Locking In an Interest Rate

In a market where interest rates are low and stable, locking in the rate and terms for a month or so until you close seems like no big deal. However, if interest rates are unstable and going up, locking in the rate can easily mean the difference of a fourth or half percent in your payment. On a $150,000 loan, that can translate into a $50 to $70 a month increase.
Locking in an interest rate means that the lender agrees to lock in the interest rate for a set period of time, usually 30 to 60 days. If the market goes up, you’re locked in for the agreed on period. Likewise, if the market drops, you pay a higher rate, although some lenders may offer a float down option that lets you get a lower rate if the market drops.
Dos and don’ts of locking in a rate

1. Get the lock in writing.
2. Lock in the rate, points, and any other costs you can.
3. Lock in the rate on application rather than approval, especially if the market is volatile and going up.
4. When you shop for a loan, make sure you understand the lender’s policy on lock and if there’s a lock-in fee. Some lenders charge a fee, while others don’t.
5. Make sure the rate lock is long enough to close, but not so long that it costs you a fee.

Another option is not to lock in a rate and float with the market. Your interest rate is what the market is the day you close. In a market with falling rates, this is the best way to go. In an inflationary market of rising rates, locking in the rate becomes the better route.

(Loan Payment Options 5) No Doc or Low Doc Loans

Self-employed, commissioned, or others who don’t have a regular paycheck usually have a harder time getting a loan. Sharply honed skills getting the most out of Tax Schedule C becomes a two-edged sword, because the lender looks at the bottom line after all the business expenses are deducted. The depreciation and home office expenses that look so good on April 15 now slice away on the mortgage you can qualify for.
The conforming mortgage system is set up to process a couple of years of tax returns or W-2 forms, one or two recent pay stubs showing year-to-date, and a list of account numbers. If the data fits neatly in all the round holes, then approval follows. But, anything outside this conforming profile triggers a yellow penalty flag floating to the turf. Self-employed Aaron and Sarah found this out when they outgrew their home office and wanted to move up to a bigger home. Although their nine-year-old business was successful and had a great track record, their tax returns ruled out a conventional mortgage. Aaron and Sarah’s mortgage broker knew several investors who bought stated income or nonconforming low/no doc loans. That’s mortgage-speak for loans that require the borrower to submit few or no financial documents.
These types of loans are made almost solely on the basis of the credit report. Sometimes the investor wants to see a couple of years of tax returns to make sure you’re real and that the loan request is within the bounds of reality.
Mortgage investors have learned that self-employed buyers with good credit and a business track record work extra hard to protect their credit. As a result, there’s an active and competitive market for stated income mortgages.
In Aaron and Sarah’s case, their credit was excellent and their business was seasoned, so they were able to get a $225,000 loan with 10 percent down.
Their interest rate was 0.75 percent higher than a conforming Fannie Mae rate, which translated into $110.36 more a month. Still, Aaron and Sarah were happy with their new loan, and they were able to close in less than two weeks because there wasn’t a lot of paperwork to process.
The bottom line on low/no doc loans is that they’re credit driven and have higher interest rates to balance out the investor’s greater risk. They’re a great way to go if you’re selfemployed, on straight commission, or want a quick, streamlined loan.
Down payments on these programs range from zero down to 25 percent or more and interest rates are typically 0.75 to 2 percent higher than par.

(Loan Payment Options 4) Bi-Weekly Payment Options

An interesting conventional payment alternative is making two half payments each month. If your pay period is every two weeks, there are programs where you can pay half the payment on the first and the other half on the fifteenth of the month. Most lenders that offer this option require an automatic deduction on your checking account. For example, Wes and Lynne went with this option when they bought their townhouse and financed $275,000. Since both their paychecks were direct deposit and bimonthly, they felt that this was a way they could put their mortgage payments on autopilot, save interest, and shorten their loan, too.
For Wes and Lynne, this is how it worked. Monthly principal and interest payment was $1,693.22. One half, $846.61, was taken out on the 5th of month and the balance $846.61 on the 25th. In effect, they were making two extra payments per year with this system. This would result in paying off a 30-year loan in 24.35 years and saving $74,329 in interest.
Fannie Mae and Freddie Mac, as well as many other investors, have bimonthly payment programs available. Although not as popular as standard fixed and variable mortgages, the bimonthly programs can be a great way to go. The key question is, can you consistently have the funds in your account those two times a month the bank deducts them?

