More About Loans and Lenders
Do all loans require impound accounts?
What about splitting my mortgage in two and paying bi-weekly?
What are the benefits of pre-paying the mortgage?
Where do I get information on correcting loan payments?
Is there such a thing as a no-cost or no-fee loan?
What about nothing down?
What about these ads for no-cost loans?
100% Financing & Down Payment Assistance
What is a low down payment?
Are there low-down-payment home loans?
Are there alternatives to low-down-payment loans?
Who do I call for a low-down-payment loan?
Should I put more or less down, if we can afford it?
What are no-doc loans?
What are the risks of "b" and "c" loans?
How do you find out if a loan is assumable?
Where do I get information on who regulates lenders?
Do all loans require impound accounts?
If you are taking out a FHA or VA loan, the lender can require an impound account to pay real estate taxes and hazard insurance premiums, as with a standard loan.
Most conventional loans do not require an impound account.
What about splitting my mortgage in two and paying bi-weekly?
Some people set on paying off their home loan early and reducing interest charges opt for a biweekly mortgage. Monthly payments are divided in half, payable every two weeks.
Because there are 52 weeks in a year, the program results in 26 half-payments, or the equivalent of 13 monthly payments per year instead of 12. Using the biweekly payment system, a homeowner with a $70,000, 30-year biweekly mortgage at 10 percent interest could save $60,000 in interest and pay off the balance in less than 21 years.
What are the benefits of pre-paying the mortgage?
By making additional payments that go toward the principal balance, you can save thousands of dollars and shave years off the length of your loan.
Principal payments over and above the minimum monthly amount required by the terms of the mortgage constitute partial prepayment of a mortgage. Each mortgage will have terms describing how and when prepayment may occur. Refer to the note to see if there is any penalty incurred for prepayment.
The total savings potential also depends on how long you want to stay in the house. Borrowers who plan to move in the near future should not expect to realize as significant a savings as people who pay ahead of schedule until they own the home free and clear. Check with your lender, who should be able to provide specific answers as to how such a prepayment plan will shorten the life of the loan and what kind of interest savings can be expected.
Where do I get information on correcting loan payments?
The following auditing services can do a thorough review of residential mortgages for lender calculation errors:
- Mortgage Monitor; 1372 Summer Street, Samford, 06905; (800) AUDIT-USA.
- Loantech, (301) 762-7700.
But keep in mind that these services come with a fee, and your lender should be able to work with you to make your own accurate calculation.
Is there such a thing as a no-cost or no-fee loan?
Not really.
While some lenders occassionally promote "no-cost" loans, banking regulators have cracked down on these misrepresentations.
Advertised "no-fee" loans may actually cost the borrower more over the long term because these costs are often rolled into the new note through higher interest or more principal.
A typical no-fee loan is one where the points charged and all fees are included in the loan principal, meaning that the borrower does not pay these expenses at the close of escrow, but instead ends up paying on them over the life of the loan. The loan is called a no-feeloan because the borrower is not charged any fees up front.
What about nothing down?
Though some real estate experts advise against it, home buyers interested in buying a house with nothing down can do so. But it's not easy finding these loans and in some cases they can be risky. Occasionally, a builder will offer no-down loans to induce sales in an otherwise slow-moving project. Desperate sellers also may agree to finance the full purchase price to get out from under a property. The Department of Veterans Affairs, or VA, loan program is one program that allows buyers to qualify for a no-down loan.
What about these ads for no-cost loans?
In many states, real estate regulatory agencies are cracking down on such advertising. The very term, "no-cost" loan, is misleading because borrowers are actually paying a higher interest rate in exchange for not having to pay fees or closing costs up front when the loan is secured.
A "no-points" loan is one for which the lender does not charge points (one point is equal to 1 percent of the loan amount). But there are other fees involved in no-point loans, as with most loans.
