Advantages and Disadvantages of Mortgage Programs

Years you plan to stay in the house	Recommended program
1-3	3/1 ARM, 1 year ARM or 6 month ARM
3-5	5/1 ARM
5-7	7/1 ARM
7-10	10/1 ARM, 30 year fixed or 15 year fixed
10+	30 year fixed or 15 year fixed

 

Loan Programs	Advantages	Disadvantages
Fixed Rate Mortgages
40 year fixed 30 year fixed 20 year fixed 15 year fixed 10 year fixed	Monthly payments are fixed over the life of the loan. Interest rate does not change Protected if rates go up Can refinance if rates go down	Higher interest rate than ARM program*  Higher mortgage payments Rate does not drop if interest rates improve
Adjustable Rate Mortgages
10/1 ARM – 10y. fixed period 7/1 ARM – 7y. fixed period 5/1 ARM – 5y. fixed period 3/1 ARM – 3y. fixed period 1 year ARM 6 month ARM 1 month ARM	Lower initial monthly payment than fixed rate programs*  Lower payment over a shorter period of time Rates and payments may go down if rates improve May qualify for higher loan amounts	More risk Payments may change over time Potential for high payments if rates go up
Interest Only (I/O) Option Programs
30, 40 year fixed programs 3/1, 5/1, 7/1, 10/1 ARMs	Lower initial monthly payment during the I/O period  More flexibility Two payment options are available up to 15 years: fully amortized (principal and interest) or interest-only.	Payments will be  higher at the end of the initial I/O period Higher interest rate than the same program without I/O option
High Loan-to-Value (LTV) Programs
	Lower down payment LTV can be up to 97%	May be subject to income and property value limitations May be subject to PMI (private mortgage insurance) Higher rates Higher payments
Stated Income Programs
Not available on today’s market	Don’t need to verify income	Higher rates Higher payments  Higher down payment      Subject to Loan-to-Value limitations
No point, No fee Programs
	Hidden closing costs Less money required to close	Higher rates Higher payments
Imperfect Credit Programs
	Potential for reestablishing credit if you pay your mortgage on time. When used for debt consolidation, you may be able to reduce your monthly debt payment	Higher rates Terms may not be as favorable Harder to get long term fixed loans Loans may have prepayment penalties
Home Equity Line of Credit
1st position up to 75% LTV2nd position up to 80% CLTV	You only borrow what you need Pay interest only on what you borrow Flexible access to funds Interest may be tax deductible	Rates can change. The maximum interest rate is normally high. Payments can change Harder to refinance your first mortgage
Home Equity Fixed Loan
2nd position up to 80% CLTV	Fixed payments Interest may be tax deductible	Higher interest rates than on 1st mortgages Harder to refinance your first mortgage

Initial Documentation Required for a Mortgage

When you apply for a mortgage, you should have the initial documentation readily available to your broker to analyze your situation, do math, understand your aims. A broker will run your scenario with different banks trying to find lenders that are willing to accept your application, especially on today’s market, choose the best lenders for you, and develop comprehensive mortgage plan that fits into your financial goals. Only then, he will discuss with you available mortgage options and provide the actual rate quote. 

You will need to provide the following documents:

1) Income Documentation – This represents your income and work experience. Banks want you to have 2 years  experience preferably without gaps.
-Explanation letter of job history/gaps/unemployment
-For Employees:
        –Past 2 years W-2 statements 
        –Most recent 30 day’s pay stubs
-For Self-Employed or Commissioned:
        -Most recent 2 years signed federal tax returns
        -Business Certificate/License
        -YTD profit and loss
-For Divorced People:
        -Complete Divorce Decree or Separation Agreement with stipulations regarding payment of child   support, alimony and separate maintenance
        -Verification of Alimony/Child support payments
-For Investment Property Owners:
        -Lease agreements (all rental properties)
        -Most recent 2 years signed federal tax returns

2) Assets Documentation – Available liquid assets for down payment, closing costs, and reserves need to be verified.  Any large deposits on the accounts may also need to be explained. You can present copies of paper statements mailed to you, or online printouts as long as your name and bank are clearly legible on the printout.
-Most recent 2 months statements for checking and savings accounts
-Latest statements for investment accounts (401K, IRA, Stocks, Bonds, etc.) – Will be used 70% of investment value

3) Liabilities Documentation – You will sign Borrower Signature Authorization form that allows a broker to run your credit history. He will calculate your total liabilities and Debt-to-Income (DTI) ratio, check your middle credit score and derogatory trades. Different lenders have different guidelines for DTI.