(Loan Payment Options 3) Loans with Balloon Payments

In mortgage-speak, a balloon payment is where the loan balance is due in a lump sum at a future date. These loans are usually short term, 10 years or less, and sometimes require at least a monthly interest payment, while others have accrued interest due at the end. Loans with balloon payments are usually put together with the idea of refinancing in the near future. A common example is the construction loan taken out to build a home, which is then refinanced once the house is finished. Also, some home equity credit lines and second mortgages have the balance due in 10 to 15 years, with only a minimum interest payment due each month.

(Loan Payment Options 2) Adjustable Rate Mortgages (ARM)

Adjustable rate mortgages differ from fixed rate options in that the interest rate typically changes every six months or one year, depending on the program. The interest rate is tied to a popular financial index such as the Treasury bill index or a Cost of Funds Index (COFI). If the index goes up, your payment goes up; if the index goes down, your payment goes down.

Not knowing what your payment is going to be next year can be scary. But, the wise people of the mortgage industry knew that consumers would be wary of such a loan, so they added caps. In mortgage- speak, caps or cap rate means that your interest rate won’t go up more than 1 or 2 percent in any adjustment period or above a 5 to 6 percent ceiling for the life of the loan. The payment is recalculated each adjustment period using the new interest rate and the remaining years of the loan.

So why would you want to go with an adjustable loan? One advantage of ARM loans is that the interest rate starts out 1 to 1.5 percent less than fixed rate. If your adjustment is yearly, that means you get one year of lower rates before the bank recalculates your payment. When you add in a 1 percent cap, you’ve got a deal for the first year. If it takes another year to get up to par, you’ve gotten a good deal for two years. After that your payment depends on the financial index your loan is tied to.
Because of lower initial payments, you can sometimes qualify for a better home. If your income is going up or you’ll only be in the home for two to three years, then ARMs can be a good way to go. Some lenders even offer hybrid loans that start out at an adjustable rate and then convert to a fixed rate down the road, in usually five years or less. Hybrids can be a good way to go by giving you the best of both options. These programs are more complicated, so it’s important to look at the APR and cap terms carefully.
Many buyers who don’t feel comfortable with adjustable rate loans use them to get into a home and then refinance to a fixed interest rate as soon as possible. If values go up and interest rates drop, refinancing to get rid of PMI and the adjustable payment can be a double plus. The bottom line on adjustable loans is to think short term. If interest rates are high, you’ll get an interest break for a year or two while you hope for better times. If your qualifying ratios are tight, an ARM may help put you over the top in getting your dream home.

(Loan Payment Options 1) Fixed Rate

The most popular payment choice is still the fixed, 30-year amortized mortgage. (Amortized is mortgage-speak, meaning the monthly payments reduce the loan to zero in the time agreed on.) If you qualify, you can also go 15- and 20-year payoffs and save big bucks in interest. In the last couple of years, many homeowners who bought their home on 30-year loans got a great deal refinancing. Dramatically increasing home values and falling interest rates enabled them to refinance to 15-year loans, get rid of PMI, and keep their new payments close to their old ones.

Interestingly, payments over 15 years are not double a 30-year loan but are about 30 percent higher. This is because 15-year programs usually get a half percent discount, and the mathematical fact that 30-year mortgages have more years of front-loaded interest payments. For example, a $150,000, 6.15 percent 30-year mortgage has a $913.84 monthly payment. Reducing the term to 15 years increases the payment to only $1,237.60, with a half percent discount. You will also save $106,214 in interest by taking a 15-year rather than a 30-year loan.

Piggyback Loans: A Way Around PMI?

Some lenders offer a low down piggyback or 80-10-10 loan program as way to avoid PMI. These programs stack an 80 percent first and a 10 percent second with a 10 percent down payment. The 10 percent second usually carries higher rates for a shorter term, typically 10 to 15 years.
Whether these programs save you money depends on long you stay in the house. Since the average length of a mortgage is now less than six years before payoff or refinance, it’s hard to justify going this route. Before committing, do the math and see where your break-even point is.

