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”
Alternative income documentation
There are many mortgage programs that allow for alternative income documentation. Alternative income documentation is using non-traditional methods of documenting income. Traditional methods would be using pay-stubs, W2 forms and income tax returns. An example of alternative income documentation would be to use a 12 months bank statement program to document income.
Alternative income may be stated income, stated assets, 12 month bank statements personal or business, 24 month bank statements personal or business, no income no asset loans and no ratio loans.
Taking this one step further you may also choose to go the stated income/stated asset route. Most lenders require some type of reserves and on stated asset you are not required to show this money.
You may also elect to choose a stated income loan instead of providing W2’s or tax returns to expedite the processing of your loan. With a stated income loan you state your actual income on your loan application but usually the most documentation the underwriter will want is to get a verbal VOE or a copy of your business license to prove you have a job currently and you have had a job for the past 2 years.
Alternative income is another way to qualify for a loan. If you cannot qualify the traditional way with paycheck stubs and tax returns the lenders will still work with you. There was at one time a lot of money being lost due to turned down loans because of income. Lenders recognized this and have made adjustments to there lending guidelines. Now there is alternative income, stated income, no income no asset… Just to name a few.
When using bank statements as proof of income, some lender banks use the average gross deposits as total income, others use net deposits. Net deposits are gross deposits minus withdrawals. Naturally, a borrower is considered to have higher income if a bank does not include withdrawals in its income calculation. Transfers from one account to another are usually not considered as income.
Other sites: Broker Outpost | Closing Costs | Why should I refinance | MIP | FSBO | Fixed-rate mortgage| Pay Option Arm Calculator
Biweekly mortgage
A mortgage on which the borrower pays half the monthly payment every two weeks. Because these results in 26 (rather than 24) payments per year, the biweekly mortgage amortizes before term.
Homeowners should beware of third parties who contact them and offer to set up bi-weekly payments. In most cases this can be accomplished by contacting your loan servicer without the need of any third party. Even if your loan servicer does not offer a bi-weekly mortgage payment program you can still simply make bi-weekly payments on your own and any excess money the servicer receives over and above the interest due will be applied to principal reduction.
One of the most effective bi-weekly mortgage plans are that where the loan actually re-amortizes every 2 weeks. This actually will save more than just an extra payment per year and pay off the mortgage earlier than the typical bi-weekly payment plan. Ask your lender whether the bi-weekly payments are actually re-amortized every two weeks, or if it is simply making an extra payment every year.
Most bi-weekly payment providers will also charge you a very small fee either per withdrawal or per month. This is usually just a couple of dollars but I have seen this fee as high as 7 or 8 dollars per withdrawal. This adds up over the course of a year and you also usually have an initial setup fee charged from most biweekly provide. While bi-weekly programs are very helpful and can save a lot of money, you need to make sure that you are not overpaying for the program itself. If you have the willpower to make the extra payment once per year yourself this can save you some money, however, many consumers do not follow through with continuing to make the extra payments.
Biweekly shortens the time needed to pay off a 30 year mortgage by about 5 years. One of the problems with biweekly is the fact that the lender withdraws payment every two weeks from the borrowers’ bank accounts, so customers must have at least 3 or 4 payments worth of funds “lying around” in their bank accounts. If they don’t have that kind of reserves, they would have to take care to have funds available for withdrawal. And that’s a difficult task because funds are drawn on the day of the week (e.g. every other Friday) rather than the day of the month (such as the 1st of every month).As an alternative, a client can get a “regular” mortgage, and make an extra payment every year. Making that 13th payment achieves a less effective but similar result as a biweekly mortgage, and depending on whether the escrow portion (property tax and hazard insurance) of the monthly payment is included in the extra payment, one can even pay off a 30 year mortgage in 23 years!
An example of the savings of biweekly payments would be as follows: Mortgage amount: $100,000Rate: 6%Term: 30 years You would make payments of $302.06 every two weeks. You would make 639.2 payments and cut your term down to 24.52 years saving you $24,405.
Borrowers should not commit to a loan that has a much higher interest rate simply because it will pay down the loan quicker. They can do this on their own by adding an additional 1/12 payment each month with their regular mortgage payment.
