Stewart Brown Jr – Mortgage Loan Originator – Purchase or Refinance
The IMF or International Monetary Fund is a major world organization and part of the United Nations and is headquartered in Washington, DC. It consists of 190 countries from around the world. It was formed in 1944 at the famous Bretton Woods Conference along with it’s complimentary institution, the World Bank. Both organizations were implemented for the overall goal of helping countries recover after the two World Wars and the Great Depression. It’s primary purpose is to promote international monetary cooperation, facilitate international trade, foster sustainable economic growth, provide resources to members experiencing balance of payment troubles, prevent or assist with the recovery from an international financial crisis and reduce poverty. The IMF was also instrumental in overseeing the new system of fixed foreign exchange rates and managing the Gold Standard until it was eradicated by President Nixon in 1971.
The World Bank was conceived in 1944 along with the IMF at the Bretton Woods Conference held in New Hampshire. It was created in 1945 and is headquartered in Washington, D.C. It is actually the collective name for five international organizations: 1) the IBRD International Bank for Reconstruction and Development 2) IDA International Development Association 3) IFC or the International Finance Corporation 4) MIGA Multilateral Investment Guarantee Agency and 5) ICSID International Centre for Settlement of Investment Disputes. The purpose of the World Bank is to provide loans and grants to the government of low and middle income countries for capital projects including road transport, social/welfare services, electricity transmission, rail transport, rural development, water suppy, sanitation and energy to name a few.
A central bank is a national bank that provides financial and banking services for it’s country’s government and commercial banking system, as well as issuing paper money and coins and implementing the government’s monetary policy. The responsibilities of a country’s central bank are to keep inflation stabilized, issue money in the form of coins and notes, set interest rates, promote growth and employment, and to ensure the stability of the banking system and being a lender of last resort to the country’s government. The Federal Reserve is the central bank of the United States. Other well known central banks are the Bank of Japan, People’s Bank of China, the Bank of England and the Deutsche Bundesbank in Germany.
The Federal Reserve or simply the Fed is the central bank of the United States. It is the most powerful institution in the United States and one of the most powerful institutions in the world. It performs five functions: (1) it handles the nation’s monetary policy to promote maximum employment, stable prices, and the moderation of long-term interest rates in the economy (2) it promotes the safety and soundness of individual financial institutions (3) it fosters payment and settlement system safety and efficiency through services to the banking industry and the U.S. government that facilitate U.S.-dollar transactions and payments; and (4) it promotes consumer protection and community development through consumer-focused supervision and examination, research and analysis of emerging consumer issues and trends, community economic development activities, and the administration of consumer laws and regulations.
The NMLS or Nationwide Multi-State Licensing System and Registry is a centralized database used by mortgage regulatory agencies to maintain and track state licensing programs. It began operating in 2008 after Congress passed the SAFE ACT or Secure & Fair Enforcement for Mortgage Licensing Act. The NMLS is in place primarily to protect borrowers so they can check to make sure the lender and mortgage loan officer they are working with are properly licensed to serve them in their jurisdiction. To obtain an NMLS license, a mortgage company or loan originator must not have had a felony conviction in the last seven years, never had a felony conviction related to a financial crime, provide their credit report to show their financial responsibility and maintain annual mandatory continuing education. An NMLS identifying license number must be displayed at all times in any correspondence or marketing advertisements with the public.
The Federal National Mortgage Association (FNMA) or more commonly known as Fannie Mae is a United States GSE, Government sponsored entity. Founded in 1938 during the Great Depression as part of President Roosevelt’s New Deal, it’s purpose was to expand the secondary mortgage market by securitizing mortgages in the form of MBSs or mortgage backed securities. This allows lenders the ability to reinvest their assets in making new mortgages and promoting home ownership throughout the U.S.A. Since 1968, Fannie Mae has been a publicly traded company. Along with its brother organization, Freddie Mac, they are responisble for keeping the conventional mortgage market healthy by guaranteeing loans up to a certain size, called the conforming loan limit which is updated annually by state and county throughout the U.S.
The Federal Home Loan Mortgage Corporation (FHLMC) or more commonly known as Freddie Mac is a United States GSE, Government sponsored entity. Founded in 1970 and created out of the Emergency Home Finance Act of 1970, Freddie Mac essentially buys mortgages, packages them together in what are known as mortgage backed securities or MBSs and sells them to private investors. This process allows lenders the ability to reinvest their assets in making new mortgages and promoting home ownership. Along with its sister corporation, Fannie Mae, they are responisble for keeping the conventional mortgage market healthy by guaranteeing loans up to a certain size, called the conforming loan limit which is updated annually by state and county throughout the U.S.
Ginnie Mae or the Government National Mortgage Association (GNMA) is a government owned corporation within the Department of Housing and Urban Development. Ginnie Mae secures the following types of loans: FHA, VA, USDA and mortgages for native Americans. Founded in 1968, Ginnie Mae was created to increase afforable housing by guaranteeing government loans, in essense making borrowing costs cheaper for Americans. This allows lenders the ability to reinvest their assets in making new mortgages and promoting home ownership. Ginnie Mae is similar to Fannie Mae or Freddie Mac except the later two are government sponsored entities or GSEs. In addition, the mortgage backed securities that Ginnie Mae guarantees are the only ones that are backed by the “full faith and credit of the United States government.”
The LIBOR or London Interbank Offered Rate is a benchmark interest rate which major global banks lend to one another in the international interbank market for short-term loans. It is administered by the Intercontinental Exchange which would use estimates from these major world banks to calculate the rate. It was based on five different currencies including the US dollar, Euro, Swiss franc, Japanese Yen, and British pound. It serves seven different maturities, overnight, spot, one, two, three, six and twelve months. Due to manipulations and fraud concerns over the years, it was decided at the end of 2021 to discontinue use of this benchmark for many major mortgage loan products. In turn, the SOFR or Secured Overnight Financing Rate essentially replaced the LIBOR at this time and became the new go to benchmark.
To understand what the CMT or Constant Maturity Treasury is we first need to understand what Treasury securities are. Treasury securities fall into three main categories: Bills, Notes and Bonds. T-Bills or Treasury bills are short term obligations under one year. T-notes carry a maturity from two to ten years. T-Bonds range from ten to thirty years in duration. The CMT rate refers to a computed yield that is derived by taking the average yield of these different types of Treasury securities that are set to mature at different times and using it to adjust for a number of time periods. The CMT is commonly used as the index for mortgage products such as FHA or VA 5 year ARMs. The CMT is published by the US Treasury as a weekly, monthly and one year rate. These are also used as a reference for pricing debt securities issued by corporations and institutions.
The Mello-Roos is a tax assessed against the land, but is not based upon the value of the property that sits on it. Related to California and more specifically the Mello-Roos Community Facilities Act of 1982, it allows a special tax for the purpose of financing certain public improvements and services through the sale of bonds. Such public works include parkways, streets, roads, open spaces, water, sewage and drainage, electricity, infrastructure, schools, museums, cultural facilities, parks and police protection. The amount of the tax varies from year to year. It was implemented as a means of bypassing the state’s 1978 Proposition 13 amendment to the California Constitution which put a cap on property tax increases. Even to this day, the law remains controversial within the state.