Getting Rid of PMI As Quickly As Possible

In 1998, Congress passed the Homeowners Protection Act that requires lenders to drop PMI when a loan balance is paid down to 78 percent of the purchase price. This seems straightforward enough, but how long would it take to pay down a loan to the 78 percent level? In the above example, Isadoro and Maria would need to pay their loan down to $100,620. If they made just the required payments with no extra paid on the principal, they would reach that level in about 11 years and have paid $9,094 in PMI fees.
To get around this, many homeowners ride the appreciation tide and refinance when they can get a high enough appraisal. In a hot market, this can happen in a year or two.
So that you don’t miss out, keep track of the sale prices of homes similar to yours in the area. Call the realtor who sold you the home and get a printout of recent sales every few months. Also, if you refinance or pay off an FHA loan and some conventional programs in the first five years or so, you may get a refund on some of your PMI costs. Your mortgage lender should be able to give you the information you need to apply when you refinance.

How Much PMI Adds to Your Monthly Payment

The cost of PMI is based on the LTV. A 95 percent loan costs more than an 85 percent loan. The premium is charged monthly and added to your payment, along with taxes and homeowners insurance. Typically, the PMI premium costs .75 to .92 percent, with 5 percent down payment. A 10 percent down payment drops the PMI to .50 to .68 percent. The exact percent you pay depends on your credit score.
For example, when Isadoro and Maria bought a $129,000 home, they put 5 percent or $6,450 down. At 6.25 percent interest, their monthly payment was $754.56. Since their loan was a 95 percent LTV, the lender charged them a .092 PMI fee. This translates into $754.56 _ .092, which equals $69.42 added to their monthly payment.
If Isadoro and Maria had put 10 percent down, the PMI factor would have dropped to 0.068 or $51.31 a month. Of course, if they could have come up with 20 percent down, there would have been no PMI.
The bottom line is that PMI is an insurance policy separate from your mortgage.
When you’re shopping for a lender and comparing costs, don’t forget to compare PMI fees. They are negotiable because PMI companies are usually separate entities, and they’re competitive. Mortgage insurance is an important part of the home buying process. It gives you an opportunity to buy a home without saving up a big down payment. If the alternative is renting for years while saving for a down payment, it’s a great bargain, because in those years you can be paying off a mortgage instead of paying a landlord.

All About Private Mortgage Insurance (PMI)

One of the ways our country’s financial system has enabled almost 65 percent of households to own their own home is through Private Mortgage Insurance (PMI). It makes it possible for homebuyers to get into a home for 3 percent or less. So how does PMI work to accomplish this?
PMI is an insurance policy issued by private companies that insures the mortgage against default. There is usually some kind of mortgage insurance on any loan that is more than 80 percent of the purchase price. An 80 percent loan on a $150,000 house, for instance, would be $120,000, and your down payment would be $30,000. Or, in other words, any loan with less than 20 percent down will generally cost you a PMI fee. Lenders feel that a loan with 20 percent or more down payment is not a risk if they have to foreclose. There’s enough equity to absorb any loss from the process. Bankers use the mortgage-speak term loan-to-value or LTV when taking about this ratio. In the above example, the LTV would be 80 percent. The value can be the sales price, appraisal, or other criteria. If you’re buying a home, the LTV would be based on the appraisal. A second mortgage loan might be based on a percentage of your equity. Or a small lender might go with a percentage of your county tax assessment value.

All About Annual Percentage Rate (APR)

There’s the interest rate quoted, and then there’s the real interest rate you’ll be paying on your mortgage. When you take the quoted interest rates and add in all the costs associated with getting that loan, a different and higher percentage number results. This higher number is called the annual percentage rate or APR for short. Federal law requires that all lenders provide the APR and a breakdown of loan costs to borrowers within three days of receiving their loan application.
In reality, this law has created a great loan comparison tool. You can have two lenders, A and B, quoting the same interest rate on the phone, say 6.0 percent. But when you get their APR statement in writing, lender A may be 6.48 percent APR and lender B 6.37 percent. This tells you that lender A’s loan is more expensive than that of lender B, and that lender A has added in more or higher fees. Different loan types generate different APR levels. For instance, FHA loan APRs are about a half-percent higher because of the built-in insurance premium than most conventional APRs quote. Likewise, a 20 percent down conventional APR is lower than a 5 percent down loan because of the mortgage insurance. So when you compare loans using APR, it’s important to compare similar programs with the same down and loan type.
For example, suppose you call two mortgage brokers and ask them to fax you a quote on a 30-year, $150,000 conventional loan with 20 percent down. Lender A tells you it has a special rate today, only 5.95 percent. Lender B tells you that today’s rates are the lowest this week and quotes 6.0 percent.
A short time later you get both lenders’ faxes. Lender A, who quoted 5.95 percent, has an APR of 6.15 percent. Lender B also comes in with an APR quote of 6.15 percent. How can this be? It all comes down to the loan fees. Lender A’s fees totaled 0.20 percent or $3,000 because it wanted the competitive low interest quote and hoped to make up the difference up in loan fees and a small buydown. Lender B, on the other hand, took a different approach. It felt that the APR would ‘‘tell the tale’’ in the end, so it might as well quote the real par rate and go with 0.15 percent loan fees or $2,250.

