Mortgage Primer: loans that Wall St. doesn’t like
Here’s a mortgage primer on which loans are no longer the flavor of the month on Wall Street. They’re the Michael Vick’s of the mortgage world, they were once very popular on but now nobody wants to be associated with them. Okay, that’s a little bit too harsh since these loans didn’t kill dogs. Then again, these loans have put families in dire straits so lets keep the Michael Vick analogy.
Loans the Wall Street doesn’t like:
- THE LOANS WITH THE REALLY REALLY REALLY LOW RATE AND LOW MONTHLY PAYMENT
- THE LOANS FOR BORROWERS WITH REALLY REALLY REALLY BAD CREDIT HISTORIES
- THE LOANS FOR BORROWERS WHO HAVE GOOD CREDIT BUT WHOSE OVERALL LOAN APPLICATION DOESN’T MEET FANNIE MAE OR FREDDIE MAC’S STANDARDS
- THE LOANS FOR BORROWERS WHO CAN’T REALLY REALLY REALLY SHOW HOW MUCH MONEY THEY’VE MADE OR HOW MUCH THEY HAVE SAVED UP
- THE LOANS FOR BORROWERS WHO REALLY REALLY REALLY DON’T WANT TO PUT ANY MONEY DOWN
- THE LOANS FOR BORROWERS WHO REALLY REALLY REALLY DON’T WANT TO PAY AN AMORTIZED PAYMENT
- THE LOANS FOR BORROWERS WHO REALLY REALLY REALLY WANT TO BUY A HOME THEY HAVE NO INTENTION OF LIVING IN
- THE LOANS FOR BORROWERS WHO REALLY REALLY REALLY MAKE A LOT OF DOUGH
- THE LOANS FOR BORROWERS WHO REALLY REALLY REALLY HAVE NO INTENTION OF LIVING IN THEIR HOMES FOR 15 to 30 YEARS
- THE LOANS WITH REALLY REALLY REALLY NO RISK
Also called: 1%, NEGATIVE AMORTIZATION, NEG AM, OPTION ARMS, PAY OPTION ARMS or
“A CAN OF WHOOP ASS WAITING TO HAPPEN”
Also called: SUBPRIME, NON PRIME, POOR CREDIT, 2/28s, 3/27s, or
“I GUESS THIS IS WHAT I GET FOR NOT PAYING MY BILLS”
Also called: ALT-A or
“SO I’VE GOT GOOD CREDIT AND A GOOD JOB BUT I’M PENALIZED FOR NOT SAVING ANY MONEY”
Also called: STATED INCOME, STATEDSIVA, SISA, NO DOC, or
“DON’T THEY HAVE LOANS FOR PEOPLE WHO DON’T HAVE JOBS?”
Are called: 80/20, 100% Financing, NO MONEY DOWN, 103%, 107% or
“I WANT A LOAN WHERE I GET TO KEEP MY MONEY IN CASE MY JOB GETS OUTSOURCED TO INDIA”
Also called: INTEREST ONLY, IO, or
“IF I LIKE PAYING DOWN PRINCIPAL MY PAYMENT GETS RECAST TO A LOWER PAYMENT EVERY MONTH”
Also called: INVESTMENT PROPERTY LOANS, NON OWNER OCCUPANCY, NOO or
“I’M GOING TO BE THE NEXT DONALD TRUMP”
Also called: JUMBO, NON CONFORMING, SUPER JUMBO, MILLION DOLLAR LOANS, ANYTHING OVER $417,000 or
“THAT’S PRETTY LOW FOR A RATE OF RETURN AND PRETTY HIGH FOR A MORTGAGE INTEREST RATE”
It remains to be seen if Wall Street still likes:
Also called: ADJUSTABLE RATE MORTGAGES, ARMS, 3/1, 5/1, 7/1, 10/1, TEASER RATE LOANS, HYBRID LOANS, BALLOONS or
“THE AVERAGE PERSON MOVES EVERY 5 to 7 YEARS, SO WHY SHOULD I GET A LOAN FOR 30 YEARS?”
