Stated-Income

Understanding the Different Types of Mortgage Loans

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Applying for a mortgage loan can be overwhelming. As lenders throw different terms at you, it’s easy for you to get confused. Before you even shop for a mortgage, you should know the type of loans available so that you can make the right choice for you before you even shop for a home.

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Below we discuss the various options available for you to learn the options that may be available to you.

Conventional Loans, Government-Backed Loans, and Subprime Loans

First, let’s consider the type of mortgage you should consider. The most common options are conventional and government-backed loans. If you don’t meet the requirements of either type of these loans, you can opt for a subprime loan.

Conventional loans are loans sold to Fannie Mae and Freddie Mac. They are your ‘general loans,’ that most lenders offer. Typically, you have to have good credit, low debt ratios, and a decent down payment to qualify for this program. In other words, the requirements are the toughest for these programs.

You’ll need at least a 5% down payment for these loans. If you do opt to put down less than 20% on the home, expect to pay Private Mortgage Insurance until you owe less than 80% of the home’s value. If you do put less than 20% down on the home, lenders tend to be a little more cautious about your credit scores and debt ratios, as you pose a higher risk with a higher LTV.

Government-backed loans are those backed by a government agency. The options include FHA, VA, and USDA loans.

  • FHA loans – FHA loans are backed by the Federal Housing Authority. With a 580 credit score, 31% housing ratio, 43% total debt ratio, and 3.5% down on the home, you may be a good candidate for this program. You don’t have to be a first-time homebuyer to secure this loan program, as many people believe. Note that you will pay an upfront mortgage insurance premium plus mortgage insurance for the life of the loan, no matter your LTV.
  • VA loans – Veterans that served at least 90 days during wartime and 181 days during peacetime may be eligible for a VA loan as long as they had an honorable discharge. This loan program doesn’t require a down payment. It also has flexible underwriting guidelines, allowing credit scores as low as 620 and debt ratios as high as 43%. The largest qualifying factor is the need to meet the VA’s disposable income requirements based on your location and family size. You will not pay any mortgage insurance for this loan.
  • USDA loans – Low to moderate-income families that don’t qualify for any other mortgage program may qualify for the USDA loan. The catch is that you have to buy a home in a rural area. The USDA is liberal with their rural boundaries, though. The USDA requires a 640 credit score; 29% housing ratio, and 41% total debt ratio. You will pay an upfront mortgage insurance fee as well as annual insurance for the life of the USDA loan.

Subprime loans are those that don’t fit in the conventional or government-backed loan programs. These loans are provided and held by private lenders. They don’t sell them on the secondary market. This allows the lender to set their own requirements, which may provide you with more options for qualifying. For example, some lenders allow the use of bank statements rather than tax returns for self-employed borrowers. This gives self-employed borrowers a greater chance of qualifying for the loan. Subprime lenders may also allow lower credit scores, higher debt ratios, or make other exceptions that conventional and government-backed lenders cannot provide.

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Jumbo Loans

Finally, if you need a loan amount that exceeds the standard conforming limit, you will need a jumbo loan. This year, these loans exceed $453,100. These loans usually have stricter guidelines than even conventional loans require because of the higher risk of the high loan amount.

You should expect to need a great credit score, low debt ratio, and a large down payment. The requirements will vary by lender, though, so make sure you shop around.

Fixed Rate and Adjustable Rate Loans

Once you determine the type of loan you need/want, you’ll need to look at the type of interest rate you can choose. You’ll hear lenders talk about fixed interest rates and adjustable interest rates.

Fixed interest rates are fixed for the life of the loan. The rate you get at the closing is the rate you keep as long as you keep the loan. It doesn’t matter what happens in the market – your rate never changes. You can usually opt for a fixed rate between 15 and 30 years, but the exact term depends on your qualifying factors and what the lender offers.

Fixed interest rates offer predictability. They never change, so you can always budget for your payment. The downside, though, is if you take the mortgage during a period of higher interest rates, you are stuck with that rate for the life of the loan.