Is Paying Points Worth It?

It all depends on how long you’re going to be in the house. Usually, if you plan on staying four or more years, then points can save you money. To determine how many months until you break even, subtract the payment if you buy down the rate from the payment if you don’t buy it down and divide by 12.
For example, on a $100,000 loan at 6 percent for 30 years, the payment is $599.55. But, if you pay $2,000 and buy the rate down to 5.75 percent, the payment is $583.57, a difference of $15.98 a month. (Incidentally, if you had subtracted the $2,000 and gone with a $98,000 loan instead, the payment would be $587.56, about $3 more.) Dividing the $15.98 monthly savings into the $2,000 point cost shows that it will be about 125 months before you break even and start saving $15.98 a month. This is hardly a barn-burner investment, but if you keep the home for the full 30 years, the savings will add up. However, most financial advisers don’t recommend going beyond 36–48 months to recoup your point costs.
It’s interesting to note that in the above example, if the interest rate were 9 percent, buying the rate down to 8.75 percent would result in a 112-month breakeven. The higher the interest rates goes, the more attractive points become in saving you mortgage interest. The bottom line is that points are usually not a good investment as you can see from the numbers in the above example. However, if points are part of a seller or builder concession, it’s better to take the buy-down than to subtract the concession from the sales price.

How Points and Buy-Downs Work

When you call a mortgage banker about a home loan, it’s likely the lender will reel off a whole smorgasbord of interest rates. In addition to that day’s interest rate (par), the lender will also give you the choice of several lower rates if you’re willing to pay points. In this case, loan discount points are paid to the lender at closing to buy down the current interest rate, a rate that—along with the points—can change from day to day as the money markets fluctuate.
As mentioned, a point is one percent of the loan amount and is interest paid up front to increase the investor’s yield or profit on the loan. For example, if you call a mortgage lender for the current rate, you might get 6.0 percent at par and 5.75 percent if you pay two points. On a $100,000 loan, this would add $2,000 to your closing costs to buy the interest down .25 of one percent for the life of the loan. Points are normally charged by mortgage lenders to increase their up-front profit and offset the uncertainty of a loan that would normally go 15–30 years. However, since few mortgages go full term anymore because of sale or refinance, points can be an attractive incentive for investors to invest in mortgages.
As a rule-of-thumb, each point is approximately equal to 1/8 percent (.125) when buying down the interest on a 20- to 30-year mortgage. However, in a competitive market, if you shop around, it’s possible to find discounts as high as .25 percent per point. Plus, how long you want to lock in the rate is also an important factor. A 30-day lock will have better terms than a 60-day one.
You usually have two choices when you begin the loan process:
You can lock in the interest rate and points for thirty to sixty days. Or you can ‘‘float’’ and take whatever the market is the day you close. If you like to gamble and the rates are falling, this can be a good way to go. But, if you don’t want to take the chance of getting caught by an upward spurt in interest rates, then locking the rate is the safest bet. When a builder or seller offers to pay the bank a point or more to lower your interest rate, it’s called a buy-down. Often builders increase the price of the home so that they can advertise an attractive interest rate. As a consumer, it’s a good idea to ask the lender or salesperson how many points are built into the price of financing when the interest quote is lower than the current rate. There’s no ‘‘free lunch’’ in mortgages. If you find an interest rate less than the current rate, someone is picking up the difference, and that’s usually you. Buy-down programs are varied and limited only by the lender’s imagination. In addition to permanent buy-downs, there are three two-one and two-one programs. With these temporary buy-downs, the interest rate is typically 3 percent less the first year, 2 percent less the second year, and 1 percent less the third year. After the third year, the interest rate levels off for the remainder of the loan. And the two one buy-down has only two years of reductions before it levels off. Temporary buy-downs can be a two-edged sword. If the bank qualifies you on the first- or second-year rate, you’ll be able to buy more home with the hope that your income will go up in the next few years to cover the increasing payments. A miscalculation of your future income or being overly optimistic can mean an uncomfortable payment increase each year for two or three years.
On the positive side, you can often qualify for more house using a buy-down. In a slow market sellers may be willing to pay a few points to help you buy their house if your qualifying ratios are tight.