Wall Street will always like:
Also called: FHA, VA, CONFORMING, FANNIE MAE, FREDDIE MAC or
“THE LOANS THAT MAKE UP THE MAJORITY OF THE AMERICAN MORTGAGE LANDSCAPE”
What are rates doing?
I get asked “What are rates doing?” more than any other question. Here’s what bankrate.com has to say about rates this week:
Rate: 6.56 percent (30-year fixed) Average Points: 0.39
Worries about inflation and interest rates pushed fixed mortgage rates higher for the third week in a row. The average 30-year fixed-rate mortgage increased to 6.56 percent, the highest since the week of June 26, 2002. The average 15-year fixed-rate mortgage popular for refinancing stepped up to 6.21 percent. On larger loans, the average jumbo 30-year fixed rate jumped from 6.68 percent to 6.73 percent. Adjustable-rate mortgages were also higher, with the average 5/1 adjustable-rate mortgage rising from 6.17 percent to 6.25 percent and the average one-year ARM notching higher from 5.83 percent to 5.89 percent. News about the tight labor market and rising prices for commodities like oil and gold are fueling inflation worries and the resulting uncertainty about further Fed rate hikes. Together, these are the forces helping lift bond yields and mortgage rates higher. Fixed mortgage rates are closely related to yields on long-term government bonds.
Super Jumbo Loan
Editors Note: Due to the mortgage and credit crunch, Super Jumbo loans are more difficult to obtain. If you’re in need of a super jumbo mortgage in Denver, CO contact us to discuss your mortgage options.
Super jumbo loans are conventional home loans that exceed $1,000,000 (one million dollars)
The majority of super jumbo loans over 2 million dollars require at least two appraisals of the property being financed or refinanced.
The rate on a super jumbo mortgage is higher because the investor is taking on more risk. The risk of default on a super jumbo loan can more greatly affect the lender’s overall portfolio.
Lenders can require up to 2 separate appraisals for these types of loans.
Sometimes you can split the loan up into two separate loans making a first and a second mortgage on the property to accommodate lender requirements.
Many programs exist for borrowers looking for loans over one million dollars. A few of the options are 100% loans, stated income and no ratio options.
Because Super Jumbo Loans are not eligible to be delivered to FNMA or FHLMC, and can only be sold to other investors or held as portfolio loans, they always carry higher interest rates than Conforming loans.
A super jumbo mortgage is a mortgage request exceeding $650,000. A super jumbo mortgage typically has a rate 1/4% higher than your average jumbo mortgage.
Super jumbo loans will always be a little more restrictive on what they require, however funding is always available for any size loan. What sets the lending limits apart for these loans are the higher the amount you wish to borrow, the more restrictive the lending conditions are.
With the rising costs of homes, lenders have expanded their programs to meet the demand. Even with the low start rate Option Arm, you can finance up to 8 million dollars on some programs.
Although some lenders may define these loans as only those above $1,000,000 most lenders use the $650,000 breakpoint for pricing, marketing and underwriting. Remember, the term Super Jumbo Mortgage is used to describe mortgage loans exceeding $650,000 whereas a Jumbo Mortgage refers to loans which simply surpass Fannie Mae’s limits for conforming loans. Finding the right loan officer who understands what lenders concentrate on this market is key to finding the right program.
Reverse Mortgage
A form of mortgage in which the lender makes periodic payments to the borrower, using the borrowers equity in the home as security. For older owners who have a lot of equity in their home, this can be used as income. The loan does not need to be repaid until the borrower sells the property or moves into a retirement community.
When you sell your home or no longer use it for your primary residence, you or your estate must repay the lender for the cash received from the reverse mortgage, plus interest and service fees. Any remaining equity belongs to you or your heirs. It’s important to remember that you can never owe more than the home’s appraised value when it is sold. None of your other assets will be affected by your reverse mortgage loan.
Reverse mortgages are a great way for an elderly person or couple to supplement income, especially if they are only getting social security as retirement income.
Any principal and interest accrued over the life of the loan is due and payable in one lump sum when the last borrower in the home is no longer the primary resident. In most cases, the amount that is due can be paid either by the selling of the home (where the difference of the selling price and remaining debt is left with the heirs), or refinancing the reverse debt with a traditional mortgage.