100% Financing & Down Payment Assistance
Down payment is often the largest obstacle to home ownership. To assist homebuyers in over coming this obstacle, special loan programs have been created. These programs are broken down into three categories, 100% financing, government and community sponsored programs and seller assisted down payment grants.
Down Payment Assistance
Community Programs A government or community sponsored down payment assistance program may be able to assist you in acquiring the down payment for a home. These programs have specific requirements, such as being a first time homebuyer, and maximum household income limits. Many of these programs require monthly repayment, or repayment on sale or refinance. The details of these programs change depending on location. There may be unique programs available through the community in which you plan to buy your home. Discuss the available options with an experienced Realtor or loan originator; they can help you determine which program will best meet your needs.
FHA FHA allows you to receive gift funds for your down payment from an immediate family member, employer or non-profit agency. Down payment assistance programs such as Neighborhood Gold, Nehemiah, and HART are available to every homebuyer. These programs are referred to as "seller assisted programs"; they take advantage of a loophole in HUD'S source of funds rule. For these to work, the seller of the home must agree to make a contribution to the grant program from their net sale proceeds. The non-profit agency retains a nominal fee to cover administrative costs, and the remaining contribution is passed back into the non-profits pool of funds that granted your down payment. The possible downside of these programs is that you rely on the seller to take a reduction on what they'll make when they sell their home. The buyer is not allowed to inflate the offering price of the home to compensate for the seller's loss of proceeds. In some cases, down payment assistance can have an adverse impact on the underwriting process, it may be seen as an increased risk factor.
Generally, down payment assistance is utilized in conjunction with an FHA loan, but there are exceptions to this rule (assistance is sometimes combined with conventional mortgages as well). The reason FHA is most frequently used is that it has a specific provision in the source of funds underwriting rule that allows for gift funds as the sole source of money for down payment.
100% Financing
Conventional
A hybrid 80% first mortgage combined with a 20% second mortgage is the most common 100% conventional loan program. This type of mortgage combination can eliminate the need for down payment funds and keep you from paying monthly mortgage insurance.
Another option is a single mortgage at 100%. This option is not as popular due to the required monthly mortgage insurance. The interest rates for these programs tend to be higher than FHA and many times have stronger credit requirements.
VA Veterans Administration loans are very attractive because the buyer is not required to make a down payment. The U.S. Department of Veterans Affairs has maximum loan limits, which vary by region. If you select a property that exceeds the VA loan limits, a VA loan can still be used provided you have the cash to make up the difference between the loan amount and purchase price. The Veteran's Benefits Improvements Act of 1994 gives men and women who have completed 6 years in the Army, Air Force, Marine Corps, Coast Guard Reserves, Army National Guard or Air National Guard eligibility for VA home loans.
What is a low down payment?
A low down payment is anything less than the standard 20 percent. Many people borrow with less than 20 percent down by obtaining private mortgage insurance, or PMI. There also are numerous programs to help first-time buyers with little or no down payment, including FHA, VA and Fannie Mae's Community Home Buyers Program.
Are there low-down-payment home loans?
A host of private lenders offer low-down-payment loans. In addition, there are government programs to help cash-strapped buyers.
The U.S. Department of Housing and Urban Development offers a variety of programs through the Federal Housing Administration that require approximately 4 to 5 percent cash down. Loan limits vary depending on the county where the property is located.
Fannie Mae's Community Home Buyers program allows people to buy with just 3 percent down. For details, contact lenders who offer government-insured loans. In addition to calling lenders for information, contact Fannie Mae directly at (800) 832-2345.
Are there alternatives to low-down-payment loans?
There are a variety of alternative financing arrangements such as equity sharing, employer housing assistance, seller-financing and lease options that may reduce the size of the down payment.
Who do I call for a low-down-payment loan?
Here are several popular programs available to home buyers, along with the appropriate telephone numbers for more information:
- The Federal Housing Administration has programs which require as little as 3 or 4 percent cash down. FHA loans are originated and serviced by private lenders. Check with local lenders to find the best source for your loan.