This is definitely a good program. But beware of those programs that charge you $400 or more for setup, then take your money every 2 weeks, yet only apply it to your mortgage account at the end of the month. You still get the extra payment every year, but don’t save quite as much interest because they are not applying your payment when you actually pay it.. Try to go directly through your loan servicer for this program!
A mortgage that you make payments every 2 weeks, instead of monthly. The basic idea is that instead of making 12 monthly payments during the year, you make 13. The extra payment reduces the balance, significantly reducing the time to pay off a 30 year mortgage.
Biweekly payments are a great way to save money in interest. By making biweekly payments you are making an extra payment a year. If you do not want the hassle of making payments every two weeks make one extra mortgage payment a year. If you made your regular payments and made an extra payment at the beginning of the year you would be saving more that making biweekly payments.
Other sites: Loan Officer | Delinquency | Negative Amortization | MIP | Fixed-rate mortgage | Consolidating Credit Card Debt into Your Mortgage | Increasing your homes value | Stated Income Loan | Mortgage banker | Quick Closing| Pay Option Arm Calculator
Buy vs. Rent
One of the main benefits of buying a home vs. renting a home (or apartment) is that your mortgage interest that you pay each year is tax deductible. This can help at tax time to get more money back from the IRS. Another advantage of buying vs. renting is that with buying a home you are actually investing your money into a fairly safe investment. Unlike renting, when you are basically just throwing your money out the window.
Ask your mortgage professional to provide you a detailed analysis of the benefits of buying vs. renting. You will see many benefits of buying.
Another benefit in buying a home instead of renting is that you will be building equity. Your equity can later be turned into cash.
Owning your home vs. buying represents much more in terms of freedom and security. Very few renters actually realize that on a month to month rental the landlord can ask them to leave with only 30 days notice. This can usually be done without cause, meaning that they normally would not need a reason to do this. In many cases, rental properties have restrictions on how many persons may live in the property, pets, number of automobiles allowed, and many other things that can affect the way the renter lives.
There are many rent vs. buy calculators available online that will help demonstrate the advantages of homeownership compared to your current renting situation. These calculators provide all different kinds of information such as tax savings, equity gained, and a breakdown of differences between the payments.
Another advantage to buying a home is that you are locking into a payment. As in most cases rent will increase yearly while your mortgage payment may stay the same up to 30 or 40 years.
Keep in mind that owning a home has many responsibilities too that renting does not. A homeowner needs to upkeep the home. If the furnace goes or the hot water heater quits a homeowner needs to take care of these items. As a homeowner you must make sure that your property taxes and homeowners insurance get paid. Also, as a homeowner you must upkeep the exterior of the home, the yard, landscaping etc… While these responsibilities do exist for a homeowner the benefits of owning your own home still outweigh and are much more rewarding than the benefits of renting. Your home should always appreciate in value and you are going to basically make money simply for living there and making your monthly housing payment.
For many people, psychological and emotional factors drive their decision to stop renting and buy a home. These factors include pride of ownership, a feeling of establishing roots, a desire for a place to raise a family, desire for privacy, and freedom - freedom to paint your walls any way you want, freedom to barbeque on your own back porch, freedom to play with your dogs in your own back yard.
Other sites: Loan Officer | Stated Income Loan | How To Choose A Real Estate Agent | Delinquency | MIP | Closing Costs | Selling your home with a real estate agent| Pay Option Arm Calculator
Cooperative (Co-op)
Residents purchase stock in a cooperative corporation that owns a structure; each stockholder is then entitled to live in a specific unit of the structure and is responsible for paying a portion of the loan.
Many banks offer cooperative mortgage loans in areas where coops are common. Most coop mortgages offer the same features as mortgages that are secured by single family houses, such as fixed rate or adjustable rate, stated income documentation or no-doc. Coop boards in cooperatives often require questionnaires and forms to be filled out by the coop buyer in addition to an interview. One of their criteria may be to limit the number of occupants (i.e. A one-bedroom coop apartment may only house a maximum of two people). They may also dictate the relationship of the occupants (i.e. A two-bedroom apartment may only house a couple with a child and not a couple with children of different sex. Male and female children must have separate bedrooms.)Coop boards often have a more stringent income review than a lender bank. Many mortgage banks allow a borrower to contribute up to 45% of their gross income towards housing expenses whereas coop boards may only allow up to 36%. In other words, a coop buyer may very well qualify for a mortgage loan but fail to qualify the coop boards’ requirements.