This is a great income supplement for those who need it.
A reverse mortgage is an agreement allowing a homeowner to borrow against home equity and receive tax-free payments until the total principal and interest reaches the credit limit of equity.
In reference to the HECM (most popular reverse mortgage), the fees associated with this loan are as follows: 1) Maximum of 2% origination fee based on the lesser of FHA’s lending limit or the home’s appraised value; 2) Closing costs such as title, escrow, appraisal, etc; 3) 2% charged by HUD on the lesser of lending limit or home value for initial mortgage insurance premium; 4) Monthly servicing fee of between $25 and $30 that is set aside initially and added to the loan balance as the loan progresses.
Loan to Value calculations, Credit requirements (FICO scores), and Debt to Income calculations are not used in determining how much a borrower can access in equity. For the HECM program, the amount that can be borrowed is based on the lesser of home value or lending limit, age of youngest borrower in the home, and an interest rate.
A Reverse Mortgage is a financial tool which provides seniors 62 years of age and older with funds from the equity in their homes. Generally speaking, no payments are made on a reverse mortgage until the borrower moves or the property is sold. The final repayment obligation is designed to not exceed the proceeds from the sale of the home.
There are currently 3 reverse mortgage programs available. The most popular reverse mortgage program is the FHA insured Home Equity Conversion Mortgage (HECM). The second program is the Fannie Mae Home Keeper, and the third is a jumbo reverse mortgage (cash account) offered by Financial Freedom. With the exception of the Home Keeper, the HECM and the Cash Account can be structured in different ways (i.e. interest rate adjustment for HECM, point variation on the Cash Account).
Possible income source for those who are on social security or limited fixed income.
A Reverse Mortgage borrower cannot be forced out of his/her home. Nor will he ever owe more than the value of his house. Reverse Mortgages are “non-recourse” loans, meaning in the rare case of drastic declines in home prices, the homeowner can never be held liable beyond the value of the subject home.
A reverse mortgage allows homeowners that are 62 and older to unlock a portion of the equity in their home without having to make a monthly repayment. The amount that they can unlock will be determined by a combination of three things: 1)Youngest borrower’s age 2) Lesser of their home’s value or a lending limit (HECM and FNMA) 3) An interest rate.
There are three basic types of reverse mortgage are: single-purpose reverse mortgages, which are offered by some state and local government agencies and nonprofit organizations; federally-insured reverse mortgages, which are known as Home Equity Conversion Mortgages (HECMs), and are backed by the U. S. Department of Housing and Urban Development (HUD); and proprietary reverse mortgages, which are private loans that are backed by the companies that develop them.
Reverse mortgage loan advances are not taxable, and generally do not affect Social Security or Medicare benefits. You retain the title to your home and do not have to make monthly repayments. The loan must be repaid when the last surviving borrower dies, sells the home, or no longer lives in the home as a principal residence. In the HECM program, a borrower can live in a nursing home or other medical facility for up to 12 months before the loan becomes due and payable.
You can get your money in a lump sum or monthly payments.
There are no credit requirements. Only that you need to 62 years of age or older and have sufficient equity.
You maintain complete ownership of your home.
If you are a senior at least 62 years old who is “house rich, but cash poor”, a reverse mortgage may be a viable option to help get you the cash you need. Whether paid to you in lump sum or in installments, reverse mortgages require no payments from your side and are generally not taxable and generally don’t impact social security or Medicare benefits.
Because this loan must be the first lien on the home, any existing mortgage balance must be paid with the proceeds of the reverse mortgage. For instance, if the amount that can be borrowed from the reverse is $100,000 and the existing mortgage balance on the home is $50,000, the $50,000 will be paid with the amount available from the reverse ($100,000) and the remaining balance ($50,000) will be available to the homeowner. The homeowner can elect to convert the $50,000 into a monthly payment, place it in a line of credit, take any or all of the amount at closing, or any combination of the three.