Adjustable rate loans are fixed for a short period and then they adjust, usually on an annual basis. You can usually lock in the ‘introductory rate’ for 3 to 10 years. After that point, the rate is based on the chosen market index of the lender plus the predetermined margin.

The benefit of the ARM loan is the lower interest rate you get for the first few years. This rate is usually lower than the fixed interest rates at the time, allowing you to save money on interest for a few years. The downside is that you cannot predict what interest rates will do in the future, so you don’t know what your payment will be in the future.

Choosing the right loan program is important as it will determine your ability to qualify for the loan as well as afford the payments. Make sure you exhaust all of your loan options and compare them side-by-side so that you can determine the best option for you.

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Reserves and Mortgages: How Much Do You Need to Qualify for a Loan?

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What happens after closing? You start making your mortgage payments, pay your property charges, and so on. Do you have enough funds to cover these expenses in case something unexpected happens? These “leftover funds” are called financial reserves.

Lenders will look into these funds to determine if you have enough set aside before they approve your mortgage. As to the minimum level of reserves required, that will depend primarily on your loan type, property, and borrower profile.

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What Are Reserves?

Reserves are assets that are available to you post-mortgage closing. By available, these assets must be readily convertible to cash for your use, per Fannie Mae, who together with Freddie Mac, is the largest purchaser of mortgages in the secondary market.

To make them more relatable, think of these funds as x months’ worth of your total housing expenses as represented by PITI or PITIA:

  • Principal
  • Interest
  • Taxes
  • Insurance (homeowners insurance, mortgage insurance)
  • Homeowners association dues, other assessments

While they are not as popularly discussed as down payment and closing costs, reserves are an important aspect of your mortgage that you should prepare for, save up if you must.

Eligible or Not Eligible Assets for Reserves

Not all assets are eligible to be considered as reserves. Aside from being liquid assets, they must be redeemed/vested, taken from personal bank accounts, or derived from the sale of an asset.

Aside from cash, these are acceptable sources of reserve funds:

(i) savings/checking accounts, (ii) stocks, bonds, certificates of deposits, trust accounts, or any investments, (iii) the portion of the retirement savings account that has vested, and (iv) the cash value of a vested life insurance policy.

As to retirement accounts, not all of the whole vested amount will be considered, e.g. 70% of 401(k), IRA and other related accounts’ vested value.

Stock units become unacceptable if they are from a company or corporation not listed with the SEC. This applies to stock options and restricted stock units that have not vested.

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You can’t also use personal unsecured loans or proceeds from cash-out refinance for your reserve funds.

This is why lenders verify assets for reserve requirements (although this asset verification applies to down payment and closing costs) to ensure that the borrower has funds safely tucked in and that these funds are not illegally sourced or additionally burdensome to the borrower.

How Much Do You Need for Your Reserves?

Your minimum reserve requirement rests on a combination of various factors. But a good starting point would be the property type, i.e. its occupancy status and the number of units.

From there, you can look up what each loan type’s reserve requirement is:

  • FHA loans: This loan program does not have a reserve requirement on one-to-two properties. But for borrowers with non-traditional credit or those requiring manual underwriting, one month of reserves is required. On three-to-four unit properties, reserves worth three months of PITI are required.
  • VA loans: Just like FHA loans, these loans for military personnel require (i) no reserves on one-to-two unit properties and (ii) six months’ reserves on three-to-four unit properties. The borrower also pays additional three months of reserves for every rental property he or she owns.
  • USDA loans: Although these government-guaranteed loans don’t really require cash reserves after closing, having two months of reserves can be a compensating factor.
  • Conforming Loans: The reserve requirements for Fannie Mae take into account the transaction type, the property’s number of units, the borrower’s credit score and LTV, and debt-to-income ratio, the type of underwriting (DU or manual). This is an example of Freddie Mac’s reserve requirements matrix.
  • Jumbo Loans: Reserves on those loans can be equal to three months, although they can go higher depending on the size of the loan.

Indeed, buying a home goes beyond closing. There’s your house to take care of after the transaction closes. Despite reserves being a requirement, it’s wise to have funds set aside for your home.

