders that make loans according to these
guidelines may sell them to Fannie Mae or
Freddie Mac. Conforming loans make up the
majority of loans in the U.S.
Conforming
Loan Limits for 2002
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All
Other
Areas |
Hawaii,
Alaska,
U.S. Virgin Islands |
| One
- Family |
$300,700 |
$379,050 |
| Two
- Family |
$323,400 |
$485,100 |
| Three
- Family |
$290,900 |
$586,350 |
| Four
- Family |
$485,800 |
$728,700 |
Non-conforming
Loans
Loans that do not conform to the guidelines
established by Fannie Mae or Freddie Mac
are called non-conforming loans. A loan
that is larger than the conforming loan
limit is called a Jumbo loan. Loans
that do not meet the credit quality of conforming
loans ('A' paper) are referred to ad A-
through 'D' paper loans, or subprime
loans.
Government
Loans
FHA and VA loans are the two most popular
types of Government loans. Government loans
have different loan limits and qualifying
criteria compared to conventional loans.
Portfolio
Loans
Loans may be sold on the secondary market
to Fannie Mae, Freddie Mac or a select number
of conduits (e.g. GE Capital) or they may
be kept in the bank's portfolio. Portfolio
loans generally have more flexible qualifying
criteria, while saleable loans must meet
more strict criteria.
Commercial
Loans
Loan programs discussed above apply to one-
through four-family, residential properties.
Loans on residential properties containing
five or more units, office buildings, warehouses
and other commercial properties are considered
commercial loans.
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| Adjustable
Rate Mortgages (ARM) |
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An
ARM is a loan which allows for the adjustment
of its interest rate according to the terms
of the note and as market interest rates change.
The ARM interest rate is based upon one of
many indices which reflect market interest
rates. The borrower assumes the risk that
interest rates (and their monthly payment)
will rise. By assuming this risk, lenders
may charge a lower initial interest rate compared
to fixed rate loans. The lower initial rate
is the main reason borrowers choose ARM loans--it
allows them to qualify for a larger loan and
obtain a higher-priced home.
Borrowers
considering an ARM should familiarize themselves
with standard ARM features. These
features include:
- Start
rate (Teaser rate): This
temporary rate is the starting interest
rate. It is often referred to as the teaser
rate. The start rate is lower than
the fully-indexed rate (sum of the index
plus the margin), and lower than the market
rate on fixed loans.
- Initial
Adjustment Period: The
length of time the interest rate is fixed
initially. For example, if the initial
adjustment period were six months, the
interest rate would remain fixed for the
first six months. Beginning in month
seven, the loan would adjust at regular
intervals.
- Regular
Adjustment Period: The
frequency at which the interest rate adjusts.
If the regular adjustment period were
six months, the interest rate would adjust
every six months.
- First
Adjustment Cap: The maximum
amount the interest rate can increase
when it adjusts for the first time. For
example, if your teaser rate and first
adjustment cap were 5 percent and 3
percent respectively, the maximum your
rate could increase after the initial
adjustment period would be 8 percent.
- Regular
Adjustment Cap: The maximum
the interest rate can adjust up or down
each adjustment period.
- Lifetime
Cap: The maximum interest
rate allowed over the life of the loan.
- Index: The
variable index referenced in your note.
The margin is added to the index to set
the ARM interest rate. The index can usually
be found in business newspapers. More
information about various indices is available
below.
- Margin: A
fixed number which is added to the index
to arrive at the ARM rate.
- Fully-indexed
rate: The fully-indexed
rate is equal to the index plus the margin.
Your loan always adjusts toward this rate.
- Conversion
Options: Some ARMs have
an option which allows the borrower to
convert the ARM to a fixed-rate loan.
Exercising the option usually must occur
within a predetermined time frame; the
fixed rate is determined by a formula.
For example, a one-year T-bill ARM
may be converted to a fixed-rate loan
during the first five years on the adjustment
date. I.e., you could convert during the
thirteenth, twenty-fifth, thirty-seventh,
forty-ninth or sixty-first month.
The formula
to calculate the fully-indexed interest
rate is:
fully-indexed rate = value of index + margin
Note:
The rate you pay after one or more adjustments
may not be the fully-indexed rate.
This can occur when the interest rate adjustments
are limited by a cap.
- Not reaching
the fully-indexed rate: Your previous
rate was 7 percent, your loan has
a 1 percent adjustment cap, the index
is 7 percent, your margin is 3 percent.
The fully-indexed rate is 10 percent.
Because of the limiting payment cap, your
new interest rate is 8 percent.
- Reaching
the fully-indexed rate: Your previous
rate was 7 percent, your loan has
a 3 percent adjustment cap, the index
is 7 percent, your margin is 3 percent.
After the adjustment, your interest rate
reaches the fully-indexed rate of 10
percent.
Details about
the various indices:
- Prime
rate: The interest rate
banks charge their best (prime) customers.
- Treasury
bill rate: Treasury bills
are short-term debt instruments used by
the U.S. Government to finance their debt.
Commonly called T-bills, they mature in
less than one year.
- Libor: London
Interbank Offered Rate. The interest rate
international banks in London charge when
lending to each other. Indices are quoted
for maturities of one, three, six and
twelve months. The most common Libor rate
referred to in ARMs is the six-month Libor
rate.
- 6 month
CD rate: The average rate
that banks pay on a six-month Certificate
of Deposit.
- 11th
District Cost of Funds Index (COFI): The
index is the average monthly cost of the
interest expenses incurred by members
of the 11th District of the Federal Home
Loan Bank System. Deposits in checking
and savings accounts, certificates of
deposit, transactions accounts, and passbook
accounts are the primary source of funds
for these savings institutions. The COFI
moves slowly and lags behind the market.
For COFI ARM borrowers, this is an advantage
when interest rates are rising, but a
disadvantage when rates are falling. When
rates are rising, the COFI rate, and consequently
the ARM rate, will rise slowly. Conversely,
when rates are falling, the COFI rate
and ARM rate will decrease slowly.
Popular
ARM programs. Some of the more popular
ARM programs include:
- One-Year
Treasury Bill ARM
Adjusts annually with a two percent annual
cap.
- Six-Month
Certificate of Deposit (CD) ARM
Adjusts every six months with with
an adjustment cap of 1 percent. The
CD rate is very volatile and changes quickly
with the market.
- Six-Month
Treasury Average ARM
This index is relatively stable because
it averages the treasury rate over the
previous six months. This loan has a maximum
interest rate adjustment of 1 percent
every six months.
- Twelve-Month
Treasury Average ARM
This index is relatively stable because
it averages the treasury rate over the
previous twelve months. This loan has
a maximum interest rate adjustment of 2
percent every twelve months.
- Three-month
COFI ARM
The COFI is one of the most stable indices
and adjusts very slowly. The three-month
COFI ARM typically has a very low start-rate
for the first three months, after which
time the interest is fully indexed and
adjusts monthly.
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