There might be other documents required for final approval, but the above is a good start.

Introducing Super Conforming and Changes to Standard Conforming Loans with an LTV > 80%

I. Introduction of Super (Jumbo) Conforming

Banks are pleased to announce Phase I of the Super Conforming loan program utilizing the new 2009 loan limits established in accordance with the Housing and Economic Recovery Act. 

The new Super Conforming loan limit for 1-Unit properties in most areas is $625,500.

The Super Conforming products that are initially available are 30 Year Fixed, 15 Year Fixed, and 5/1 LIBOR ARM (5/2/5). 
Please ask your broker the Program Guidelines for complete information.  A future release with expanded eligibility is anticipated as more complete production information becomes available. 

II. Changes to Standard Conforming Loans with an LTV > 80%

Effective for loans locked on or after Monday, November 17, 2008, some banks will release the following changes for loans with an LTV (Loan-to-Value) greater than 80%:

-Eliminated the additional reserve requirements when the LTV is greater than 80%. Reserves are still required per loan program and transaction type – usually, 2 months PITI (principal, interest, tax, insurance).
-Maximum DTI (Debt-to-Income ratio) can be increased up to 55% on Interest Only products.
-Minimum FICO Score of 680 is required. Additional FICO requirements apply in Declining Markets.
-Maximum 31%-41% DTI on 2-Unit Primary Residence Purchase and No Cash Out transactions.
-Cash-out is restricted to 1-Unit Primary Residence, no longer available on 2-Unit Primary Residences or Second Homes.
-Construction-to-Perm financing is permitted only on 1-Unit Primary Residence Purchase and No Cash Out transactions, no longer available on Cash Out transactions and Second Homes.
These changes apply to Standard Conforming loans with an LTV greater than 80%. Please review with your broker Maximum LTV’s / CLTV’s and Loan Limits of the Program Guidelines for complete information.

We still have banks that have: a Conforming Jumbo up to $750K with no bump to rate, no bump for cash-out, up to 90% LTV, no reserve requirements, 1 day off MLS, minimum FICO of 650; or Jumbo up to $900K with low adjustment.

Read High LTV Mortgages On Today’s Market

Declining Real Estate Market – High/Low Risk States

Currently mortgage products and guidelines change almost daily with regards to the high risk Real Estate market. Guidelines became more strict and demanding. Due to declining property values or oversupply, some banks do not originate loans in the high risk States or Counties. Some banks might impose additional overlays or restrictions (such as, but not limited to: maximum Loan-to-Value ratio, maximum Debt-to-Income ratio, minimum Credit Score, loan amount limitations, documentation age, Home Equity loans and simultaneous transaction requirements) – especially for Cash-out refinance, Interest-only payment feature, 2-4 unit properties, Investment transactions. Lenders might provide different rates and adjustments for different States.