There are several types of Co-ops. Market-rate housing cooperatives - In a market-rate cooperative you can buy or sell a membership or shares at whatever price the market will bear. Building equity is very similar to single family homes. Limited-equity housing cooperatives - In a limited-equity housing cooperative (LEC) there are restrictions on what outgoing members can get from sale of their shares. These restrictions are usually imposed, because the co-op members, benefit from a below market interest rate mortgage. Leasing cooperatives - In a leasing cooperative, the cooperative corporation leases the property from an outside investor. Since the cooperative corporation does not own any real estate, the cooperative is not in a position to build any equity.
If you’re thinking of buying into a co-op or cooperative, please note that you will have to budget for your own mortgage payment covering your share of the corporation and by extension your unit, as well as a monthly maintenance fee which varies from coop to coop.
The Maintenance Fee in a Co-Op will cover any basic expenses, such as service staff, as well as a portion of the underlying mortgage and property taxes paid by the corporation on the property or properties as a whole.
In most states closing costs will be lower on a Co-op, because you are buying shares in a corporation, not property. Due to this, there will be no need for a title search or title insurance.
Some of the benefits of owning a Cooperative are, personal income tax deductions, controlled maintenance costs, lower real estate tax assessments and more control of expenses through an elected board of residents.
Because co-operative maintenance fees are mandatory in most coops, lenders will consider them to be part of your housing expenses when qualifying you for a loan.
Co-ops have become so popular, that the “Internet Corporation for Assigned Names and Numbers” (ICANN) assigned cooperatives a top level domain. The .Coop is restricted to cooperatives and cooperative organizations.
Creative Financing
Creative Financing is a term loosely defined as stretching underwriting guidelines. The mortgage industry has all but replaced creative financing with stricter enforcement of underwriting guidelines.
Many loan officers take pride in creative financing. They will find ways to help their clients purchase homes; even when the odds seem stacked against them.
Private money is also an option, but can come at a very high cost and low loan to values.
Creative financing is a very broad term in the mortgage industry. Creative financing can involve finding non-traditional ways to document income, finding creative ways to finance a home purchase with no money out of pocket, figuring out creative ways to maximize cash flow, among many other things. Consult a mortgage professional to see what kinds of creative financing you may be eligible for.
There are hundreds of different loan programs out there, and yet for one reason or another some people just do not fit into any of these programs. That is when creative financing can really help you get into your dream home, or help you refinance out of a bad situation. A good loan officer will go above and beyond, to find a way to get your home financed and help you meet your financial goals.
There are loan programs that allow you to qualify for a mortgage with less income than is traditionally needed. If you have good credit and feel you can afford your new payment regardless of your debt ratios ask your Preferred Mortgage Professional about “No Income” or “No Ratio” loans.
The term Creative Financing was coined in the late 1970’s when high interest rates caused lenders and real estate sales people to have to think of imaginative ways to accomplish the financing on home purchases.
Creative financing does not include committing mortgage fraud, as obvious as it seems. If you don’t qualify for a loan due to lack of income, then there’s usually very little that can be done. You cannot get a stated income loan and state that you make more money than you do. This is not creative financing, it is fraud.
Creative financing may simply require the mortgage broker or mortgage banker to understand the broad range or loan products that are available.
Often, creative financing comes at a higher cost than rational mortgage solutions. Don’t be too quick to assume you will need to get creative in order to get a good loan.
Debt to income ratios
Editors Note: Due to the mortgage and credit crunch, debt to income ratios have been lowered making it more difficult to qualify for a loan. If you’re in need of a mortgage in Denver, CO contact us to discuss your mortgage options.
The ratio is expressed as a percentage which results when a borrowers payment obligations on long term debts is divided by the borrowers effective income. This is calculated on a net income for FHA, VA mortgages and on a gross income basis for conventional mortgages. (also referred to as housing expenses to income ratios).
It is important to note that many lenders look at what is referred to as front and back end ratios. The front-end ratio is the housing payment vs. gross income and the back-end ratio is the total monthly (excluding utilities, food, or other non-recurring/variable expenses) vs. gross income. Some lenders will go as high as 55% on the back-end ratio depending upon certain factors such as the borrower’s credit score ampersand loan amount.