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Finding Financing for Your Investment Property

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Finding Financing for Your Investment Property

Investing in real estate is a lucrative way to grow your money, just ask Warren Buffett. From a single-family home to a multi-family building, an investment property is an income-producing venture for years to come.

There are many ways to fund your first-ever foray into the world of real estate investing, such as (a) mortgages, (b) home equity loans and (c) investment property loans.

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Stated Income Loans, et al. for Investment Property

Besides primary residences, mortgages have been used to purchase rental properties. Despite its investment-driven purpose, these mortgages are classified residential because they cover one-to-four unit properties.

  1. Stated income loans are made for self-employed professionals, small business owners and high net-worth individuals who are into real estate investing. It’s no surprise because a typical down payment on a stated income loan is 30% at the minimum. Stated income lenders also need a higher level of cash reserves sufficient to cover three to 12 months’ worth of monthly mortgage payments.
  2. By their stated purposes and intents, you can’t use an FHA loan to purchase an income-producing property. But situations are replete when it has been used for investing. Say you took out an FHA loan and then moved out of the house and have it rented out. In another case, you buy a duplex where you plan to occupy one unit and lease the other. Down payment for FHA loans could go as low as 3.5% for a credit score of at least 580.
  3. Conventional loans conforming to Fannie Mae and Freddie Mac’s standards can require at least 30% of the purchase price of the income-producing home as down payment. There should be enough cash reserves to meet six monthly mortgage payments. Moreover, a property management experience (being a landlord) of at least two years is required.

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Home Equity Loans for Investment Properties

Home values are expected to rise by 3.5% this year per Zillow. This bodes well for those who own their home outright or hold a significant equity in their homes.

Second mortgages such as a home equity line of credit or home equity loan can be used to finance the down payment on the second home. Back this second mortgage with cash savings and asset holdings for emergencies.

Using home equity is a popular way to do some house flipping, it is when you buy a home, renovate it and resell it for a higher return.

Investment Property Loans

These specialized loans are for individual and commercial real estate investors. Investment property loans are structured to assist investors in:

  • Financing and fixing properties
  • Refinancing existing properties

One final word. Just some reminders to help you with your property investing venture:

  1. Do your homework first before you put your hard-earned money or home equity on any property.
  2. Make sure that the desired property is eligible to be financed.
  3. Expect to generally see higher down payment requirements, higher rates, and bigger cash reserves on investment properties.

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3 Practical Ideas to Save for Your Down Payment

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3 Practical Ideas to Save for Your Down Payment

Homebuyers sure are lucky these days; they can buy a home with as little to no down payment. Indeed, you can get an FHA loan with 3.5% down payment or a conventional mortgage under their special programs for first-timers.

Don’t let a down payment pose a hurdle to your homeownership, especially if you can save up for it. We have rounded up some practical ideas to help you save for your down payment.

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Before you start any savings plan, know your timeframe for buying a home and always start with a budget to work around.

Set a price range for a home you can comfortably afford to pay for the down payment and the monthly mortgage amortization and maintenance costs. Say, a home with a price tag of $200,000 can have a down payment of $7,000 if at 3.5%.

Tip 1: Power Save

Take a look at traditional and modern ways to store your hard-earned money.

  1. Open a savings account. Find a bank that offers a higher savings account rate to grow your money. But be wary of too-good-to-be-true rates because they might just turn out to be that. Same with credit unions. You can seek out those that offer competitive rates. Ask your friends, co-workers or family members of credit unions that they can recommend.
  2. Automate your savings. Often the best way to save is to do it fast enough. There are finance apps that do the saving for you; they analyze your spending habits, how much you can afford to set aside for savings, and automatically transfer those amounts into a checking account. There are minimal costs in maintaining these apps.
  3. Take on a money challenge. A good example is the 52-week challenge, which in its simplest form can rack up $1,378 or in another increment up to almost $7,000 in a year. You can tweak your savings timetable, starting with the bigger amounts during the start of the year and working towards the lower amounts as the year ends.

