What's Out There?...An Overview of Mortgage Programs

Section 7: What's Out There?…An Overview of Mortgage Programs

To properly analyze the appropriate mortgage program for you,the length of time you plan to live in your property, or retain it, if it is an investment property is a priority consideration. An adjustable rate loan may be an excellent choice if you are only going to have the property for a short period of time. A fixed-rate mortgage with a longer term would apply if you plan to keep the house for a longer period of time.

Understanding of the relationship between rates and points is important . Points are considered to be prepaid interest and may be tax-deducible. Please consult your tax advisor in reference to your specific situation.

Each point is equal to one percent (1%) of the loan amount. Oftentimes, a better interest rate chan be achieved by paying less than 1% of the loan amount. The more points you are willing to pay, the lower the interest rate will be. Choosing a mortgage program also depends on:

  • Your current financial picture.
  • How you expect your finances to change.
  • How long you intend to keep your house.
  • How comfortable you are with adjustable payments.

A 15-year Fixed Rate Mortgage can save you thousands of dollars in interest payments over the life of the mortgage; however, your monthly payments will be higher. An Adjustable Rate Mortgage (ARM) will get you started with a lower monthly payment than a fixed rate mortgage, but your payments could go higher when interest rates change. The best way to navigate through the "ARM mine field" is to define your plans, finances and financial prospects in your future.

Shopping for a mortgage...the right mortgage for you...can be very time-consuming and frustrating. With so many programs to choose from, each with features and guidelines which may or may not suit your needs, our expertise in evaluating your situation and recommending the most suitable "mix" for you customizes your mortgage to your goals.

Custom programs which are a "mix" and additional specialty programs such as "GIFT OF EQUITY" Purchase Mortgages and other alternative Loan Programs are available in the wholesale marketplace.

Achieving the correct 'balance' of all desired elements in your mortgage financing, while recommending ways to save you money in restructuring your debt is our expertise. As circumstances change for our clients through the years, we are there for them. Relationship-Based.


INDEX

Mortgage Programs…Arms To Zero-Down!
Click on the Mortgage Type Below You Wish to Research


Some General Mortgage Types
Fixed Rate Mortgages
Adjustable Rate Mortgages

Most Common ARM Terms
Index
Margin
Interim Caps
Payment Caps
Lifetime Caps

Other Mortgage Options
Buy-down Options
Harp 2

USDA Mortgages
Benefits of USDA Loans
Who is Eligible...
Check to see if you qualify

VA Mortgages
VA Loan Features
VA Loan Facts

FHA Mortgages
FHA Loan Features
FHA Loan Facts

 


Mortgage Programs...ARMS to Zero-Down!
Click on the Mortgage Type Below You Wish to Research

Some General Mortgage Types

FIXED RATE MORTGAGES- With a Fixed Rate Mortgage, the most common type of mortgage, your monthly payments never change. Property taxes, homeowner's insurance, and PMI may change, but not your monthly payments.

Fixed Rate Mortgages come with several different term options. The most common is the 30-year but there are also 20, 15 and even 10-year terms. There are also "bi-weekly" mortgages, which shorten the mortgage by requiring half the regular monthly payment every two weeks. Since there are 52 weeks in a year, you would make 26 payments, or 13 "months" worth, every year. Making 13 payments a year will cut approximately 8 years off of a 30-year mortgage.

The interest rate on fixed rate amortizing mortgage remains fixed for the life of the mortgage and the payments, which remain constant, pays off the entire mortgage at the end of the term . If you have a further interest in this payment method, check out the Amortization Calculator and the Bi-Weekly Payment Calculator for examples on how this works.

During the initial payment stages of a fixed rate mortgage's amortization period, a large percentage of the monthly payment is applied toward interest. As the mortgage is paid down, more and more of the monthly payment goes toward principal. For example, a 30-year fixed rate mortgage will take approximately 22.5 years to be paid in full. 

ADJUSTABLE RATE MORTGAGES - ARMs generally begin with an interest rate that is 2-3 percent below a comparable fixed rate mortgage. The interest rate is subject to changes at specific intervals if market conditions change. If indexed rates go up, your interest rate and monthly payment will go up; however, if rates go down, so will your payments.

There are also hybrid mortgages that combine aspects of both fixed and ARM mortgages. These mortgages are fixed for 3, 5, 7 and 10 years, and then adjust to market conditions. Your unique situation and goals must be discussed with one of our Senior Analysts prior to your deciding on this mortgage type as there are many factors to consider in these often misunderstood programs.