Traditional banks do not make hard money loans. Hard money lenders are typically private individuals and companies and the approval process is significantly faster and more streamlined than conforming loans. These loans can be approved in as little as a few days versus a month or more for traditional programs. The interest rates tend to be high, sometimes even higher than subprime loans. Also, these are typically not allowed on owner occupied properties because of regulatory oversight and compliance. These type of loans are used for flipping houses, purchasing investment property and purchasing commerical property. The borrower’s financial position is typically not the focus while review is solely on the collateral hence why these loans have significantly lower LTV’s between 50 – 75% versus the typical 80% or more on a conforming loan.
Redlining is a term synomous with racial discrimination. It is the practice of outling in red on government maps areas where black residents live to avoid lending in those areas and categorizing them as risky investments. This practice came about in 1933 as a result of President Roosevelt’s New Deal that intended to provide suburban housing to white middle and lower income families, while at the same time pushing black families into urban housing projects, ghettos and slums. Unfortunately, these segratory and discriminatory practices have been going on in America for numerous decades now and have been a contributing factor to the great wealth gap and inequality we see today in society. Although the Fair Housing Act of 1968 and the Community Reinvestment Act of 1977 were passed in an effort to prevent redlining, the discrimination continues to this day.
Blockbusting is a practice in which real estate agents convince white residents in a particular area to sell their homes at below market prices because of the threat of racial minorities moving into those areas. The real estate agent would then purchase the home and sell it at inflated prices to minorities looking for upward mobility. Fortunately, it has mostly disappeared due to strong changes in the law in the real estate market. Most notably, the Fair Housing Act of 1968 was enacted to protect people from discriminatory practices related to the following seven traits: color, disability, familial status, national origin, race, religion and sex. If you ever believe you have been a victim of discrimination in real estate or mortgage lending or know someone who has it’s imperative to file a complaint as soon as possible with the Department of Housing and Urban Development at hud.gov.
A Certification of Trust is a legal document that can be used to certify both the existence of a Trust as well as prove the Trustee’s legal authority to act. This document is basically the outline of your Trust that highlights all the important information. Essentially six elements are highlighted: 1) name of trust and date created 2) name of trustee 3) name of trust settlor 4) revocable or irrevocable 5) trust tax identification number and 6) power’s of the trustee. Either an attorney or an online estate planning service can create this for you. Certificates of Trust are usually required when obtaining a mortgage on a property you want in the name of a Living Trust. Otherwise, this document is optional and does not affect the validity of your original Trust. These documents follow the law of the state that the Grantor resides in.
A 2-1 buydown is a loan that has an interest rate 2% points lower the first year and 1% lower the second year and then adjusts to the full interest rate in year three. Therefore, it’s critical to remember that this buydown of the interest rate is a temporary and does not permanently reduce your interest rate. The cost associated with this benefit can be paid either by buyer or seller. Sellers, including home builders, may want to consider using this incentive if they are having trouble selling their property or are in a buyer’s market. Keep in mind that even though your loan is starting off with a reduced payment, your lender will underwrite the loan based off the full interest and your current debt to income will have to support this adjusted future rate.
The federal funds rate is the rate banks charge each other to borrow or lend excess reserves overnight. The rate reached a staggering high of 20% in 1980 to combat doube digit inflation and a low of 0% in 2008 and again in March 2020 as a consequence of the coronavirus pandemic. Similar to the federal discount rate, the federal funds rate is used to control the supply of available funds therefore impacting inflation and consequently other interest rates. Increasing this rate makes it more expensive to borrow. That in turn lowers the supply of available money, which leads to short-term interest rates rising and helps keep inflation in check. On the flip side, reducing this rate has the inverse effect. It brings short-term interest rates down. The rate is set eight times a year by the Federal Open Market Committee, FOMC, based on prevailing economic conditions.
A correspondent lender is one who originates and funds a mortgage, but then sells it to Fannie Mae or Freddie Mac or a government entity like the FHA or VA. Correspondent lending helps alleviate the problems inherent in portfolio mortgag lending. With a portfolio lender, they end up keeping the mortgage they originated for up to 30 years while it is being paid off by the borrower. The problem with portfolio lending is that most mortgage originators have a limited supply of capital to make new loans. Hence, correspondent lending gets a fresh infusion of new capital to lend each time it sells off it’s loans. However, it’s also important to remember that correspondent lenders often times do service your loans, so they will collect your payment and maintain your escrow account.
The SOFR is the Secured Overnight Financing Rate and is the rate large financial institutions pay each other for overnight loans. The simple explanation is that it is a key benchmark interest rate used by most lenders. Mortgage lenders use this benchmark as an index when pricing conventional and jumbo adjustable rate mortgage products. The SOFR recently replaced the LIBOR, London Interbank Offered Rate in 2021. The reason for the replacement was that LIBOR had been marred by a series of scandals regarding inaccuracy due to manipulation. Alternatively, SOFR is less likely to be manipulated as the Treasury repo market is one of the most liquid in the world, which means its reported value is backed by real transaction data versus hypothetical rates that were self-reported for LIBOR.
Simply put, inflation is a rise in prices which equates to a decline in your purchasing power of goods and services over time. In the US the most commonly used indexes to track inflation are the Consumer Price Index and the Wholesale Price Index. Inflation occurs because a country’s money supply is being increased. This occurs either by printing new notes or coins, legally devaluing the legal tender currency or by loaning new money into existence as reserve account credits through the banking system by simultaneously purchasing government bonds from banks on the secondary market of which this is the most common method. Inflation can be seen as both positive or negative depending on the view point. Inflation tends to help the rich get richer because they own assets like real estate that appreciate significantly with inflation. The poor tend to get poorer because they have fewer dollars chasing more expensive goods.
Stagflation or what is also known as “recession-inflation” is continued high inflation combined with high unemployment and stagnant demand for goods and services because of their high prices in a country’s economy. The term was coined in 1965 by British politician Iain Macleod. It is seen as a rare event. However, stagflation has been persistent in the world since the 1970s. Stagflation is extremely difficult to cure because policy solutions to slow growth tend to make inflation worse and vice versa. The reasons for stagflation cited by economists range from oil price shocks like OPEC’s quadrupling of oil prices in October 1973, to poor economic policies to the loss of the gold standard in August 1971. Therefore commodities like precious metals, industrial metals, and other agricultural goods can help weather a period of stagflation.
Hyperinflation is an economic term used when a country’s inflation rate is very high, is accelerating and is out of control. This type of inflation exceeds 50% per month. This is mainly brought on by a rapid increase in the supply of paper money and a corresponding increase in the cost of goods. A recent example of hyperinflation is Zimbabwe where prices almost doubled every day, meaning products and services would cost twice as much the following day. Hyperinflation is typically brought on by wars or their aftermaths, sociopolitical upheavel, a crisis that makes it difficult for the government to collect taxes, and most importantly government budget deficits being financed by currency creation. Abandoning gold or silver coins in favor of paper money is a necessary condition to create hyperinflation.