Front ratio is calculated by dividing your gross monthly income by your housing expenses - those include principal, interest, real estate taxes, homeowners insurance, mortgage insurance (PMI) and association fees - the latter two you may or may not have and if you have condominium association, insurance is often included in association fee. When calculating back ratio your monthly consumer debt payments are also included like payments for your cars, credit cards, installment loans including student ones, second mortgage, etc.
Lower debt to income ratios allow you to get the best rates and quicker loan approvals.
Borrowers having trouble qualifying for loans on the basis of their debt to income ratio should speak with a loan officer about paying off certain high monthly payment consumer debts or exploring stated income alternatives to their selected loan program.
Conforming loans will require lower debt to income than your subprime loans. Once your mortgage professional knows what your income is and has as chance to pull your credit he or she will be able to determine what category of loans you will qualify for. This is done is the first stage of the loan process called the pre-qualification.
Your debt to income ratio is a simple way of showing what percentage of your income is available for a mortgage payment after all other continuing obligations are met. The ratio is one of the many things a lender considers before approving your home loan.
As one of the underwriting criteria, Debt-to-Income ratio carries much weight in the loan approval process. For homeowners with occupations that are difficult to document income, many lenders offer loan programs in which DTI ratios are not considered in the underwriting process.
Debt ratios tell the lender whether or not you will be able to afford the proposed payment. The lender looks at the total gross income before taxes and other deductions and uses this number in the factor to determine the income you qualify with.
The lower your income to debt, the more secure the lender feels.
Your debt to income ratio (DTI) is a key indicator of your true financial picture. Your debt to income ratio is calculated by dividing monthly minimum debt payments (excluding mortgage or rent, utilities, food, entertainment) by monthly gross income. For example, personal gross monthly income of $3,000 who is making minimum payments of $1000 on debt (loans and credit cards) has a debt to income ratio of 33 percent ($1000 / $3000 = .33). Contact A Mortgage Professional to help you determine your DTI.
Documentation requirements for Mortgages
- Full Documentation: Both income and assets are disclosed and verified, and the income is used in determining the applicants ability to repay the mortgage.
- Stated Income - Verified Assets: Income is disclosed and the source of the income is verified, but the amount is not verified. Assets are verified and must meet an adequacy standard such as, for example, six months of stated income and two months of expected monthly housing expense.
- Stated Income - Stated Assets: Both income and assets are disclosed but not verified. The source of the income, however, is verified.
- No Income - No Assets: Neither income nor assets are disclosed.
- No Ratio: Income is disclosed and verified but not used in qualifying the borrower. The standard rule that the borrowers housing expense some specified percent of income is ignored. Assets are disclosed and verified.
- No Income: Income is not disclosed, but assets are disclosed and verified and must meet an adequacy standard.
- Stated Assets or No Asset Verification: Assets are disclosed buy not verified, income is disclosed, verified, and used to qualify the applicant.
- No Asset: Assets are not disclosed, but income is disclosed, verified, and used to qualify the borrower.
- No Income - No Assets: Neither income nor assets are disclosed.
A handful of banks offer the simplicity and convenience of Stated Income mortgages to borrowers with the same low interest rates as full documentation loans. Applicants must have good credit profiles, often with credit scores of above 720. There is usually also limitations on the subject property, such as no 3-family or 4-family houses.
If you qualify, generally the fast closings occur with stated income or no documentation required loan programs. As a rule of thumb, the more documentation provided, the longer it may possibly take t close the loan, however we are often able to lend you more money at a better rate if more documentation is provided.
If the broker working on the loan determines you can fit into a full doc loan vs. a stated loan the move is permitted to get a better interest rate. However if you have to go from full doc to stated once in underwriting that is not usually permitted.
If your credit scores are lower than 680 you can expect a higher interest rate on stated income and no documentation loans.
With automated underwriting if there are either enough assets, an excellent credit history, or sufficient equity or a combination of them the lender may reduce the documentation to things such as just one pay stub, no asset verification or even a drive by appraisal which can speed the process up.