Understanding Points and Buy-Downs

Points are prepaid interest. Each point is equal to 1 percent of the loan amount or $1,500 on a $150,000 loan, for example. Bankers, mortgage lenders, builders, homesellers, or anyone else can pay points so that they can offer lower interest rates and be more competitive. For instance, a car dealer may advertise a lower than market interest rate on a new car model, which means, as you probably guessed, that the dealer has made an agreement with the bank and paid points to get a lower rate. A new homebuilder does the same thing to get a lower rate on mortgages they advertise on banners and flyers at their home site. As a homeseller you can do the same by offering to pay points on a buyer’s behalf so that they’ll buy your home. The bottom line is that points cost you money. Sometimes for good, other times not. If you understand points, you can work with them for your advantage and not get taken in.

Third-Party Down Payment Programs

In recent years, several nonprofit organizations have created opportunities for homebuyers to buy a home for little or no money down. Two typical programs, the Nehemiah Program and Neighborhood Gold Program work with FHA, conventional, and subprime lenders to gift the down payment and closing costs.
Third-party gifts: Two of the bestWeb sites for thirdparty gift programs are www.thebuyersfund.com and www.getdownpayment.com
These programs basically work in the same way. The home seller contributes up to 7 percent of the sale price. Three percent goes toward the down payment, approximately 3 percent toward closing costs, and up to 1 percent to the sponsoring organization.
From the seller’s view, these programs can widen the buyer pool to include those with low or no down payments. But, there’s a price. The seller in effect discounts the home’s selling price by the contribution. In a slow market, such concessions are often necessary in getting the house sold. However, in a hot market, persuading the seller to give up a steep discount may be difficult. In addition, increasing the price 7 percent or so can create appraisal problems. In many of these situations, a compromise is reached. The sales price is increased as much as the house will appraise for, and the seller kicks in the rest.
From the buyer’s side, the down payment gift is not always free, because the sales price is higher. The seller concession goes to down payment and third-party fees, but you end up with a higher mortgage loan than if you had negotiated a lower price. The bottom line on no-down programs is that they will get you in a home, but you’ll pay for it in a higher sales price and/or mortgage. Does this mean you shouldn’t buy a home with these loans? Not always. If the alternative is paying off the landlord’s mortgage, then going this route can be a plus—as Anthony and Sandra found out when they bought a home on the Neighborhood Gold Program. Because it was a buyer’s market, Anthony and Sandra had a good selection of homes in their price range to consider. They looked at about twenty homes before zeroing in on a cute, well decorated bilevel. To get the ball rolling, their realtor presented a full price offer but attached an addendum requiring a $9,240 concession for gift down payment financing.
The sellers weren’t too happy with the offer, but with stiff competition in their price range plus a job transfer looming, they knew they would have to make some concessions.
The sellers’ agent felt that increasing the price $3,700 would be about as high as they could go and still have the home appraise based on recent comparables. This would effectively reduce the sellers’ concessions to $5,540, an amount they could live with.
Since this was the best home Anthony and Sandra had looked at and they loved the area, they accepted the counteroffer increasing the price.
It’s true that if they had saved up a down payment, they could have easily bought this home for $5,500 less than the asking price. That would have reduced their monthly payment $33.00 or $11,800 over the next 30 years. But as Anthony and Sandra looked at it, that $33.00 a month was paying off their mortgage and building equity in a home, not going toward rent payments.

Seller Financing

Occasionally, you’ll find a seller who is willing to play banker and carry the financing. This can be a great win-win for everyone if it is done right. The buyer can save thousands of dollars in bank closing costs, and the seller can get 4 or 5 percent more return than if she put money from the sale in CDs. From a paperwork standpoint there’s not much difference between a bank and an individual seller being the investor. How do you find these deals? If you’re shopping through the newspapers, the owner will usually advertise ‘‘owner financing.’’ You can also ask the owners when you call about a property if they’re interested in carrying the financing. Also, properties listed on the realtor’s Multiple Listing Service (MLS) will disclose if the owner is willing to consider carry back financing.