Market Classification Levels

 

Lower Risk	Moderate Risk	Higher Risk
Colorado	Arkansas	Arizona
Delaware	Connecticut	California
Idaho	Hawaii	District of Columbia
Kentucky	Indiana	Florida
Maryland*	Mississippi	Illinois
Massachusetts**	New Jersey	Michigan
Minnesota	Ohio	Nevada***
New Hampshire	Pennsylvania	New York
Oregon	South Carolina	Rhode Island
Utah	Tennessee	Virginia
Washington	West Virginia
Wisconsin

 

 

 

 

Exceptions:

*Maryland – High risk:  Calvert County, Charles County, Frederick County, Montgomery County, Prince George’s County

**Massachusetts – Moderate risk:  Barnstable County, Bristol County, Worcester County

***Nevada – Low risk:  Carson City

 

10 Best And 10 Worst U.S. Housing Markets

Fixed Rate vs. Adjustable Rate

Mortgage Programs:

-Fixed Rate Mortgage Programs (40, 30, 20, 15, 10 years) – The interest rate and your mortgage monthly payments remain fixed for the period of the loan. The shorter the term of a loan, the payment is higher because the principal amount of debt is amortized over the shorter period of time. The payments on fixed rate fully amortizing loans are calculated so that at the end of the term the mortgage loan is paid in full. During the early amortization period, a large percentage of the monthly payment is used for paying the interest. As the loan is paid down, more of the monthly payment is applied to principal. If you are going to keep your property more than 5-7 years, you should consider getting fixed rate program. You will be protected if rates go up, and can refinance your mortgage if rates go down. Usually, fixed programs have an interest rate higher than adjustable rate programs. The higher rate, the higher monthly payment. If you are planning to stay in your property less than 5-7 years, you should consider adjustable programs. But on December, 2008 fixed rates are lower than adjustable rates. We can not explain this phenomenon.
–Adjustable Rate Mortgage Programs (ARM) – Frequencies of payment/rate adjustments dictate how often the rate can change. How the interest rate can change is a function of the index added to the margin. The index of an ARM is the basis of future interest rate changes.  The Index is regularly published in a source accessible to the public. The margin is set by the lender and is the amount above the index that the interest rate can adjust at the time of adjustment. The result of the index plus margin formula is the new interest rate. Rates and payments may go down if rates improve, but it is more risky because it is potential for high payments if rates go up. This program can be good for a short period of time. The better choice will be combined mortgage programs.
–Combined Mortgage Programs (3/1 ARM, 5/1 ARM, 7/1 ARM, 10/1 ARM) – A combination of fixed and ARM loans with 30-year amortization period. With such type of loans homeowners can enjoy from three to ten years of fixed payments before the initial interest rate change. At the end of the fixed period, the interest rate will adjust annually. The advantage of these loans is that the interest rate is usually lower than for a 30-year fixed (the lender is not locked in for as long so their risk is lower and they can charge less) but you still get the advantage of a fixed rate for a period of time.
-Fixed (30 years) or Combined Programs with Interest Only Option (I/O) – A loan that doesn’t require a set payment each month up to 15 years. You get two payment options to choose from each month: your lender sends you a monthly statement offering an interest-only payment (1) and 30-year amortized payment – principal and interest (2). If you are going to pay off your mortgage during 10 years making large prepayment of principal, your actual rate can be decreased from 6-7% to 2-3% by using this program. For our customers we make special plan with math calculations how to save money with I/O 30-year amortized program instead of 10-year amortized fixed program. 
–First Position Home Equity Line of Credit (HELOC) – When you don’t have the 1st mortgage, you can obtain Equity Line up to 75% of the property value and up to $350K limit amount. Current HELOC rate is lower than the 1st mortgage rates and it is based on the prime rate that is 3.25% on today’s market. HELOC rate is always adjustable. With HELOC you can enjoy interest-only payments.

Availability of specific programs, Loan-To-Value ratios, Interest Rate depend on middle FICO credit score, type of documentation provided, type of occupancy, type of financed property and type of transaction.

Property Types:
SFR, 2-4 Family Houses
Condominiums, PUDs, Cooperatives

Credit:
From Excellent to Problematic
FICO Credit Scores from 620+

Documentation Type:
Full Income Full Assets (full docs)
Stated Income Full Assets
Stated Income Stated Assets

Occupancy:
Owner Occupied Properties
Second Homes
Investment Properties

Transactions:
Purchase
Rate & Term Refinance
Cash Out Refinance

Mortgage Structure:
First Mortgage Only
First & Second Mortgage
First Mortgage & HELOC
Second Mortgage Only
HELOC Only

High Loan-To-Value Mortgages On Today’s Market

Mortgages with Loan-To-Value (LTV) higher than 80% are considered high LTV mortgages. Most lenders generally require mortgage insurance when LTV is over 80% due to a higher risk. Private Mortgage Insurance (PMI) is provided by a private mortgage insurance companies which protect lenders against loss if a borrower defaults. Recently PMI became tax deductible.