The Start Rate on lower interest rate ARMs which are generally below the current market rate of a fixed rate can range from 1 month to as long as 10 years. As a rule, the lower the start rate the shorter the time before the mortgage makes its first adjustment. 

Most Common ARM Terms

Index - The index of an ARM is the financial instrument that the loan is "tied" to, or adjusted to. The most common indexes are the 1-year Treasury Security, LIBOR (London Interbank Offered Rate), Prime 6-month Certificate of Deposit (CD), 12-MAT (Moving Treasuries Average) and the 11th District Cost of Funds (COFI). Each of these indexes move up and down based on financial market conditions.

Margin - The margin is one of the most important aspects of ARMs because it is added to the index to determine the interest rate that you pay. The margin added to the index is known as the fully indexed rate (5.50% index plus 2.50% margin equals an 8.00% fully indexed rate). Margins range from about 1.75% to 3.50%, depending on the index, Loan to Value and borrower credit rating. 

Interim Caps - All ARMs carry interim caps. Interest rate caps of six-months to a year are most common but some have caps up to three years. Rate caps are a good thing when interest rates are rising and a bad thing when rates are falling.

Payment Caps - Some loans have payment caps instead of interest rate caps. These loans reduce "payment shock" in rising rate markets, but can also lead to deferred interest or "negative amortization." The most common of these mortgage types caps your payments at 7.5% of the previous payment.

Lifetime Caps - Most ARMs carry a lifetime cap or maximum interest rate. The lifetime cap, which varies by loan program, have higher margins with lower lifetime caps and, visa versa, mortgages that carry low margins often have higher lifetime caps.

ARMs are available for both purchases and refinances. As a rule, ARMs with indexes that are subject to rapid change lets you take advantage of quickly falling interest rates. An index that lags the market (such as the COFI mortgages) protects you when rates quickly rise. Changes in the index are what change your monthly payments. 

Questions to Ask When Considering an Adjustable Rate Mortgage:

  • What would the interest rate be today if the rate were fully adjusted, based on the current value of the index?
  • Is there a prepayment penalty?
  • How long before the interest rate can adjust?
  • By what amount can the rate adjust at that time? At the next adjustment period?
  • Over the life of the loan?

 

Other Mortgage Options 

BUY-DOWN OPTIONS- The most common buy-down is the 2-1 buy-down. Historically, for a borrower to secure a 2-1 buy-down they would pay approximately 3 points above current market points in order to pay a below-market interest rate during the first two years of the mortgage. At the end of the two years, they would then pay the old market rate for the remaining term. As an example, if the current market rate for a conforming fixed rate mortgage is 8.5% at a cost of 1.5 points, the buy-down gives the borrower a first-year rate of 6.50%, a second-year rate of 7.50% and a third through 30th-year rate of 8.5% and the cost would be 4.5 points. In the past, relocation companies, because of the high points associated with buy-downs, have usually absorbed the costs for qualifying borrower/employee transfers.

In today's market, there are variations of the old buy-downs rather than the charging of higher points to the borrower at the inception of the mortgage. It is common in today's market that the note rate is increased to cover their yields in later years. As an example, if the current rate for a conforming fixed rate loan is 8.50% at a cost 1.5 points, the buy-down would give the borrower a first-year rate of 7.25%, a second-year rate of 8.25% and a third-year rate of 9.25%. For a three-quarter point higher rate than the current market, the cost would remain at 1.5 points.

Another common buy-down which has gained in popularity is the 3-2-1 buy-down which works much in the same manner as the 2-1 buy-down, with the exception that the starting interest rate is 3% below the note rate.

Another variation is the flex-fixed buy-down programs which increase at six month intervals rather than annual intervals. As an example, for a flex-fixed jumbo buy-down at a cost of 1.5 points, the rate for the first six months would be 7.50%; over the second six-month period, the rate would be 8.00%; for the next six months, the rate would be 8.50%; with the next six months having a 9.00% rate. Following these increments, the next six months would be 9.50% and at the 37th month the rate would reach the note rate of 9.875% and would remain there for the remainder of the term. A comparable jumbo 30-year fixed at 1.5 points would be 8.875%. 

USDA Loans

A USDA Loan is a mortgage loan that is insured by the US Department of Agriculture and available to qualified individuals who are purchasing or refinancing their home loan in an area that is not considered a major metropolitan area by USDA.