Seller financing has gotten a bad rap in some areas because some owners have targeted people who can’t buy a home through normal means. They offer these buyers a chance to buy a home they otherwise couldn’t qualify for but charge them high interest rates with balloon payments, a scam created to get a higher cash flow from the property than renting would generate. Many times the buyers can’t meet the unrealistic terms, so the owner repossesses the home, puts it back on the market, and the cycle continues.

A variation of this scam involves a lease option, where the seller charges a high monthly payment but agrees to credit part of the rent back to the buyer for a down payment sometime in the future. The scam enters in when the seller creates terms he knows the buyers can’t possibly meet so that they will never get the credit. Still, seller financing can be good for both buyer and seller if it is used correctly. For instance, one investor, taking a long-range strategy, bought seven homes over a 10-year period and concentrated on paying them off during his working years. When he reached 65 and retired, he sold the homes and carried the financing at the same interest rate and 30-year terms a bank would. The interest alone from the notes he carried on the properties generated several thousand dollars a month in retirement income.

Buying a home with seller financing can be much simpler than dealing with a bank’s paperwork, and saving about four thousand dollars plus in bank closing costs doesn’t hurt either. Still, it’s best to have an attorney look at the deal before you commit. Take comfort that spending a few hundred dollars in attorney’s fees is a lot less than paying bank closing costs and being taken advantage of.

State and Local Housing Programs

Nearly every state and many cities have housing agencies with programs designed to help first-time homebuyers get into a home. State and local mortgages: You can get a wealth of information on your state and local programs by going to www.hud.gov/ local/index.cfm.
State housing authorities sell bonds to raise funds for their loan programs that offer mortgages 1 to 3 percent less than the going market rate. These programs range from down payment grants and loans to lower than market interest rates.
Most combine grants with FHA or VA loans to lower the down payment and closing costs.
However, there are restrictions to these loans you should be aware of, so it’s important to read the fine print. Typically, you must live in the property, and if you move or get transferred, you can’t rent it. Also, the down payment subsidy isn’t completely forgiven until you’ve lived in the house for three to five years, depending on the program. If you want to sell before the date in
your contract, you may have to pay back part of the grant.
Depending on the area and program, if you’re blessed with a hot market and you want to sell for a profit, the housing authority may want some of the subsidy back. Still, if you have little or no money down, one of these programs can be a good way to go. It’s certainly better than renting, but be sure you understand the strings attached.

Funding Fee and Mortgage Insurance

In reality, another downside of VA financing is getting the seller to pay the veteran’s loan costs in a hot market. Sometimes these costs can be added to the sales price, but inflating the value can create appraisal problems.
An example of this dilemma is the case of Dave, a Gulf War veteran, and his wife Amanda, who wanted to use a VA guaranteed loan to get their first home.
Although their credit was great and Dave and Amanda prequalified for $175,000, the hardest part came in finding a seller who was willing to pay their loan costs of more than $8,600. While the market in their area was stable, finding a home with sellers motivated enough to discount their home an additional 5 percent was a challenge.
After two months of looking and several rejected offers, Dave and Amanda found a home where the owners were getting a divorce and for a quick sale finally agreed to pay $6,000 toward buyer closing costs. That left $2,600 that Dave and Amanda needed to come up with to close. Even though they didn’t get into a home for zero down as they had hoped, VA financing did enable to them to buy a home for a smaller down payment than other loan options would have. The bottom line is that for a veteran needing to get into a starter home with little or no down, a VA loan is hard to beat. But expect some tough shopping if it’s a seller’s market and seller concessions are hard to come by.

VA Mortgage programs: You can get more information on VA loans and benefits by calling 800-827-1000 or going to Web site www.va.gov.