There are several options available for obtaining a renovation loan. The most popular are the FHA 203(k) Limited, the FHA 203(k) Standard, and the Fannie Mae HomeStyle Limited and Standard. Overall, the FHA 203k limited program is intended for limited repairs not to exceed $35k in renovation costs. With this option, there cannot be any structural repairs. With an FHA 203k Standard program these are for projects that have greater than $35k in renovation costs and can include structural repairs. Similarly, Fannie Mae’s HomeStyle Limited is the conventional counterpart and allows up to $50k for the Limited option and over $50k in renovation costs for the Standard option. There’s also a lesser known renovation for veterans, the VA Renovation loan, that is typically capped at $50k as well.
A deed in lieu of foreclosure is when the borrower hands the deed of the property over to the mortgage company in an effort to avoid foreclosure proceedings. Foreclosures can wreck havok on a borrower’s credit report and can make it almost impossible to get another mortgage in the short term. However a deed-in-leiu of foreclosure can help a borrower circumvent a damaging foreclosure proceeding. This strategy is typically used by a homeowner when their house is underwater, meaning they owe more on the home than it is actually worth. Once agreed upon and the deed is received, the lender releases the lien on the property and the borrower walks away owing nothing further. However, you need to remember that the lender is under no obligation to accept a deed-in leui of foreclosure. It is completely at their discretion.
A mortgage recast is when your lender recalculates the monthly payments on your current loan based on the outstanding balance and remaining term. Keep in mind that recasts are not automatic and aren’t offered by all lenders. Mortgage recasts might be a good idea if you received a large windfall of money and applied it to your mortgage balance, or if mortgage rates have increased or if you are moving. The advantages of a mortgage recast include no credit checks, less money paid towards interest, no closing costs, no extension on the term of your original loan, keeping your current interest rate, and no lengthy application process. Disadvantages might include the inability to take any equity out and lender specific restrictions. There is typically a service charge associated with a recast from a lender which could be several hundred dollars.
Lender overlays are additional requirements put in place by a lender above and beyond those set by Fannie Mae, Freddie Mac, VA, USDA, and FHA. Essentially lender overlays make the mortgage approval process more restrictive for borrowers, but at the same time makes borrowing and the mortgage market safer for all. These overlays can come in the form of lower debt to income ratios, higher credit score requirements, larger down payments, lower loan limits and higher income thresholds. Some may see these lender overlays as a threat to their approval, however borrowers should see them as greater protection not only for the lender but themselves. Lenders do these as a risk mitigation tool to further insure the loans they sell to Fannie Mae and Freddie Mac don’t end up needing to be purchased back for faulty underwriting.
A pre-qualification means your lender has reviewed the financial information you provided and deems you qualified for a mortgage. This qualification is typically done based on what a borrower tells the lender and usually doesn’t involve hard documents. A Pre-approval typically involves the review of hard documents, running the borrower’s credit, completing a loan application, and allows the lender to provide a loan amount and interest rate information. Not all sellers and their listing agents will require a pre-approval letter when analyzing an offer. However, I recommend to all my borrower’s to have a fully underwritten pre-approval before they even begin their property search. Fully underwritten means the borrower has been vetted completely by the lender and when a purchase agreement is received, only the property will require vetting.
Basically, amortization is a repayment feature on loans with equal monthly payments that have a fixed end date or term. Not just mortgages, but car loans also operate this way. As a borrower it’s always a great idea to obtain what’s called an amortization table before obtaining this type of loan. Your lender can provide one for you or you can find one online for free. This table features a month by month breakdown of your equal payments by interest and by principal reduction. These tables are great because you get to see the accumulated and total amounts of interest you will be paying over the loan term. These types of payment arrangements also cannot be manipulated. Three inputs are all that are needed to generate an amortization table, interest rate, term and loan amount.
You might not have been aware that there are loan programs specifically desiged for doctors or physicians. These loans usually do not require a down payment and at the same time allow you to not pay private mortgage insurance. In addition, these loans have flexible employment and debt to income requirements. Doctor loans also have high limits with $1, $2 and even $5 million. They are usually available only to physicians with specific degrees such as MDs, DOs, DMV, DPM, DDS and DMD. Closing costs on these are typically the same as other loan programs. Some negatives to watch out for are adjustable rates, these are only for primary residences, you can run the risk of overleveraging yourself, and condos or townhouses are potentially not eligible.
To break it down, TILA stands for the Truth in Lending Act and RESPA stands for the Real Estate Settlement Procedures Act. The TILA/RESPA integrated disclosure rule or “Know before you owe” as it is sometimes referred to began October 3, 2015 and was created in order to harmonize and consolidate disclosures and regulations. It essentially reduced the disclosures a borrower would receive from four to two. The new two documents are the LE or Loan Estimate and the CD or Closing Disclosure. The LE replaced the Good Faith estimate and the initial Truth In Lending Disclosure. Your lender must provide you the LE within 3 business days of receiving your application. The CD replaced the HUD-1 Settlement Statement and the Final Truth in Lending Disclosure and your lender must provide you the CD 3 business days before your loan signing.
An LLC or limited liability company is a type of corporate structure that is created in order to protect it’s owner or owners from personally being sued for the company’s liabilities and debts. These owners are also known as members. This type of entity is regulated on the state level and does not pay taxes on it’s earnings or profits. Rather, the profits earned by the entity are passed through to it’s members on their individual tax returns. Many individuals prefer this type of structure because it avoids the dreaded double taxation that a corporation incurs where it is taxed at the business entity level and then again at the personal level. LLCs can be a great option when purchasing real estate and a critical part of an estate plan. Speak with your accountant or attorney on using this structure to own real estate.
To understand what an Automated Underwriting System or AUS is you first need to understand what underwriting is. Underwriting is the process of verifying information about your employment, income, assets, debts and credit history to determine if you can afford to pay back a mortgage loan that you’re applying for. Automated mortgage underwriting is the process where advanced artificial intelligence (AI) technology electronically undertakes the decision making process for granting mortgage loans by analyzing one’s credit report. The size of the mortgage compared to the property’s value is also analzyed by the underwriter. The two main AUS’s are Fannie Mae’s Desktop Underwriter and Freddie Mac’s Loan Product Advisor. However, automated underwriting systems are used for FHA, VA and USDA as well. They are sometimes used for Jumbo products however these are still mostly manually underwritten.
Flood insurance covers losses to your property directly caused by flooding, meaning an excess of water on land that is normally dry affecting two or more acres of land or two or more properties. The thing to remember is that no home is 100% safe from potential flooding. One inch of water in a home can create more than $25k of damage on average. The NFIP or National Flood Insurance Program, established by Congress in 1968, offers two types of coverage – building and contents. Homes and businesses in high risk flood areas with government backed mortgages are required to have flood insurance. The foundation, electrical and plumbing, finishings, appliances, electronics, personal belongs and more are covered by a policy. This coverage is not just for homeowner’s but for business owner’s and renters alike.