USDA Loans
 

Great for First-time Home Buyers

100% Financing (including Closing Costs)

No Down Payment Requirements

No Prepayment Penalties

Low Rates

Existing Homes, Foreclosures, New Construction

Benefits of USDA Loans

  • 100% Financing - you can buy a home with no money down. In some cases you can even finance your closing costs.
  • You can refinance your home up to 100% of the value of your home.
  • Low Fixed Rate Mortgage Options.
  • They are usually easier to get because the Government insures the loan so that there is much less risk to the lender.
  • They can be used for Existing Homes, Foreclosures or New Construction.
  • Simple Loan Process.
  • No Loan Limit. No Acreage Limit.
  • There is No Prepayment Penalty.
  • You can use the loan to repair or add on to your home.
  • Flexible Credit Requirements.

Who is Eligible for a USDA Loan?

Generally these loans are available to anyone who meets minimum credit guidelines and local area income requirements and is purchasing a home or refinancing their home in an area that is not considered a major metropolitan area by USDA.

Some common misconceptions of USDA Loans:

  • They are just for farmers - USDA Loans are not "just for farmers," millions of people from all walks of life already qualify.
  • FHA or Conventional Loans are better - USDA Loans often offer better terms than an FHA or conventional loans.
  • They aren't flexible - Actually, USDA Home Loans can be used to buy a new home or refinance to a lower rate.
  • Only certain people can qualify - Anyone who meets the income and credit guidelines can qualify for a USDA Home Loan.
  • They are only for rural areas - Actually, USDA Loans are available in many areas that most people would not consider rural. For example, many small communities just outside of metropolitan areas qualify as rural areas according to the US Department of Agriculture.
  • They are harder to get than FHA or Conventional Loans - This just isn't true.  In many cases USDA Loans are actually easier to get because the loans are guaranteed by the government.

Check to see if you Qualify for a USDA Loan:


VA Mortgages

More than 29 million Veterans and service personnel are eligible for VA financing. Although many Veterans have already used their mortgage loan benefits, it may be possible for them to buy homes again with VA financing using remaining or restored (occurring after a VA loan is paid in full) loan entitlements. Both the Veterans' Administration and the Federal government guarantee VA mortgages.

Before arranging for a new mortgage to finance a home purchase, Veterans should consider some of the advantages of VA home loans. One of the most important features is that there is no down payment required in most cases. Loan amounts can be up to 100% of the VA-established reasonable value of the property; however, because of the secondary market requirements, loans generally do not exceed $240,000.00.

VA Loan Features:

No Monthly Mortgage Insurance Premiums Required - The Veteran has the flexibility of negotiating interest rates with the lender; there is no monthly mortgage insurance premium to pay and there is a limitation on the buyer's closing costs.

A Variety of Mortgage Types Available - The VA mortgage is a 30-year program with a choice of repayment plans. Although the most popular program is the traditional 30-year fixed mortgage, a veteran can also opt for a GPM (Graduated Payment Mortgage) or a GEM (Growing Equity Mortgage). The GPM offers low initial payments which gradually rise to a level payment starting in the sixth year while the GEM gradually increases payments with all the increase applied to principal, resulting in an early payoff of the loan. See GPM Graduated Payment Balloon Mortgage.

To qualify for a VA mortgage upon building a new home, periodic plan compliance inspections and a one-year warranty to insure compliance to the approved plans and specifications must be obtained. If the builder provides a 10-year warranty, only a final inspection is required.

VA Mortgages are Conditionally Assumable - (subject to assumer's credit) and have no prepayment penalty. The VA also has loan counseling for Veterans during temporary financial hardships to help them avoid loosing their home.

VA Mortgages Have Great Flexibility - A Veteran can use their eligibility to buy a home, including a townhome or condominium in a VA-approved project; to build a home; to simultaneously buy and improve a home; or to refinance an existing home up to 90% of the VA-established reasonable value. They can also refinance to reduce the interest rate on an existing VA mortgage or to purchase a manufactured home and/or lot.

A Veteran can improve a home buy installing energy-related features including solar heating/cooling systems, water heaters, insulation, weather-stripping/caulking, storm windows/doors or other energy- efficient improvements approved by the VA. These improvements can be "added on" with the purchase of an existing home or by refinancing a home owned and occupied by the Veteran. A loan can be increased up to $3,000 based on documented costs or up to $6,000 if the increase in the mortgage payment is offset by the expected reduction in utility costs. A refinancing loan may not exceed 90% of the appraised value plus the costs of the improvements.