VA Guaranteed Loans

The Veterans Administration offers government guaranteed loans to veterans from World War II through the second Gulf War. Many National Guard members and reservists are also eligible for the no-downpayment mortgages.
Generally, Guard members and reservists who were activated for the Gulf War after August 2, 1990, are eligible for a VA guaranteed loan if they were on active duty for 90 days or more and were honorably discharged. Peacetime veterans are also eligible if they served at least six years.
The biggest advantages of VA loans are you don’t need a down payment and the sellers can pay all the closing costs for a true nothing down deal. Also, there are no mortgage insurance fees, although the VA does charge a 2 percent funding fee. However, that too can be paid by the seller as part of the closing costs. Qualifying can be more flexible than other mortgage programs, and if you run into problems with a job loss later on, the VA is more willing to help.
Disadvantages are that the loan limit tops out at $240,000, and if you reuse your eligibility, the funding fee goes up depending on your down payment. Of course, if your down payment were 20 percent or more, conventional financing would avoid both.

Department of Agriculture Loans

The Department of Agriculture, through its Rural Housing Service (RHS), offers low-interest loans with no down payments on its Section 502 programs for families buying a home in rural areas. RHS loans. Check out RHS loans and income limits for your area on www.rurdev .usda.gov.
To be eligible for these programs, your income may not exceed 115 percent of the median income for the area, and you must not be able to qualify for a mortgage from other sources. RHS has two basic home buying programs. One is a guarantee program similar to FHA and VA loans in that RHS does not loan directly but guarantees the loan written by other lenders. The other, aimed at very low-income buyers in the 50 to 100 percent of the area median income, is a direct loan program.

The interest rates for these loans are set by RHS, with a subsidy that insures a family does not pay more than 26 percent of its income for the total house payment.

FHA Guaranteed Programs

The federal government’s Federal Housing Administration (FHA) guaranteed loans are one of the best ways for first homebuyers to get a home. Their programs are a little more flexible in seller, family financial contributions, and underwriting standards than Fannie Mae or Freddie Mac loans. A nice thing about FHA loans is that family members can give you the down payment and closing costs to help you get a home. For them to do this, they have to write a letter stating that the funds are a gift and the source must be verifiable. For instance, if Aunt Josie wants to lift you the down payment she has to write a letter to the lender on her pink stationary saying the funds are a gift and sign it. Second, the funds should be in her bank account so that the lender can verify they exist.

The FHA site. Check out
FHA loan programs and informative
home buying information
at
www.hud.gov. You can
also look up the loan limits
for your state and county.

The FHA gets very upset if the sellers try to slip the buyers a kickback so that they can buy the home with nothing down. This is called loan fraud, and it’s a federal offense. There are however, two limiting areas with FHA loans. One is low loan limits that vary from county to county in each state. And second, mortgage insurance of approximately one-half percent is added to the interest rate on all FHA loans, regardless of down payment.
In reality, many homebuyers get a home with a low down FHA loan and then refinance with a conventional program when they can create enough equity to drop off the mortgage insurance. One interesting FHA loan is its 203(k) program. This option allows you to buy a fixer-upper and combine the fix-up costs and purchase price into one 30-year loan. If you’re handy in the building trades or have relatives you can tap, this can be a great way to get a first home.

Bigger homes need bigger loan

If your dream home needs financing over the Fannie Mae or Freddie Mac $322,700 loan max, you’ll have to go with a mortgage lender who does nonconforming (outside Fannie Mae guidelines) jumbo loans. These loans cost about .5 percent more than conforming programs. Secondary market. These players in the mortgage secondary market are typically insurance companies, banks, savings and loans, credit unions, pension funds, etc. Many of these niche lenders make direct loans for their own portfolio and have their own underwriting standards and loan limits.
You can also finance a jumbo mortgage without paying a higher rate by taking out a first mortgage at the Fannie Mae loan limit and then getting a second mortgage to cover the rest of the purchase price. Even though second mortgages typically carry a higher interest rate than a first mortgage, they’re generally for a shorter period of time— say, 10 years. When you average the two rates, it’s usually cheaper to get a conventional first mortgage and a more expensive second mortgage than it would be to get a long-term jumbo loan.

How about conventional loan for your home mortgage?