There are few ways PMI is paid:
1)  Borrowers will pay mortgage insurance premium in addition to a regular payment (principal, interest, real estate tax, hazard and flood insurance if required).
2)  LPMI – lenders will pay borrower’s mortgage insurance for them.  With LPMI, the lender pays a borrower’s mortgage insurance by rolling the cost into the interest rate or by adjusting the fee. It means your rate on the mortgage will increase.
3)  Lenders do not require a mortgage insurance premium. From our knowledge and experience though the lender doesn’t require PMI, they will still increase your interest rate.
High LTV loans are still available up to 90-95% for full documentation loans.

Before the financial crisis there was a technique to cover LTV over 80% to obtain a second mortgage or a home equity line of credit (HELOC) that cost was less than PMI. These days 2nd mortgages or HELOC for high LTV loans are not longer available due to a high risk.

 

Read Changes to High LTV Conforming Loans

Advertised Mortgage Rate vs. Your Actual Rate

When you shop for the mortgage interest rate, you usually ask for a rate quote and get immediate answer from a broker. Don’t make a mistake! It ‘s not the rate you will get. Banks and mortgage brokers might quote you a Par Rate.  Par Rate is the lowest rate before rate adjustments for a mortgage program you need. Your Actual Rate most likely will be higher than quoted for the following reasons:
–Rates are subject to change every day, and even within the day, so the rate quoted,  reflects the market only at that point in time. It’s like the stock market – hard to predict it will go up or down.  You are guaranteed with the rate only at the time you lock.
–Adjustments! Different lenders have different par rates and impose different adjustments. Don’t trust advertised rates, look for an honest and professional broker who will research the market for the best rate for you. First, a broker must collect information about you (employment, income, assets, debt, credit report with credit scores, etc.), analyze your situation, do math, understand your aims. Second, a broker will run your scenario with different banks trying to find lenders that are willing to accept your application, especially on today’s market, and choose the best lenders for you. Only then, he will discuss with you available mortgage options and provide the actual rate quote. Finally, after you make a decision, a broker will submit your application and either lock the rate or will wait for the better market conditions (both only with your permission). 

Your Actual Rate = A Par Rate (at the time it was locked) + Rate Adjustments

For example: You want to refinance owner occupied single family residence. Your house market value (appraisal) is 800K and the new loan amount is 720K (90% Loan-to-Value). Your middle credit score is 700 and you have full documentation (full income/full assets).

What rate adjustments can you expect?
–State adjustment – Lenders might provide different rates for different States.
–Credit Score adjustment – Your middle credit score is less than 740. Usually, each 10-20 points lower might increase your rate.
–Cash-out refinance adjustment – Assuming you want to get some cash from your property or to consolidate your debt.  Your rate will be adjusted to a higher rate vs. rate and term transaction.
–High Loan-to-Value adjustment– Your property has 90% LTV. Usually beginning from 70% LTV, each 5-10 points higher will increase adjustment.
–Jumbo Loan adjustment – For the higher loan amount your rate will be higher.
Some Lenders will not impose adjustment for cash-out transactions, or higher Loan-to-Value ratio, or jumbo loans. We work with them.
–Closing Cost adjustment – The less closing cost you would like to pay the higher rate might be. Check our  post Closing Cost vs. No Closing Cost.
–Lock adjustment – The longer period of lock, the higher interest rate.

As a rule of thumb, the Lenders adjust your rate higher if the property is an investment property, condo >75% LTV, second home, two-four family residence or coop.