Funding Fee Concessions with 5% Downpayment - A basic funding fee of 2.0% must be paid to VA by all but certain exempt Veterans. A down payment of 5% or more will reduce the fee to 1.5% and a 10% down payment will reduce the fee to 1.25%. A funding fee of 2.75% must be paid by all eligible Reserve/National Guard personnel. A down payment of 5% or more will reduce the fee to 2.25% and a 10% down payment will reduce the fee to 2.0%. The funding fee for loans to refinance an existing VA mortgage with a new VA loan to lower the existing interest rate is .05%. Veterans who are using their entitlement for a second or subsequent time and who do not make a down payment of at least 5% are charged a funding fee of 3.0%.

All VA Home Loan Fees May be Paid in Cash or Included in the Loan - In addition, the reasonable closing costs that may be charged cannot be included in the loan. The following items may be paid by the Veteran, the seller or shared between them:

No real estate commissions, brokerage fees or "buyer broker" fees may be charged to the VA buyer.

Veterans' Entitlements Have Increased - Veterans who had a VA loan before may still have "remaining entitlements" to use for another VA loan. The current amount of the entitlement available and delegated to each Veteran is $36,000. This was much lower in years past and has been increasing over time by changes in the law. For example, a Veteran who obtained a $25,000 loan in 1974 would have used $12,500 guaranty entitlement, the maximum then available. Even if the loan is not paid off, the Veteran could use the $23,500 difference between the $12,500 entitlement originally used and the current maximum of $36,000 to buy another home with VA financing. An additional $14,750, up to a maximum entitlement of $50,750 is available for loans above $144,000 to purchase or construct a home.

There is No Limit on the Size of a VA Guaranteed Home Loan, provided that the Veteran is qualified for the loan from a credit and income standpoint. However, as a practical matter, wholesale investors/agencies generally limit the maximum loan amount to four times the amount of the Veteran's available entitlement plus any down payment. Currently, VA has increased no down payment loans to $240,000. To get a Certificate of Eligibility the Veteran can complete VA Form 26-1880, "Request for a Certificate of Eligibility for VA Loan Benefits" and submit to one of the Veterans' Administration Eligibility Centers. . We can assist you in securing your certificate.

VA Loan Facts

  • Past two years completed tax returns.
  • Past two years W-2's, 1099's and any other necessary tax forms.
  • One month worth of newest pay stubs.
  • Self-employed will need three years tax returns and YTD Profit & Loss Statement.
  • Past three months full bank statements for all accounts.
  • Any recent statements from investment accounts (retirement, 410k, mutual funds, etc.).
  • Driver's License or other official State identification.
  • Social Security Card.
  • Any Divorce, Palimony, Alimony Documents.
  • Green card or work-permit (if applicable).
  • VA Appraisal
  • Credit Report
  • Loan Origination Fee (usually 1% of the loan amount)
  • Discount Points
  • Title Search and Insurance
  • Recording Fees
  • Transfer Taxes
  • Survey Fees
  • No down payment is required in most cases. Loan maximum may be up to 100% of the VA-established reasonable value of the property.
  • No monthly mortgage insurance premium to pay.
  • There is a limitation to closing costs.

 

FHA MORTGAGES

The Department of Housing & Urban Development guarantees FHA mortgages. FHA's mortgage insurance programs help low and moderate-income families become homeowners by lowering some of the costs of their mortgage loans. FHA mortgage insurance also encourages mortgages to be made which otherwise creditworthy borrowers may not qualify for, by protecting against mortgage default.

Properties must meet certain minimum requirements which are established in FHA guidelines. Manufactured homes, single family and multifamily properties are covered through FHA loans.
Section 203(b) is the centerpiece of FHA's single-family insurance program. It is the successor of the program that helped save homeowners from default in the 1930s, helped open the suburbs for returning Veterans in the 1940s and the 1950s, and helped shape the modern mortgage finance system as we know it. 

Today, FHA one-to-four Family Mortgage Insurance is still an important tool through which the Federal Government expands homeownership opportunities for first-time home buyers and other borrowers who would otherwise not qualify for conventional loans on affordable terms, as well as for those who live in the underserved areas where mortgages may be harder to get.

FHA currently insures a total of about 7 million mortgages valued at nearly $400 billion. These obligations are protected by FHA's Mutual Mortgage Insurance fund, which is sustained entirely by borrower-paid premiums.