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Tip 2: Automate (Your Bills)

If you can automate your savings, you surely can automate your bills payment. Enroll your biller, e.g. utility, insurance, credit card, and more in your debit card for auto-payment every month.

This not only spares you from withdrawing cash and spending it elsewhere, it makes you current on your accounts. Ultimately, you won’t incur late fees or accumulated charges especially on credit cards. It would be a plus on your credit report, too.

Tip 3: Invest

It certainly pays to have funds for investment, aside from the money you safely put in your deposit accounts. If you’re new to investing, research first about mutual funds, bonds, instruments or any type of investment that can be for short-term or long-term as you deem.

Remember, you won’t get rich overnight by investing and there is a risk to lose money as there is a chance to gain some. That’s why it’s important to understand the risks and gains in investing.

Final thought: Cut down on any unnecessary expense and where else you can save for now. Nothing beats the joy of owning a home that you have worked hard for.

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You Can Get a Mortgage with Little to No Down Payment

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You Can Get a Mortgage with Little to No Down PaymentIf you took a survey of adults that still lived with their parents, you would probably find that a majority of them do so because of the lack of savings they possess. Without a down payment, they assume that they cannot purchase a home and they don’t want to waste money on rent, so they remain content on their parent’s couch. The good news is that there are plenty of ways to purchase a home with little to no down payment – you just have to know your options!

20 Percent is not the Only Answer

We are all trained to think that without a 20 percent down payment, a house purchase is not possible. In reality, you can get a mortgage with no down payment with several programs, including the VA and USDA loan program, but you can even get conventional financing with as little as 3% down. The kicker is that you will pay Private Mortgage Insurance in order to give the lender a guarantee that they will not lose out on hundreds of thousands of dollars if you default on your loan. You do not have to stick with conventional financing, though; there are many other options out there that do not charge PMI and do not require large down payments!

VA Loans

If you are a veteran or are actively serving right now, you likely have VA benefits to use. These entitlement benefits enable you to purchase a home with no down payment. In fact, the qualifying guidelines for this program are so flexible, that it would be hard not to qualify. Typically, you need a credit score that averages around 620, although some lenders will go as low as 580; 12-months of on-time rent payments or an alternative credit line, such as insurance or utility payments; and adequate discretionary income which varies by the area that you live. The VA actually focuses more on your discretionary income than your debt ratio – they have a set amount of money that each family size needs to have each month in order to qualify.

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USDA Loans

USDA loans offer the chance for anyone, not just veterans as the VA loans require, to purchase a home with no down payment. The kicker with this loan type is that the home must be located in a rural area, as determined by the USDA, which you can find on their website. In addition, your maximum qualifying income cannot exceed the USDA guidelines, as the program was created for borrowers that have low to middle-of-the-road income. But chances are, if you are living on your parent’s couch, you do not make too much money to qualify for the USDA loan in your area. To qualify for the USDA loan with no down payment, you must have a credit score around 620 (some lenders go as low as 580 for this program too); be an upstanding citizen; and have debt ratios around 29 percent on the front-end and 41 percent on the back-end.

FHA Loans

Last, but certainly not least, are the FHA loans. This program does require a down payment, but it is just 3.5% of the purchase price of the home. So, for example, if you found a home that was not within the USDA rural boundaries and its purchase price was $150,000, you would have to put down $5,250 on the home. The good news is that the money does not have to come just from you – a gift from a family member, employer, or charitable organization can be used to make the down payment. As long as you can source the money and prove that it is not a loan, you can use it for a down payment. The requirements to meet the FHA guidelines are similar to those of the above two loans – your credit score should be around 620, but lower scores are sometimes accepted; your debt ratio should be around 31 percent on the front-end and 43 percent on the back-end; your employment history should be steady; and your income verifiable.

As you can see, there are a variety of ways to get a mortgage without a down payment. The 20 percent rule still applies if you want a conventional loan with no private mortgage insurance, but if you need alternative forms of financing, there are many options out there that are provided by a large number of lenders making it easy to get off your parent’s couch and into your own home!

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