Types of Loans
Information Sources
New Construction Loans
Do builders give financing?
Alternative or Sub-prime Mortgages
What is seller financing?
What are the benefits of seller financing?
Are there no-down payment home loans?
How do some of these low-down programs work?
Reverse Mortgages
What is a reverse mortgage loan?
What is negative amortization?
When is a negative-amortization loan a good idea?
Can I convert a negative-amortization loan to a regular loan?
What is a wrap-around loan?
What is Private Mortgage Insurance (PMI)?
Is PMI always required on low-down home loans?
What does PMI cost?
How do I drop PMI?
Where do I get information on PMI?
Where do I get information on mortgages?
For information on mortgages, check out the following sources for information:
- American Bankers Association; (202) 663-5000.
- Mortgage Bankers Association of America, 1125 15th St., N.W., Washington, DC 20005; (202) 861-6500.
Where can I get a list of mortgage brokers?
For information on mortgage brokers, contact the National Association of Mortgage Brokers at (703) 610-9009.
New Construction Loans
New construction financing can be broken into two basic categories: builder provided construction financing, and buyer provided construction financing. This report is directed towards buyers that intend to acquire the construction financing.
Homebuyer provided construction financing means that the occupant of the home is financially responsible for the construction loan as well as the permanent loan.
There are two options available to a buyer who is acquiring new construction financing.
One-Close Construction to Permanent Financing You have the option of securing a one-time-close construction to permanent loan. This means that the permanent mortgage and the construction loan close at the same time, prior to the start of construction. An advantage of this type of financing can be a slight reduction in fees associated with the mortgage and construction loan process. This advantage can be offset by the fact that any increases in the actual cost of construction (versus the projected costs) must be paid for directly by you, the buyer. Increases in cost can be a function of even slight changes in design or fixtures. Equity in the project and the LTV of the permanent mortgage are strictly a function of how much you choose to put down on your new home. Any additional equity associated with the increase in value of your home after completion as compared to the cost of building is unrealized until you refinance or sell your new home. This can be an important consideration when evaluating the cost of private mortgage insurance. One-close mortgages are available for a wide range of borrower profiles, including conventional and alternative programs. In some cases LTV's of 95% can be supported with the one-close loan (dependent on borrower qualification and program restrictions). Please talk with your lender for more information and to find which programs are available for you.
Two-Close Construction to Permanent Financing You also have the option of securing stand-alone construction financing, followed by a permanent mortgage once construction is complete. You should expect to pay slightly more for the total cost of getting financing with this solution due to the fact that you are paying for two sets of closing costs. On occasion, this disadvantage is offset by the potential for a new home without having to put any money down. This is achieved because your permanent mortgage is actually a refinance of your construction loan. Appraised value (once built) is evaluated when determining the final loan to value, rather than the cost of construction. The permanent mortgage programs available to be used in combination with two-close construction financing are extensive and limited only by the restrictions imposed by the construction lender.
Whom to Contact: Mortgage Bankers Association of America
1125 15th Street, N.W.
Washington, DC 20005
(202) 861-6500
American Bankers Association
(202) 663-5000
Do builders give financing?
Builders often include financing programs to help move more buyers into a project early on. If it's a buyer's market in your area, you can be sure that developers will offer incentives such as low-down-payment financing.
Alternative or Sub-prime Mortgages
Alternative mortgage programs are for borrowers that have unique needs with either great, or damaged credit. It is important to understand that there is most likely a mortgage program for you, regardless of your credit profile. The questions become, what LTVs (loan to value ratio) are available, what are the rules for documenting income and verifying assets, what are the costs associated with the mortgage, and are they acceptable to you. An experienced lender will help you understand the answers to these questions, and determine which program best serves your needs.
Examples of Alternative Loan Programs:
Self-Employed Borrowers Individuals who are self-employed often have difficulty proving income using the standard guidelines (verifying income from tax returns), due to substantial tax deductions. Loan programs for these borrowers range from conventional mortgages, to stated income mortgages, to no income no asset mortgages, to no doc mortgages. These options represent a range of programs from limited documentation of income, stating income with no verification or proof, not stating an income (but proving the business exists), to the ultimate program: a mortgage based on credit alone, the no ?document loan.
Less Than Perfect Credit Many times borrowers are directed towards alternative or sub-prime mortgages when other programs may still be an option, including FHA or expanded conventional loans. Work with a loan originator or lender who has access to, and knowledge of, all programs to ensure that all traditional options are evaluated first. When the traditional programs simply will not work, in the majority of cases you will still have access to a sub-prime option.