Lava zones can play a role in whether you can get a mortgage. They relate specifically to areas designated by the U.S. Geological Survey for the island of Hawaii. First created in 1974 and then revised in 1992, lava zones are the associated risk from the five volcanoes that comprise the island of Hawaii. There are nine lava zones identified. As the numbers increase the potential hazards decrease. Therefore lava zone 1 is ranked as highest risk while zone 9 is lowest. To mitigate risk, lenders will typically not provide financing to homes in lava zone 1 or 2. Zone 1 includes summits and rift zones of Kilauea and Mauna Loa volcanoes that have been highly active historically. When looking into real estate in this area be cognizant of these perils and understand where you run the most risk of dangerous flowing lava.
Indian land leases are unique in only a few markets in the U.S. Essentially, you own the structure and lease the land on which it stands for only the duration of the lease. In the Palm Springs real estate market, an indian land lease on the Aqua Caliente Indian Reservation is a contract between the indian landowner and the lessee. However, not just Palm Springs, these leases are in spots inside the nearby cities of Cathedral City and Rancho Mirage. The lease can be negoatiated for any period of time not to exceed 99 years. Currently there are 1,175 commercial leases, 7,671 residential subleases, and 11,118 time shares. The primary benefit of purchasing a home on indian land is being able to acquire it for 15-30% less than fee simple land. The mortgage process tends to be more complicated and that’s where a local lender like myself with familiarity of the complexities can assist.
There are essentially five Homeowner’s Association documents that you should be familiar with when looking to buy and finance a home. They are 1) the Articles of Incorporation which details information about the HOA such as name, location and purpose 2) the Bylaws which set out the technical rules and procedures for voting, election of directors and term limits 3) CC&R’s or the Covenants, Conditions, and Restrictions which contain the rights and responsibilities of the HOA to the homeowners and information about property use and architectural restrictions and maintenance standards 4) Rules and Regulations which detail how the CC&Rs are interpreted and implemented and 5) Financial statements including the balance sheet, income statement, statement of cash flows, general ledger and accounts payable reports.
A loan processor works with your loan officer to make sure your financial profile fits the lending guidelines of the program you selected. They collect paystubs, W-2s, and bank statements in order to submit an application to underwriting. They also request written verifications, order title work, work with the underwriter to clear conditions and help prepare your loan file for closing. In addition, they are responsible for working with the title or escrow company to collect information about the property. Loan processors should have excellent written and verbal communication skills, the ability to work with strict deadlines, good interpersonal and customer service skills, time management and organization skills and experience with mortgage loan software programs.
There are six pieces of information that consitute a loan application and thus trigger your loan officer to submit a Loan Estimate and initial disclosures to you. Those pieces can be thought of as the acronym PENCIL. PENCIL stands for (1) P – Property Address (2) E – Estimated Value (3) N – Name (4) C – Credit which you need your borrower’s social security number (5) I – Income and (6) L – Loan Amount. Once these 6 pieces of information are received from the borrower, they must receive the LE or Loan Estimate within 3 business days. You may apply for a mortgage in written form, online or over the phone with a licensed mortgage loan originator.
When applying for a mortgage, in most cases you will need to document your assets. This is done by providing scanned copies of your bank statements or by allowing your lender access to view your banking balances and recent activity online by providing your login credentials through a secure encrypted portal. The reason for this request is to make sure you can repay your loan on time and comfortably and have sufficient cash for any required down payment. Often times, there will be an additional requirements for reserves. Depending on your specific loan program, your lender may require 2,3,6,12 months or even longer of readily accessible reserves. Reserves are basically your payment amount, principal, interest, taxes, insurance and homeowner’s association dues multiplied by the number of months required.
There are basically six different types of ARM, adjustable rate mortgages, that you will see being offered by most lenders. Essentially they fall into 5, 7, or 10 year fixed rate options with the remainder of the term having a fluctuating interest rate. With each of these three fixed term periods, you can have a rate that adjusts either once a year or every 6 months. You will see these type of arrangements shown as 5/1, 5/6, 7/1, 7/6, 10/1, and 10/6. But this is only part of understanding an ARM loan. You will then see three additional numbers separated by backslashes. For instance, a 2/2/5 is a popular option. What this signifies to you are the product’s rate caps. The first number is the initial maximum rate increase, the second number is the subsequent adjustment cap and the final number is the lifetime interest rate cap.
Closing costs are the associated fees with a mortgage when buying or refinancing a property. Discount points used to adjust your interest rate down are one component of closing costs. Then there are lender charges which typically include a processing and underwriting fee. Then there are services you cannot shop for. These include your appraisal fee, credit report charge, flood cert, etc. Then there’s charges you can shop for which are mostly title and escrow related with the bulk being title insurance for your lender. You will also have government, state, and local taxes and transfer fees. In addition, you’ll typically need to pay 1 year upfront homeowner’s insurance. Lastly, if you are required to escrow your property taxes and homeowners insurance premiums or choose to do so, you will need to fund your impound account with a certain number of months of these payments.
Often times a lender will grant an appraisal waiver or PIW as it is also known, property inspection waiver, if the home was recently appraised, usually within the last year, and there have been no significant market changes. These waivers are generated by lenders that use the automated underwriting systems of Fannie Mae and Freddie Mac. PIWs can be received on a purchase transaction, limited cash out refi or a cash out refi. The great things about an PIW are you won’t need to write an appraisal contingency into the purchase agreement. You’ll also be able to save the cost of the appraisal, usually between $500-$800 and it can reduce the amount of time it takes to close on a home. The drawbacks of a PIW are: you won’t have a third party’s opinion about the value of your home, you could end up borrowing money on a house that is priced too high, and you won’t have an up to date assessment of your homes condition.
Mortgage backed securities are essentially a bundle of home loans purchased from lenders at a discount that come in two varieties. The first is a pass through where interest and principal payments from the borrower pass through to the MBS holder or investor. The second is a CMO or collatarized mortgage obligation. CMOs consist of multiple pools of securities which are known as tranches. The tranches are given credit ratings which determine that rates that investors receive. MBSs are issued by Fannie Mae and Freddie Mac and private corporations. At this point in time a huge portion of MBSs are held on the Federal Reserve’s Balance Sheet. It’s also good to know that MBSs played a pivot role in the 2008 Financial Crisis and the strict legislation and rules on lending practices that were enacted afterwards.
A Non-QM mortgage is a loan that doesn’t meet the standards of a qualified mortgage and utilizes non-traditional means of income verification to assist borrowers in getting approved. These types of loans do not afford the same protections as a qualified mortgage would under the 2010 Dodd-Frank Act. Examples of non-QM loans include bank statement loans, limited documentation loans, jumbo loans with 10% down or less, asset-based loans, ITIN or foreign national loans, interest only loans, commercial rental property loans, recent credit event loans, balloon loans, and negative amortizing loans. Non-QM loans also don’t adhere to the ability-to-repay rules that QM loans do.
A Home Equity Line of Credit or HELOC as it is known is typically a second mortgage. This product allows homeowners the ability to borrow against the equity they have in their homes and to receive that money as a line of credit similar to a credit card. Borrowers can then use these funds for a multitude of purposes, including home improvements, education or to consolidate higher interest rate credit cards or auto loans. To qualify you will typically need a 700 credit score or higher, reliable income, low DTI, at least 15-20% available equity and a responsible payment history. HELOCs exploded in popularity in the 1980s as a way to circumvent the Tax Reform Act of 1986 which excluded consumer interest from being tax deductible. With the HELOC, consumers could deduct all the interest. However, the Tax Cuts and Jobs Act of 2017 removed the home equity loan tax deduction starting in 2018 except for qualified home renovations.