Conventional mortgages, in contrast to FHA and VA guaranteed loans, are bought by Fannie Mae, Freddie Mac, or another financial institutions like a bank, credit union, or insurance companies. Because the secondary market is big and diverse, with a plentiful supply of funds to loan homebuyers, conventional mortgages have a lot of pluses such as:
They’re available through a variety of financial sources throughout the country and on the Internet. If you have a 20 percent plus down payment, you don’t have to pay the mortgage insurance or funding fees that FHA and VA government programs charge. You have a sizable buffet of loan options and programs to choose from.
Loan limits or the amount of money you can borrow are much higher than government guaranteed FHA and VA programs. Currently, Fannie Mae and Freddie Mac’s maximum loan amount is $322,700, although in 2002 their average loan was considerably less at $139,300, according to their Web site. If you can’t qualify for a conforming mortgage, there are many
smaller lenders who specialize in subprime or A-, B, C, or D
loans.
With subprime loans, the further down the alphabet you go, the higher the interest rate and loan costs go because the lender’s risk increases.

But, this is not all bad. Many borrowers who have to start out with an alphabet loan can rebuild their credit and refinance with an ‘‘A’’ loan after a few years.

Wholesale sector in mortgage loan

On the wholesale level there are three large publicly traded companies, Federal National Mortgage Association (called Fannie Mae in the industry), Federal Home Loan Mortgage Corporation (called Freddie Mac), and Government National Mortgage Association (called Ginnie Mae). There are also a host of other money sources like banks, insurance companies, and pension funds that buy mortgages. Since Fannie Mae and Freddie Mac buy close to 50 percent of the mortgages written, their underwriting standards are what the rest of the industry follows if they want to sell the loans they originate. You might say that the Fannie Mae/Freddie Mac combo is to mortgage lending what Microsoft is to computing. Fannie and Freddie package these loans into mortgage-backed securities that are sold to investors. The money from the sale of these securities enables them to continue buying mortgages from lenders. If you were to call your favorite stockbroker and buy shares of Fannie Mae stock, your investment would be backed by millions of home mortgages. This cycle is what gives homebuyers a plentiful and consistent flow of mortgage money at reasonable interest rates. Their track record over the past few decades is impressive in creating a good flow of mortgage funds at competitive interest rate that otherwise wouldn’t be possible.

Another corporation, Government National Mortgage Corporation, buys Federal Housing Administration (FHA) and Veterans Administration (VA) government guaranteed loans from lenders. These mortgages are also packaged and sold on the securities market, ensuring a continuing flow of funds for FHA and VA loans. In mortgage-speak, the wholesale mortgage industry is referred to as the secondary market. In addition to the big mortgage buyers mentioned above, many banks and other money sources buy or make mortgage loans for their own portfolios; this is called warehousing the loan.
Also, if a loan meets with Fannie Mae or Freddie Mac underwriting standards, it is called a conforming loan. If it doesn’t meet these standards, it is a nonconforming loan.

How automated underwriting benefits you?

Once your loan officer has your application and verified the data, she submits the package for Fannie Mae or Freddie Mac approval. Most likely you’ll get a phone call within hours with an approval, a ‘‘no,’’ or a ‘‘let’s talk about it.’’ This fast turnaround means that within a day or two you can know if your loan is approved so you can start making plans.
Another advantage of the automated system is once you have approval, your loan officer can shop the loan to different investors to get you the best deal.
The key to making the system work for you is having the best credit score you can and presenting a stable employment history. If your income to debt ratios are a little high, the chances are you’ll still get an approval.
If, after reading this chapter, you get the feeling that the mortgage lending system is biased toward good credit scores, you’re right. Letting your credit score dip can cost you big time.

What is Automated Underwriting?

Automated Underwriting
One of the biggest changes in mortgage lending to come along the last few years is automated underwriting or desktop underwriting, as it’s sometime called. Developed by Fannie Mae and Freddie Mac, the goal was to streamline the loan process and improve the quality of loans these agencies purchased from banks and mortgage brokers.
This marriage of the Internet with a vibrant secondary market that buys the loans from banks and mortgage brokers is a huge plus for home buyers.

How the System Works
When you apply for a mortgage, the loan officer enters your employment, income, assets, and credit history into a program that is connected to a Fannie Mae or Freddie Mac computer. The program compares your loan data to a programmed standard. If your application is within the standard, you’ll get a quick approval. If it’s not, you’ll get a quick no. If it’s close but not quite good enough for approval, your application will go to an underwriter, who will look at it more closely.
Sometimes your application may get rejected, but with a little tweaking, your loan officer can get it approved. Paying off a credit card to increase a credit score or verifying ongoing overtime for example, can make your application fly the second time around.