When stating assets on your loan application you are usually required to document proof of them. If the money is in a checking or savings account then usually the underwriter will request 2 months of bank statements to show the money is in there and has been there. A 401k statement is required (the most recent statement you have) to document a 401k account. If you do not want to deal with documenting assets during your loan process simply do not list them on your application. Sometimes providing assets may provide a better approval for a lower rate than if you don’t document assets though.
Alternative Documentation can be the use of pay stubs, W-2 forms, and bank statements instead of Verifications of Employment (VOE) and/or Verifications of Deposit (VOD) to qualify a borrower for a mortgage.
The method of documentation that a lender’s underwriter will perceive to have the lowest risk factor is W-2 income backed up by two years of actual W-2 statements and one complete month of paycheck stubs. The underwriter will want to be comfortable that they are issued by a legitimate company or organization. Pay stubs or W-2 statements that are handwritten rather than computer or machine generated will cause a red flag.
These documentation types should not be used for fraudulent purposes. The lender as well as the loan officer and client could be held liable for fraudulent loan practices.
There are many types of “alternative” options. Some lenders allow bank statements in place of pay stubs, some allow trade lines that do not appear on credit. There are many creative ways that your mortgage broker should know about to best help your situation.
Generally, the more documentation you can provide to the lender, the smaller the risk is to the lender, which in turn gives you a better rate.
A qualified mortgage professional will look at your whole financial situation and can make recommendations on that type of income will suit you best.
Other sites: Mortgage Broker | Fixed-rate mortgage | New Credit Card Minimum Payments | Quick Closing | Why should I refinance | Closing Costs | MIP | Mortgage banker | Delinquency | Increasing your homes value | Stated Income Loan | Why choose a mortgage Broker | VA| Pay Option Arm Calculator
Escrow account
A separate account into which the lender puts a portion of each monthly mortgage payment; an escrow account provides the funds needed for such expenses as property taxes, homeowners insurance, mortgage insurance, etc.
You can choose to waive escrow and pay your insurance and taxes on your own. Lenders will usually charge a small fee for waiving escrows. You may also here the term escrow used for a different account. This would be the escrow account where your earnest money would be held until the closing. Usually the title company or closing attorney will hold these funds.
Escrow accounts can be great for borrowers with little or no savings so that when these items become due they are not responsible for the lump sum payments.
Most lenders require escrow accounts unless you have a 20% down payment.
Banks “escrow” property tax and hazard insurance premium payments to protect the banks’ interests. In the event of a foreclosure, the mortgagee’s lien takes priority over all other claims, EXCEPT for government tax liens. If the homeowner does not purchase hazard insurance, the home is not covered against catastrophic loss. In the event of a catastrophe that causes damage to the home, and the homeowner is financially unable to make repairs, the value of the home will decrease. Therefore, banks will require the homeowner to put sufficient monies into an escrow account from which the bank will make property tax and insurance premium payments, on behalf of the homeowner, when they become due.
When you buy a house, you will probably have an escrow account with the lender. The amount of money you pay each month, has extra above what would be required for just your principal and interest. The extra money is held in your escrow account to pay property taxes and insurance when they come due.
The escrow holder is required to safeguard the funds while they’re in their possession , and to disburse funds or convey title, only when all requirements of the escrow have been met.
Some lenders require Taxes and Homeowners insurance to be escrowed as a safeguard to protect the lenders interest in the property.
Other sites: Mortgage Broker | VA | Will Stated Income Work for You | Fixed-rate mortgage | Mortgage banker | Reduced Documentation Loans| Pay Option Arm Calculator
FHA 203(b)
FHA program which provides mortgage insurance to protect lenders from default; used to finance the purchase of new or existing one- to four family housing; characterized by low down payment, flexible qualifying guidelines, limited fees, and a limit on maximum loan amount.
If you are purchasing a condo you will not have an upfront mortgage insurance premium like you would normally have with the program.
FHA loans are a wonderful tool for first time homebuyers as well as buyers with limited credit, or down payments. The FHA 203b program allows for a 3% down payment which can be from flexible sources such as gift funds from family members, employers as well as non- profit organizations.
Other sites: Mortgage Broker | What not to do after you apply for a Mortgage | Will Stated Income Work for You| Pay Option Arm Calculator