The simplest thing to remember when comparing a deed of trust to a mortgage is that a deed of trust involves three parties, the lender, borrower and a neutral third party that holds the rights to the real estate in question and a mortgage only involves two parties, the lender and the borrower. Both are put in place to protect the lender if the borrower defaults on their loan. Lenders will typically prefer a deed of trust to a mortgage because if a borrower defaults it’s much simpler to foreclose on the property since the judicial process is not needed. Unfortunately, as the borrower the decision on which to use is not up to you. This is determined on the state level. Currently, 30 states plus the District of Columbia use a Deed of Trust, while the other twenty use a mortgage.
When it comes to obtaining a mortgage, there are some things you definitely do not want to do. The Top mortgage mistakes to avoid include most importantly 1. not keeping tabs on your credit report. 2. searching for homes before getting fully underwritten pre-approved by a lender 3. not shopping around for a mortgage from at least a few lenders 4. buying a more expensive home than you can afford 5. not hiring a seasoned real estate agent specializing on the buy side 6. opening or closing lines of credits 7. making big purchases on credit 8. moving large sums of money around between bank and investment accounts 9. changing jobs, quitting your job or becoming self emloyed 10. skipping a home inspection and 11. not comparing the loan estimate LE to the closing disclosure CD.
The right of rescission allows the borrower to completely cancel their mortgage transaction within three business days of signing the promissory note. However, its good to remember that this right does not blanketly apply to all mortgages. Home refinancings, home equity loans, home equity lines of credit and some reverse mortgages must have the recission built into the signing. Therefore, a home purchase in particular would not have a right of rescission. Another important thing to remember is that this right only applies to owner occupied primary residences, not second homes or investment properties. Your lender must supply each borrower with two copies of the cancellation document and the Closing Disclosure as well. You then have until midnight of the third business day to send the rescission notice back to the lender either by email, postal mail or fax.
The refinancing rule of thumb says that you should consider refinancing your home when you can get an interest rate that is at least one percentage point lower than your current rate. Another school of thought is if you can get an interest rate at least 2% less than the current rate. However, neither of these is accurate per se. Truth is, there is no one size fits all when it comes to refinancing. Every two individuals and their loan scenarios are different and each should be analyzed by you and your loan officer on a case by case basis. Your future plans, financial objectives, number of years you are planning to remain in your home, and type of loan program you are moving out of and moving into all play into the decision on whether to refinance.
Coventional Loans make up the majority of the mortgage market at approximately 64%. These types of loans are primarily for borrowers with higher credit scores and minimal credit issues. There’s also a myth that you need to have a 20% down payment. 20% is what you will need to put down only to avoid PMI or private mortgage insurance. The lowest down payment is actually 3%. These loans are dictated by guidelines set by two government sponsored entities, Fannie Mae & Freddie Mac. Lenders underwrite to their rules and then sell their loans to one of these entities as a mortgage-backed security. Finally, these loans can be used for not only a Primary owner occupied residence, but as for second homes or investment properties.
620 is the minimum credit score permitted by all lenders to qualify for a conventional loan. 740 is the highest score you would need to get the best rate on a conventional loan. 2 years+ of credit history is preferred but not always necessary. Also, if you have zero credit or no credit you may still qualify. You can use tradelines to show creditworthiness such a rent or utility payments. Important derogatory credit events to be aware of are a deed in leui of foreclosure or short sale where you will need to wait 4 years before obtaining mortgage financing, a foreclosure would be 7 years, a chapter 7 bankruptcy would be 4 years and a chapter 13 bankruptcy would be 2 years from discharge or 4 years from the dismissal.
The down payment on a Conventional loan can be as low as 3%, if you are a first time home buyer or have a co-applicant that is. In addition, if you’re using Fannie Mae’s HomeReady or Freddie Mac’s HomePossible programs your income can not exceed 80% of the AMI or area median income. Otherwise, the standard down payment is 5%. Also, if you are purchasing a property that is not a single family residence, meaning it has 2-4 units you may need to put down up to 15%. If you’re purchasing a second home the minimum down payment is 10% and if you are obtaining an adjustable rate mortgage the minimum is 5%. Down payments are verified through 2 months of bank statements, gift funds, or a 401k loan.
The loan limit for 2022 is $647,200 for most areas. That’s an increase of $98,950 from 2021. The loan limit is $970,800 in Alaska, Hawaii, Guam and the U.S. Virgin Islands. However, this amount can vary based on if you live in a high cost county. If you live in California, Colorado, Connecticut, Washington D.C., Florida, Idaho, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Tennessee, Utah, Virgina, Washington, West Virginia or Wyoming your loan limit would be somewhere between $647,200 and $970,800 so it’s best to check your county’s loan limit. Loan limits are also higher for 2, 3 and 4 unit properties. There are several resources online to check these specifics and also in the description of this video.
Unlike government loans such as FHA, VA and USDA there is no streamline option when it comes to refinancing a conventional loan. What this means is that when you refinance you will need a new appraisal, your credit will need to be ran, you will need to resupply fresh income documents, and you will need to undergo full underwriting. There are also two options available when refinancing. There is a limited cash out refi which is essentially an adjustment to the rate and or term and a cash out refi is used primarily to pull out equity as a lump sum but can also be used to lower your interest rate or term.
Seller credits are how much the seller can give you towards your closing costs. This is all negotiated in your contract up front and should be reviewed with your Realtor. Depending on how much you are putting down determines how much you can ask for in seller credits. If putting down less than 10%, the maximum you can ask for is 3%. If putting 10% to less than 25%, the maximum you can ask for is 6%. If greater than 25% down, then you can ask for a maximum of 9%. If you’re looking at an investment property that maximum seller credit regardless of down payment is 2%. As a reminder, these would all be part of your initial offer when purchasing a property.
Fannie Mae’s HomeReady and Freddie Mac’s HomePossible conventional loan programs allow credit worthy low income borrowers the ability to purchase a home with only 3% down. They also allow borrowers to receive lower rates and pay lower mortgage insurance than a standard conventional loan. The maximum income requirement is 80% of the AMI or area median income. You can find your specific locations area median income by visiting www.ami-lookup-tool.fanniemae.com. A homebuyer course is required under these programs which can usually be done online. The course is usually free but can be time consuming and provide little real value. Another positive feature is that you don’t need to be a first time home buyer either.
To manage risk your lender will look at your Debt to income ratios. For conventional loans there is no front end ratio requirement only a 49.99% back end ratio maximum. To clarify, front end would only cover your mortgage payment, whereas back end would encompass your mortgage and all other monthly debt obligations. This is determined by taking your monthly gross income and multiplying it by .4999. This amount will need to include not only your projected monthly mortgage payment of principal, interest, taxes, insurance and Home owners association dues or PITIA but also your monthly payment obligations for other debt including credit cards, car loans, student debt, etc. that is reported on your credit report.