No Job or Employment If you don?t have a job or income at the time of your home purchase or refinance, you may still be able to secure financing with a no-doc mortgage. A no-doc mortgage focuses entirely on the borrowers credit profile, requiring strong to perfect credit. If you plan on purchasing a home without having a job, review this option with your lender.
Buying Outside the Standard Guidelines Anytime your mortgage needs exceed the traditional guidelines for documenting income, source of funds, assets, LTV, credit profile, etc., an alternative or sub-prime mortgage may be the best and only solution available to you. An experienced and knowledgeable loan officer can help you understand your options and reach your goal.
What is seller financing?
Seller financing is when a seller helps to finance a real estate transaction by taking back a second note or even financing the entire purchase if the seller owns the home free and clear. Usually sellers do this when a buyer has difficulty qualifying for a conventional loan or meeting the purchase price.
Seller financing differs from a traditional loan because the seller does not give the buyer cash to complete the purchase, as does a lender. Instead, it involves extending a credit against the purchase price of the home while the buyer executes a promissory note and trust deed in the seller's favor. These special circumstances must be acceptable to the lender who makes the first mortgage on the property.
The necessary paperwork is prepared by the title or escrow company after the terms are worked out between the buyer and seller.
If you are a seller considering such an arrangement, it is critical to thoroughly evaluate the creditworthiness of the buyer first. Fear of default makes many sellers reluctant to take back a second. But seller financing can bring a higher price plus complete the sale sooner in some situations. For more information, contact the Internal Revenue Service for a copy of its Publication 537, "Installment Sales." Order by calling (800) TAX-FORM.
What are the benefits of seller financing?
Seller financing offers tax breaks for sellers and alternative financing for buyers who can't qualify for conventional loans.
If you are a seller, the risks you face are the same as those facing any lender: Is the borrower a good credit risk? Will the property hold enough value over time to allow for the repayment of all loans made against it?
You should run a full credit check on the borrower, require hazard insurance on the property and include a due-on-sale clause. There also are financing, disclosure and repayment-term requirements that need to be met. It is wise to consult a lawyer when putting together this kind of transaction.
Are there no-down payment home loans?
Though some real estate experts advise against it, home buyers interested in buying a house with nothing down can do so. Occasionally, a builder will offer no-down-payment loans to induce sales in an otherwise slow-moving project. Desperate sellers will also promise to finance the down payment to get out from under a property. A veteran can buy a house with nothing down through a VA home loan, as can members of some pension funds.
How do some of these low-down programs work?
Most of the private and government low-down loan programs have special requirements. These rules range from requiring borrowers to be first-time home buyers to limits on family income.
In general, cities and counties require that borrowers earn no more than 100 percent to 120 percent of the county's average household income. However, some programs such as the Federal Housing Administration have no income restrictions and do not require the borrower to be a first-time buyer.
Many private low-down loan programs insist borrowers have good credit and also that they obtain private mortgage insurance, which is a small monthly insurance payment that insures the lender against default. Some of the city and county programs are available only in targeted neighborhoods where local leaders are trying to spark reinvestment or increase the homeownership rate.
Resources:
"Unlocking the Doors to Homeownership," Freddie Mac publication 183; call (800) FREDDIE.
Reverse Mortgages
A reverse mortgage is a loan program for seniors that does not need to be repaid. This is exactly what it sounds like. Instead of you paying the bank, as in a traditional mortgage, when you have a reverse mortgage, the bank pays you and you don't have to repay it as long as you live in the home.
Until recently, there were only a few ways to tap into your home's equity for cash. You could sell the home and move, or you could borrow money by using the home as security for the loan, which meant that you would have to make monthly payments until the loan was paid in full. If you were to fall behind on payments, you could lose your home.
Reverse Mortgage Basics
A reverse mortgage is a loan against your home that you do not repay as long as you live there, the funds from it can be paid to you in a number of ways:
- In regularly monthly payments
- In a single lump sum of cash paid at once
- In the form of a credit line account that you can access as needed
- A combination of any of the above
Regardless of how you receive the money, typically no payments are due until you sell your home, move out of your home, or pass away. If one of these scenarios does happen, the loan becomes due and you or your heirs will have three choices. Sell the home and pay off the loan, keep the home and pay off the loans from other funds (possibly refinance), or allow the mortgage company to sell the home. If the home is sold for a profit, the funds will go to the estate of the homeowner. If there is a deficiency, the bank cannot come after the estate for the deficiency. The reverse mortgage lender is protected against loss with the mortgage insurance that is paid for by the homeowner at closing. As long as you reside in your home, the title will remain in your name.