- Veterans (and reservists) who qualify can buy a home with no money down through the U.S. Department of Veterans Affairs. Call 1-800-827-1000 to find out more.
- Both the VA and FHA offer foreclosure properties for sale, some requiring as little as $100 down. Anyone interested in a VA foreclosure can call 1-800-827-1000 to request a current listing. For FHA-insured properties, call your local U.S. Housing and Urban Development office for more information. Fannie Mae helps buyers who can put down as little as 3 percent of their own money. To see if this can work for you, call 1-800-732-6643.
- Many cities and counties offer special housing loans in order to promote the benefits of home ownership in their communities. To find out what funds may be available to you, inquire at your local housing department.
Should I put more or less down, if we can afford it?
Putting down as little as possible allows buyers to take full advantage of the tax benefits of home ownership, many experts say. Mortgage interest and property taxes are fully deductible from state and federal income taxes. Buyers using a small down payment also have a reserve for making unexpected improvements.
Other real estate experts, however, advise that it is more prudent to make a larger down payment and thereby reduce the amount of debt that must be financed.
What are no-doc loans?
"No-doc" loans are mortgages for which lenders require very little loan documentation as long as the borrower puts down a sizable down payment, generally 25 percent or more.
These mortgages are common among self-employed people who say they earn a certain amount of money but whose tax returns show that their earnings are much lower.
Resources:
"How to Shop for a Mortgage," Mortgage Bankers Association of America, 1125 15th St., N.W., Washington, DC 20005; call (202) 861-6500.
What are the risks of "b" and "c" loans?
The major risk is the cost of the loan. Desperate home buyers who are not selective when seeking an "A-," "B," "C" or "D" loan may find themselves locked into long-term loans with outrageous fees and interest rates. "Watch out how costly they are," said Jon Riccardi, a mortgage broker with MPR Financial in Albany, Calif. "Some of the quotes are a little difficult to quote."
Traditional lenders who offer conforming loans are extremely competitive. They must offer desirable terms or lose their share of the market. Meanwhile, hopeful home buyers who were rejected often turn to mortgage brokers and specialized mortgage lending businesses.
Alternative lending sources not only offer a variety of loan products but also are more willing to deal with higher debt-to-income ratios, credit problems and other black marks on an individual's record.
In cases where negative information on a credit report may be due to disappear in the next few years, or a borrower expects their income to increase significantly, non-conforming loans without excessive prepayment penalties can be excellent. The borrower can obtain a conventional loan as soon as they qualify, yet enjoy the benefits of home ownership and establish equity in the meantime.
Many home buyers engaged in this process look at these less desirable loans as a penalty while others are grateful for a second chance. Yet no one should be so anxious that they sign for a loan with questionable terms. "The goal of these loans is to pay them off quickly," Riccardi said. "What I've seen is, people don't investigate these loans enough and when they try to get out of it, realize what they got into."
Resource:
"How to Shop For a Mortgage," a brochure available from the Mortgage Bankers Association of America, 1125 15th St., N.W., Washington, DC 20005.
How do you find out if a loan is assumable?
Look to the loan agreement to determine if it is assumable by someone else. Then talk to the lender about specific requirements based on the value of the home.
Assumable loans permit one borrower to take over a loan from another borrower without any change in the loan terms. Such loans still exist but they aren't very common or popular (for buyers) in a low-interest-rate environment. Plus, today new assumable loans are almost always adjustable rate mortgages.
Where do I get information on who regulates lenders?
The following regulatory bodies oversee lenders:
- Comptroller of the Currency, Compliance Division, Washington, D.C., (800) 613-6743.
- Office of Thrift Supervision, Consumer Affairs, Washington, D.C., (202) 906-6237.
- Federal Deposit Insurance Corp., Consumer Affairs, Washington, D.C., (800) 934-3342.
Your state departments of real estate or commerce also may regulate the lenders in your area.