Conventional loans want at least a 2 year history of stable employment. There is no set length of time at a specific job that is required. However, what’s most important to your lender is that you are in the same line of work over the last several years. You will usually need to provide the last two years of all your W-2 statements and your paystubs from the last 30 days. If you are self employed you will most likely need to provide your last two years Federal tax returns with all schedules along with a year to date profit and loss statement. If you are retired, your lender will most likely want a copy of your social security or pension award letters.
Rates on conventional loans are the most ubiqitious of all mortgage rate reportings. These rates have averaged about 7% over the long term, however they have seen wide swings over the years. Mortgage rates reached an all time high in October 1981 when they reached almost 19% and an all time low in January 2021 when they bottomed out at 2.875%. There are many factors that affect mortgage rates on the macro level, including the Federal Reserve, the bond market, the health of the economy, inflation, the SOFR or secured overnight financing rate, and the CMT or Constant Maturity Treasury Rate. Factors that affect mortgage rates on a micro level are your personal credit score, down payment, loan to value and occupancy classification.
There are several special features to be aware of when it comes to conventional loans. Conventional loans tend to be easier for foreclosed homes. Also, you could get an appraisal waiver if you have a high enough credit score and are putting 20% or more down. Although, not all homes qualify. An appraisal waiver or PIW (Property Inspection Waiver) speeds up the mortgage process considerably. Instead of a 30 day close of escrow you might only be looking at 15 days. Another special feature is if you obtain an appraisal and it comes in low, you can switch lenders and get a new appraisal. Unfortunately, with an FHA loan your appraisal stays with the property for 4 months regardless of lender. There’s also a HomeStyle Renovation loan option similiar to the FHA 203k loan which allows you to finance in renovation costs.
There is no required upfront mortgage insurance on a conventional loan unlike an FHA, VA or USDA loan. PMI or private mortgage insurance is only required if you are putting less than 20% down. Keep in mind however, if you have an existing loan that has PMI on it and your LTV or loan to value reaches 80%, PMI will not automatically fall off, you will need to request it from your lender. Otherwise, it falls off automatically at 78% LTV. Also, PMI is calculated based off of the risk of the borrower looking at the credit score and their debt to income ratio. The range in cost is usually around .5 – 1% annually of the loan amount.
Simply put, a reverse mortgage is a loan for homeowners 62 years of age or older who have significant equity or who have completely paid off their primary residence. It allows the homeowner the ability to receive income from their home’s built up equity tax free. Unlike a regular mortgage or forward mortgage, the homeowner makes no payments and actually receives payments or funds in the form of a lump sum or periodic installments from the lender. A reverse mortgage only ends when the the borrower dies, sells the home or permanently vacates the property. The most popular and regulated of all reverse mortgages is the HECM or the Home Equity Conversion Mortgage. This product is the only reverse mortgage insured by the U.S. Federal Government and only available through an FHA approved lender.
The most popular type of reverse mortgage is the HCEM or Home Equity Conversion Mortgage. The HECM is the only reverse mortgage option that is insured by the U.S. Federal government and only available through an FHA approved lender. The next type of reverse mortgage that exists are proprietary reverse mortgage products. These are private loans that are not insured by the federal government. With these proprietary products you can often times receive a larger amount of your equity in proceeds and access it in some cases as early as 55 years old. In addition, these reverse mortgages have jumbo options for homes that exceed the HECM limit. And then there are single purpose reverse mortgages. These are not very common and are offered by state and local government agencies or nonprofit organizations. These are the least expensive option, but can only be used one time for a defined specific purpose.
If you opt for a variable rate HECM reverse mortgage product there are essentially 5 different payment options you need to be aware of: (1) tenure plan (2) term plan (3) line of credit that can be accessed until it is exhausted (4) modified tenure plan which is a combination of a line of credit and fixed monthly payments for the remainder of the time you live in the home and (5) a modified term plan which is a combination of a line of credit and a stream of fixed monthly payments for a specific length of time. If you choose a fixed interest rate you will receive a lump sum one time payment. With all of these options, it’s important to remember that interest accrues each month and requires that you have set aside adequate funds to pay property taxes, homeowner’s insurance and maintenance on the property.
When trying to understand how a reverse mortgage works the most important thing to know is that even if your home is 100% free and clear of any mortgages you will not be able to do a reverse mortgage for the entire value of your property. The amount that can be borrowed is known as the principal limit and this amount is based off of several factors. Those include: (1) the age of the youngest borrower or eligible non borrowing spouse (2) the home’s value (3) current interest rates and (4) the HECM mortgage limit which at the time of this video in 2022 is $970,800. If you are older, the interest rate is low, and the home is worth a considerable sum then you will have a higher principal limit. In addition, the amount might also increase over time if the borrower has a variable rate HECM.
When it comes to loan options, reverse mortgages are not inexpensive. However, most HECM’s allow borrowers to roll their closing costs into the loan amount. This will however reduce the amount of funds available to you. Here’s a quick breakdown of HECM fees and charges directly from HUD’s website: (1) MIP or mortgage insurance premium. There is a 2% initial MIP at closing in addition to annual MIP of .5 percent of the outstanding loan balance. Next is the origination fee. This is capped at $6000. Lenders charge the greater of $2500 or 2% of the first $200,000 of your home’s value plus 1% over $200,000. There are also some incidental servicing fees that range from $30-$35 a month and of course some third party fees such as appraisal, title, recording fees, etc. that you will also need to pay.
Unfortunately, there’s no end to the number of scammers and people trying to part you with your money. Most things are common sense, but as we’ve seen in the mortgage market over the decades many scams have taken place. The two biggest things to look out for regarding reverse mortgage scams are contractor loans and veteran loans. Contractor loans are just what they sound like, contractors trying to convince you to take out a reverse mortgage when selling home improvement services. The second are advertisements promising special deals for veterans such as no fee reverse mortgages from the US department of Veterans Affairs. If you see these types of offers, avoid them at all costs. The Department of Veterans Affairs does not provide any type of reverse mortgage product. But just be vigilant and if any saleperson or company is pressuring you to sign anything, thats a big red flag.
As you research the requirements for a reverse mortgage, first and foremost, age is the critical factor. For the standard HECM reverse mortgage you must be 62 years of age or older. Additional requirements include: (1) the home has no mortgage or has a significant amount of equity (2) You must occupy the property as your primary residence; a reverse mortgage can’t be done on a second home or investment property (3) You cannot be delinquent on any federal debt as this is a federal program (4) you have the income and means to continue making property tax payments, homeowner’s insurance and HOA dues and (5) You must participate in an information session provided by a US Dept of Housing and Urban Development approved reverse mortgage counselor.
If you are trying to determine how much equity you can take out of your home with a standard HECM reverse mortgage you can find a list of tables in an Excel format that is published by HUD, the Department of Housing and Urban Development. It’s quite a large cumbersome spreadsheet. But it will give you a good idea of the maximum principal limit you’ll be able to receive from your home. The table is broken out by interest rates along the horizontal axis and these will be as low as 3% all the way up to 18%. And these rates are further broken down into eighths. From there you will use the vertical column all the way to the left to navigate to your current age. Once you’ve intersected your current age with the applicable interest rate from your lender it will be provide you the appropriate maximum percentage you will be qualified for. Multiplying that number by your property’s estimated value will yield a good approximation.