Repayment While you are living in the home, you do not need to make mortgage payments. The banks that offer reverse mortgages are not doing it out of the goodness of their heart. The interest continues to accrue on the balance that is owed on the loan, but you do not need to repay it while you are living in the home. If you move out of the home for more than 12 months, sell the home, or pass away, then the mortgage balance, plus accrued interest is due. This is an easy way for a senior citizen to be able to get the equity out of their home without selling it or creating a monthly mortgage payment. It is a very common misconception that the bank will take your home when you move or pass away. What actually happens is that your home becomes the property of your estate and is passed on to your heirs. At this point, your heirs can decide what they would like to do with the property, and mortgage. If you decide to move, you can sell the home at any time, and use the proceeds from the sale to payoff the reverse mortgage.
Qualifications
- You must be 62 years or older and own your own home. This home must be your primary residence and cannot be a mobile home.
- There are no income or medical requirements to qualify. You may be eligible for a reverse mortgage even if you still owe money on a first or second mortgage. It is possible to get a reverse mortgage to pay off an existing mortgage, eliminate the monthly payment and receive additional payments or a lump sum.
- The size of the loan depends on your age at the time of closing, the value of your home, the current interest rate, and the type of reverse mortgage you select.
- You are required to receive counseling from a HUD approved housing counselor prior to obtaining the loan. The counselor?s job is to educate you about reverse mortgages, to inform you of alternative options given your situation, and to assist you in determining which reverse mortgage product best fits your needs.
Homes The home must be a single-family dwelling or a two-to-four unit property that you own and occupy. Condominiums, townhouses, detached homes and some manufactured homes are eligible. The home must be in reasonable condition and meet minimum property standards. In some cases, home repairs can be made after the closing of a reverse mortgage.
Costs The costs associated with a reverse mortgage are similar to that of a conventional loan. They include, but are not limited to, an origination fee (1% is typical), appraisal, title fees, monthly service fee and an upfront mortgage insurance fee. The monthly service or maintenance fee is usually about $35 per month and is taken out of the loan proceeds at the time of closing. Usually, most, if not all of these fees can be rolled into the loan, meaning that you do not have to pay cash or write a check at closing. It is important to note that the funds received from a reverse mortgage are tax-free; it is your money and not considered additional income. It does not affect regular social security or Medicare benefits.
What is a reverse mortgage loan?
A reverse mortgage is a special type of loan available only to older homeowners with full or nearly full equity in their homes. Such owners can borrow against the equity they have built up over the years, but no repayment is necessary until the borrower sells the property or moves elsewhere. If the borrower dies before the property is sold, the estate repays the loan (plus any interest that has accrued.
These loans have become increasingly popular. If you believe you qualify for such a loan, be sure to have the document reviewed by an attorney or financial advisor.
What is negative amortization?
Negative amortization occurs when the monthly payments on a loan are insufficient to pay the interest accruing on the principal balance. The unpaid interest is added to the remaining principal due.
When home prices are appreciating rapidly, egative amortization is less of a possibility than when prices are stable or dropping, particularly for the borrower who made a small cash down payment to begin with. The combination of negative amortization and depreciation in home prices can result in a loan balance that is higher than the market value of the home. Adjustable rate mortgages with payment caps and negative amortization are usually reamortized at some point so that the remaining loan balance can be fully paid off during the term of the loan. This could necessitate a substantial increase in the monthly payment. Most ARMs have a limit on the amount of negative amortization allowed, usually 110 to 125 percent of the original loan amount. If the loan balance exceeds this amount, the borrower has to start paying off the excess.
When is a negative-amortization loan a good idea?
Experts don't agree on this question. Negative amortization is less likely to occur in rapidly appreciating markets. In markets where prices are stable or dropping, it is possible to end up with a loan balance that is higher than the market value of your home.
Adjustable rate mortgages with payment caps and negative amortization are usually reamortized at some point so that the remaining loan balance can be fully paid off during the term of the loan. This could necessitate a substantial increase in the monthly payment. Most ARMs have a limit on the amount of negative amortization allowed, usually 110 to 125 percent of the original loan amount. If the loan balance exceeds this amount, the borrower has to start paying off the excess.