The amount of cash that a borrower can receive is based on a formula of factors that include age of the youngest borrower, the interest rate, value of the home and the county where the home is located.
Nonconforming Loan
Also called a jumbo loan. Conventional home mortgages not eligible for sale and delivery to either Fannie Mae (FNMA) or Freddie Mac (FHLMC) because of various reasons, including loan amount, loan characteristics or underwriting guidelines. Nonconforming loans usually incur a rate and origination fee premium.
With the emergence of new lenders and programs to the mortgage market on a weekly basis there is a loan program for just about anyone whether conforming or non-conforming. Just check with you online Mortgage Professional to see what you qualify for.
Conforming loan limits will adjust to $400,000 in most states in December.
A Non-conforming loan simply means a loan that is outside of the standard guidelines set by Fannie Mae and Freddie Mac (the two government-sponsored enterprises that insure loans on the secondary mortgage market). Non-conforming loans have no set guidelines and vary widely from lender to lender. But most often non-conforming loans are mortgages that have larger loan balances, require less documentation, and have flexible credit score requirements. These loans carry an additional risk to the lender and as such the rates are higher.
Non-conforming loans have less stringent rules on fees that can apply to your loan, so review the details carefully.
The demand for nonconforming loans is gaining strength at just about the right time. Its growing presence is throwing lifelines to a record number of perplexed homeowners facing higher sales prices or stiff documentation requirements.
Non conforming loans has strict loan-to-value guidelines.
Conforming loans are available now with Stated Income, Stated Assets or “SIVA”
A Non Conforming Loan is a loan with an unpaid principal balance or an unexpired term that exceeds lending limitations established by the principal purchasers and guarantors of the secondary mortgage market; the Federal Home Loan Mortgage Corporation, and the Federal National Mortgage Association.
Jumbo loans are one type of non-conforming loans, due to the loan amounts exceeding the maximum limits adopted by FNMA and FHLMC. Besides exceeding the loan amount limits, loans can be non-conforming for other reasons, such as the borrower’s credit profile, income/employment situations, cash reserves, property type, etc.
Non-conforming loans typically have a higher rate and different requirements for your down payment.
Jumbo Loans
Jumbo loans exceed the maximum conventional loan amount established by Fannie Mae and Freddie Mac. They are available as fixed rate mortgages, adjustable rate mortgages, or negative amortization mortgages.
These type of loans facilitate the high-end purchase of expensive homes, vacation homes, investment property and upscale luxury homes. They are very attractive for primary occupants or investors who want to leverage their assets.
For 2006 jumbo loans are home loans that exceed $400,000 for single family homes (amounts are higher in Hawaii and Alaska).
For duplex, the conforming loan limit for 2006 is $533,850, $645,300 for three-family residence, and $801,950 for four-family homes.
Jumbo loans that are sold to investors on the secondary market are not created by the quasi-government agencies Fannie Mae and Freddie Mac. Because of this, the investors perceive these loans as a little more risky and demand a slightly high rate of return. This is why the interest rates on Jumbo loans are normally .25% to 1% higher than their conforming counterparts.
2006 Jumbo loans will start at $418,000
The Jumbo loan limits can change at any time. To know what the limit is at currently, call your mortgage broker.
Fannie Mae Explained
Fannie Mae and Freddie Mac reduce the costs of borrowers, who meet the underwriting requirements of the agencies, and who need loans no larger than the largest mortgage the agencies are allowed by law to purchase. For 2006 the maximum is $417,000. It is raised every year in line with increases in home prices.
There is no company in America, taking bigger strides or that is more committed to providing lending for the purpose of expanding minority homeownership.
The Conforming Loan limits set by FNMA (Federal National Mortgage Association) for 2006 is $417,000 for single family residence, $533,850 for duplex, $645,300 for triplex, and $801,950 for quads. Hawaii and Alaska have Conforming loan limits 1.5 times higher than the continental U. S. Mortgages with loan amounts higher than the conforming limits set by Fannie Mae are referred to as “Jumbo Loans”.
These loans offer the best rates for borrowers. You do not need perfect credit to qualify and they also will take very high debt to income ratios, sometimes as high as 65%.