Homeowner’s often wonder if they get into a reverse mortgage if they are at risk of losing their home. The short answer is yes. But with any mortgage, reverse or otherwise, if you don’t comply with the terms you agreed to you can ultimately lose your home. So lets take a look at the ways that you could violate the terms of your reverse mortgage. First, if you don’t pay your property taxes, homeowner’s insurance or HOA dues you would be in violation of the terms of your agreement. Second, the home no longer is your primary residence.This doesn’t preclude you from traveling, but if you vacate the property for more than 12 consecutive months your reverse mortgage could be called due and payable. Lastly, you decide to move or sell. At this point the reverse mortgage will be called and payable. Keep in mind there are many protections afforded the HECM created by HUD which safeguard homeowners so abuse by lenders is rare these days.
Before entering into a reverse mortgages its good to take a high level overview and underatand it’s positives and negatives. Let’s start with the negatives. 1) mortgage insurance premiums, origination, and servicing fees can add up. 2) There is no escrow account, so you are on the hook for property taxes, homeowner’s insurance and HOA dues and maybe 3) leaving less of an inheritance to your family. The positives of a reverse mortgage are your proceeds are tax free and can be used for whatever you like including living expenses, debt repayments, healthcare and hospital bills. Also, non-borrowing spouses not listed on the mortgage can remain in the home after the borrower dies. Extra funds can help retirees enjoy their retirement more. In addition, borrowers facing foreclosure can use a reverse mortgage to pay off an existing mortgage and stop foreclosure.
A USDA loan is a loan that is insured by the United States Department of Agriculture. These loans are only permitted on properties that lie in rural areas with populations of 35,000 or less. You can find out if an address falls into this category by visiting eligibility.sc.egov.usda.gov/eligibility. USDA loans offer an affordable 30 year only term with no money down, so 100% financing is available. This government guaranteed loan helps by providing low and moderate income households the opportunity to own a home in eligible rural areas. There are basically two types: Section 502 Guaranteed loan through an approved lender and a Section 502 Direct loan from the USDA. The option directly from the USDA is only available to low and very low income applicants. These programs are also not limited to first time home buyers.
To qualify for a USDA loan there are certain eligibility requirements. First you must be a US citizen, US non-citizen national or a qualified alien. You must also personally occupy the dwelling as your primary residence. The residence must also qualify using the USDA’s eligibility site which can be found at eligibility.sc.egov.usda.gov/eligibility. If applying for the guaranteed loan through a lender your income cannot exceed 115% of the area median income. While there is no minimum credit score requirement, if your score lies below 640 a manual underwrite would be required. If applying directly to the USDA your income must lie between 50 – 80% of the area median income. In addition, you must not be able to qualify for conventional financing with no private mortgage insurance. Therefore, your bank account statements must show that you have less than a 20% down payment.
Similar to private mortgage insurance, PMI, on conventional loan , MIP or mortgage insurance premium on an FHA loan, or a funding fee on VA loan, a USDA loan has a type of insurance called a guarantee fee. This is a 1% upfront guarantee fee based on the loan amount and this fee can be rolled into the loan. In addition, there is a .35% annual fee that is based on the remaining principal balance. This amount is then divided by 12 and this will be included with your principal and interest payment each month. These fees apply whether you are purchasing or refinancing a home. This fee is charged to protect the mortgage lender against losses if the borrower fails to pay.
The standard debt to income ratios for a USDA loan are 29% front end and 41% back end of the gross monthly income. The maximum DTI on a USDA loan is 34% front end / 46% back end of your gross monthly income. Your lender will use the USDA’s automated underwriting system also known as GUS or guaranteed underwriting system to process your loan request. If your loan is rejected by GUS you can request your lender to do a manual underwrite. USDA will allow these higher DTI ratios with compensating factors. Also, USDA allows single family residences, PUDs, condos, modular homes, manufactured homes and new construction. Properties must also be less than 2,000 square feet and cannot have an in ground swimming pool. No second homes or investment properties are allowed.
FHA or Federal Housing Administration loans make up about 15% of the mortgage market. An FHA loan is one that is insured by the government, more specifically HUD or the Department of Housing & Urban Development to protect lenders. These type of loans are good for lower or mid credit score borrowers. It’s also good to remember that these types of loans are not just for first time homebuyers. The program originated during the Great Depression when foreclosures and defaults rose sharply. FHA loans came out of the National Housing Act of 1934 which was intended to increase home construction and reduce unemployment. Today the program has insured over 50 million mortgages to date and is self-supporting due to insurance premiums paid into it by the borrowers.
FHA loan rates tend to be lower than a conventional loan. They tend to be similar to the other government programs including VA and USDA loans. It’s also easier to get lender credits than a conventional. However, the thing to remember with an FHA loan is that the interest rate is not the only factor to consider. These loans come with a hefty 1.75% upfront mortgage insurance premium at the time of origination and will continue to have mortgage insurance incorporated into the payment each month. In addition, being aware of your municipality’s property tax rate, HOA and homeowner’s insurance cost are just as critical because at the end of the day all of these items factor into what you will pay each month.
The minimum down payment on an FHA loan is 3.5% but you must have a minimum 580 credit score. In general, a minimum credit score of 500 is required for an FHA loan. Any score between 500-579 will require a 10% down payment. There are local and national DPAs or down payment assistance programs and grants that can help contribute partially or in full. The FHA also allows down payment money to come in the form of gifts from friends, family, an employer or labor union. However, the FHA also spells out who can’t provide a gift including a real estate agent, seller, builder or anyone else with an interest in the subject property.
For all FHA loans, the property must be a primary owner occupied residence. If you don’t plan on occupying the home immediately, you must make plans to move in within 60 days of closing and it must be your primary residence for at least one year after closing. After this time you are permitted to rent out all or a portion of the home. 2-4 unit properties are permitted. However, condominiums need to be approved by the FHA. You can check and see if a particular condo development is approved at www.entp.hud.gov. House hacking is allowed to generate rental income. 75% of rental income is considered. There is a property flip rule which states that the property must be own for more than 90 days before being sold.
An appraisal done in conjunction with an FHA loan is much stricter than you’d receive with an “as is” appraisal on a conventional loan. FHA is extremely concerned with making sure the property meets its health and safety standards, is structurally sound, and is in move in condition. However, if the property does not meet these requirements you can do an FHA renovation loan. Common issues that would cause problems with an FHA appraisal are broken glass, non functioning or malfunctioning HVAC, chipping or peeling paint, plumbing problems, rotting wood, malfunctioning electrical or exposed wiring, and a damp or wet basement or crawlspace. Make sure your realtor helps you inspect the property thoroughly before the appraisal is done.
When looking at FHA debt to income ratios, the maximum front end ratio is 36.99% and the maxiumum back end ratio is 56.99%. However, the decision to approve a loan at these debt to income levels is done on a case by case basis. If you’ve incurred student loan debt and currently have outstanding balances on your credit report, FHA does not allow an IBR or Income Based Repayment. What this means is that your lender will need to use 1% of the outstanding student loan debt balance to calculate your monthly payment on these oblligations. It’s also good know that FHA allows for manual underwriting unlike conventional which is typically done through an Automated Underwriting System.