Negative amortization can be avoided by paying the additional interest owed monthly. ARMs that don't have payment caps usually don't have negative amortization.
Can I convert a negative-amortization loan to a regular loan?
Loan terms vary and each agreement needs to be reviewed carefully. Talk to your lender about specific situations.
Negative amortization occurs when monthly payments on a loan are not enough to pay the interest accruing on the principal balance. The unpaid interest is added to the principal due.
Adjustable rate mortgages with payment caps and negative amortization are usually reamortized at some point so that the remaining loan balance can be fully paid off during the term of the loan. This could necessitate a substantial increase in the monthly payment. Most ARMs have a limit on the amount of negative amortization allowed, usually 110 to 125 percent of the original loan amount. If the loan balance exceeds this amount, the borrower has to start paying off the excess. Negative amortization can be avoided by paying the additional interest owed monthly. ARMs that don't have payment caps usually don't have negative mortization.
What is a wrap-around loan?
This method of seller financing is risky if the underlying first loan has a "due on sale" clause because the loan might be called due when the first lender becomes aware that the property has transferred title," says Dian Hymer, author of "Buying and Selling a Home, A Complete Guide," Chronicle Books, 1994.
A seller usually will want to incorporate a late charge to encourage the buyer to make monthly loan payments on time. "A buyer will probably want to stipulate that prepayment of the loan be without penalty. This should not cause a problem unless the loan payments are a source of retirement income, in which case early prepayment could have negative financial repercussions for the seller...
"Most sellers prefer to have a due-on-sale provision included in the note, but this can be a negotiable item. Buyers who are concerned that they might be forced to sell during a period of high interest rates can request that the note be assumable by a future buyer, and sellers might find this provision agreeable as long as they have the right to approve the future buyer's credit report and financial statement," Hymer writes.
What is Private Mortgage Insurance (PMI)?
Private mortgage insurance, or PMI, insures the lender against a default. It is required when the borrower is making a cash down payment of less than 20 percent of the purchase price.
PMI costs vary from one mortgage insurance firm to another, but premiums usually run about 0.50 percent of the loan amount for the first year of the loan. Most PMI premiums are a bit lower for subsequent years. The first year's mortgage insurance premium is usually paid in advance at the close of escrow, and there is usually a separate PMI approval process.
Lenders generally turn to a list of companies with whom they regularly work when lining up private mortgage insurance. In most cases, PMI can be dropped after the loan to value ration drops below 80 percent. The Homeowners Protection Act requires PMI to be dropped when the loan-to-value ratio reaches 78 percent of the home's original value AND the loan closed after July 29, 1999. For other loans, find out from your lender what procedure to follow to have PMI removed when your equity reaches 20 percent. For homeowners who have improved their properties and believe that their equity has increased as a result of these improvements, refinancing the property at a loan-to-value ratio of 80 percent or less is another possible way of eliminating PMI payments.
Is PMI always required on low-down home loans?
A growing number of private lenders are loosening up their requirements for low-down-payment loans. But private mortgage insurance, or PMI, usually is required on loans with less than a 20 percent downpayment. The Homeowners Protection Act states PMI must be dropped on any loan originated after July 29, 1999 IF it has a 78 percent loan-to-value ratio.
What does PMI cost?
PMI costs vary from one mortgage insurance firm to another, but premiums usually run about 0.50 percent of the loan amount for the first year of the loan. Most PMI premiums are a bit lower for subsequent years. The first year's mortgage insurance premium is usually paid in advance at the closing.
How do I drop PMI?
In some states, the loans have to be at least two years old, and the borrower cannot have made any late payments in the last year in order to drop private mortgage insurance. In addition, the loan-to-value ratio must be less than 75 percent. Some state disclosure laws require lenders to notify borrowers after the close of escrow whether the borrower has the right to cancel private mortgage insurance. Under the new federal law - The Homeowners Protection Act - lenders must drop PMI if the loan closed after July 29, 1999 AND the loan-to-value ratio reaches 78 percent of the home's original value.
Where do I get information on PMI?
Look for tips in "A Mortgage Insurance Guidebook," or "How to Buy a Home with a Low Down Payment," published by the Mortgage Insurance Companies of America, 805 15th St., N.W., Suite 1110, Washington, DC 20005; call (202) 393-5566 to order.