Mortgage insurance is probably the biggest downside of an FHA loan. With this loan there are two types of mortgage insurance you will need to pay. The first is a UFMIP or upfront mortgage insurance premium. This amounts to a one time 1.75% fee on your original loan amount and it can be rolled into your loan amount. Mortgage insurance is not dependent on the buyer’s risk profile unlike a conventional loan. It is the same amount for every borrower. Also, unlike a conventional loan it stays on for the life of the loan unless you put 10% down and then it falls off after 11 years. That’s why if you put down less than 10%, your longer term objective should be to refinance out of an FHA into a conventional loan.
Unlike a conventional loan that goes through what is called an AUS or automated underwriting system by Fannie Mae and Fredd Mac and does not require the lender to manually underwrite, an FHA loan can be manually underwritten. In fact as of 2020 all FHA loans that exceed a 43% back end debt to income ratio or have a credit score under 620 must be manually underwritten. What this means is that there are acceptable compensating factors taken into consideration for loan approval. These factors include one or more of the following: verified and documented cash reserves, residual income or having an energy efficient home. It’s important to discuss these options if your loan is declined solely on the basis of an AUS.
FHA loans have limits that are typically adjusted annually. As of 2022 the base or floor loan limits for low cost areas are $420,680 for a 1 unit property, $538,650 for a 2 unit, $651,050 for a 3 unit, $809,150 and for a 4 unit. For 2022 the ceiling or highest county loan limits for high cost areas are $970,800 for a 1 unit property, $1,243,050 for a 2 unit property, $1,502,475 for a 3 unit property and $1,867,725 for a 4 unit property. And then we have loan limits for Alaska, Hawaii, Guam and the Virgin Islands. For these four places, the limits are $1,456,200 for 1 single family home or 1 unit property, $1,864,575 for 2 units, $2,253,700 for 3 units and $2,800,900 for a 4 unit property. Your specific county will fall somewhere in between these numbers. To check out your specific loan limits visit www.entp.hud.gov where you can enter your specific state and county.
FHA loans do have some special features you want to be aware of. First off, there is a $100 minimum down payment through the HUD REO program. These properties were an FHA foreclosure and instead of 3.5% down you only need $100. There is also an FHA 203k rehab loan. These allow you to factor in renovation costs into your loan. These loans will take longer to close and tend to have higher rates. There also down payment assistant programs. Also, instead of a full refinance, FHA allows a streamline refinance option to lower your interest rate. What this means is that unlike a conventional loan you get to bypass the income verification, credit check and need for an appraisal.
Veteran’s Affairs or VA loans were introduced in 1944 as part of the Serviceman’s Readjustment Act, better known as the GI Bill of Rights Acts. This Act was introduced to help make it easier for our service men to transition from military to civilian life after the end of World War II. Signed into law by President Franklin D. Roosevelt on June 22nd of that year this legislation aimed to level the playing field in home ownership for those who risked their lives in the line of duty. The program doesn’t have a minimum credit score requirement, although most lenders require a 620 score if you plan on utilitizing 100% of your equity. In addition, you must occupy the home within 60 days of closing and occupy the property for at least 12 months before renting it out.
There are several ways to meet the eligibility requirements for a Veteran’s Affairs or VA loan. To start, you should reference your DD 214 Form. This form will reflect the number of years you served in the military. You can qualify in one of four ways. One, if you were on active service duty during wartime and served for at least 90 continuous days or more. Two, you served 181 days or more of active service during peacetime. Three, you were in the National Guard or reserves for 6 years or longer. Four, you are the surviving spouse of a veteran who has died in the line of duty or as a result of a service-related disability. A Certificate of Eligibility or COE will prove to your lender that you qualify. You can obtain a COE either online or by mailing in a VA Form 26-1880 to the address listed on the VA’s website.
The majority of people who qualify for a VA loan are required to pay the VA funding fee. This fee is collected by the Department of Veterans Affairs to guarantee the loan to the vendor / lender and it insures 25% of the property value should the borrower default. This funding fee ranges from 1.4 to 3.6% depending on your down payment percentage and whether you are using a first or subsequent VA loan. If you are utilizing the VA IRRRL or interest rate reduction refinance loan your funding fee will only be .5%. This fee does not have to be paid upfront, it can be rolled into your loan amount. Surviving spouses, Purple heart recipients, and veterans who receive disability are exempt from paying this funding fee on any of their VA loans.
Overall, the great thing about a VA loan is that it essentially has no loan limit. However, with the being said your specific loan limit depends on your entitlement status. So, if you have full entitlement, you don’t have a loan limit. But if your COE, certificate of eligibility, shows that you have an exisiting loan your remaining entitlement will be reduced. Therefore, it is possible to have multiple VA loans in your name. Your COE can be confusing. You will see basic entitlement and also bonus entitlement or sometimes referred to as tier 2 entitlement. Your basic entitlement will show $36,000. What this means is that if you default on a loan of $144,000 the VA will guarantee payment of 25% of the balance to your lender. Bonus entitlement covers loan amounts above $144,000. As with all other loan types, your individual loan limit will be dependent on your debt to income ratio.
The Department of Veteran’s Affairs will require proof that any home financed with a VA loan is “safe, sound, and sanitary.” Allowed property types include 1, 2, 3, and 4 unit homes, manufactured homes that are attached to the land, modular homes, PUDs or planned unit developments, and VA approved condominiums. In addition, the VA requires the following for each property: (1) safe drinking water is available from a local health authority (2) drainage directs water away from the home (3) there is private road access if the home is located in a rural area and (4) each unit has sufficient space for living, cooking, sleeping, and sanitary facilities. It’s also important to know that a VA loan can only be used on a primary residence. No second homes or investment properties are permitted.
VA or Veteran’s Affairs loans come in many different types. The first, is the standard VA loan which allows qualified service members to purchase a home with no minimum down payment. Next, for loans that exceed the conforming loan limits, we have VA Jumbo loans. Then we have the VA IRRRL or Interest Rate Reduction Refinance Loan which allows qualified service members the ability to move from a higher rate VA mortgage to a lower rate one or switch from an adjustable rate to a fixed rate. Then we have a VA Cash-Out Refinance which allows service members to swap out their conventional loans to a VA loan. Then we have a VA Rehab or Renovation loan that allow service members the ability to build their dream home by financing the cost of construction and improvements into their loan. Finally, there are NADL or Native American Direct Loans.
One of the most unique things about a VA loan is that they are assumable. Yes, if you sell your property the new owner can take over your exisitng mortgage. There is a .5% closing fee on this feature. In addition, a VA loan is a lifetime benefit for veterans who qualify. Also, there is no down payment requirement, meaning 0% down is permitted. There are no prepayment penalties. In addition, outside of the initial funding fee, their is no continuing private mortgage insurance unlike all other major types of loans on the market that don’t meet down payment requirements. There are also looser credit and debt to income ratio requirements. In fact there are many veterans approved with DTI ratios in excess of 60, 70 and even some cases 80% . Finally, you may be able to finance up to $6,000 of “going green” costs with a VA EEM or energy efficient mortgage.