FHA Loan Features

Down payment Requirements can be Low - In contrast to conventional mortgage products, which frequently require down payments of 10% or more of the purchase price of the home, single-family mortgages insured by FHA make it possible to reduce down payments to as little as 3 percent. It is FHA insurance which allows borrowers to finance approximately 97% of the value of their home purchase through their mortgage, in some cases.

Down Payment Gifts - One of the key benefits to the FHA program is that the down payment can be 100% gift funds. Verification of the source of gift money is not required. However, it is necessary that the gift funds be deposited in the borrower's bank or savings' account, or in an escrow account, prior to underwriting approval. Proof of deposit is required. Gift donors are restricted primarily to a relative of the borrower. Certain organizations, such as a labor union or specified charitable organizations can also qualify as gift donors.

Many Closing Costs can be Financed - With most conventional loans, the buyer/borrower must pay closing costs (the many fees and charges associated with buying a home) equivalent to 3%+ of the price of the home with financing of "allowable" costs available. FHA allows the borrower to finance many of these charges, thus reducing the up-front costs of buying a home. FHA mortgage insurance is not free. Borrowers pay an up-front insurance premium (which may be financed) at the time of the purchase, as well as monthly premiums that are not financed, but instead are added to the regular mortgage payment.

Some Fees are Limited - FHA rules impose limits on some of the fees that mortgage companies may charge in FHA mortgages. For example, the loan origination fee charge by the mortgage company for the administrative cost of processing the loan may not exceed one percent of the amount of the mortgage.

HUD Sets Limits on the Amount that may be Insured - To make sure that its programs serve low and moderate-income people, FHA sets limits on the dollar value of the mortgage loan. FHA's maximum loan amounts varies, depending upon the county where you live. It is critical that your mortgage amount, including closing costs (if you finance your closing costs), not exceed the maximum loan amount in your county set by FHA. Owners of higher-priced homes cannot borrow any more than owners of homes valued at the FHA limit for the same area. 

FHA Loan Facts

   There are no income limits on FHA loans. 

   FHA offers more relaxed credit quality, income, and asset requirements.  

   You can use a non-owner occupant as a co-borrower. In other words, your co-borrower doesn't have to live in the home with you.

   If rates should fall and you want to refinance, you won't have to pay for a new appraisal or credit report. 
 

Keep in mind that the Mortgage Insurance Premium (MIP, which in conventional mortgage programs is called Private Mortgage Insurance or PMI) that is paid on an FHA mortgage can be higher than on standard (conventional) financing. Further, the appraisal of the property is more costly due to complex FHA guidelines than on conventional financing.

At 1 STOP Mortgage we want to help you understand how a FHA mortgage loan works. In all actuality the Federal Housing Administration (FHA) doesn’t loan any money, they insure it. This means that you’re considered to be a less risky borrower than someone who might not have the backing of the federal government. Our role is to make sure that you qualify for an FHA mortgage and structure our loan to reflect it.

The other pages in the FHA loan center can help you understand more about this unique program. Whether you’re trying to determine if you qualify or if you’re interested in finding out what kind of documentation you’ll need to ultimately get your loan, our site can provide you the information you’re seeking. Additionally we’re more than happy to take your phone calls at 901-476-9100.

An important resource for considering a FHA loan is the official Housing and Urban Development website. There you can find even more answers to questions and learn more about insuring your loan through the Federal Housing Administration.

FHA insured mortgages are some of the best kinds of mortgages available. This is because they can help more people into the home buying market. Check out the list below to understand some of the most basic benefits of an FHA mortgage.

Easier to Qualify for – because they’re backed by the federal government lenders are more likely to give you the kind of loan that you need.

Low Down Payment – FHA insured mortgages only require a 3% down-payment which makes it easier for people to own homes. Additionally the 3% can come in the form of gifts, unlike many other loan programs.

Lower Credit Borrowers Qualify – because FHA insured loans are backed by the government those with a poor credit history have an easier time getting this kind of loan.

Better Interest Rates – with the backing of the government these loans typically have a better interest rate than most traditional mortgage loans.

Better Home Stability – the FHA has programs designed to help homeowners keep their homes during hard times. The will work with you to help your home from falling into foreclosure. Always try to work out problems with your lender before the situation becomes dire.

Check out our list of common questions related to FHA mortgages. Check out our list of common questions related to FHA mortgages.

What is the FHA?

  • FHA stands for the Federal Housing Administration. It was created in 1934 to help Americans get into homes.

What makes a FHA insured mortgage beneficial?

  • A FHA insured mortgage is easy to qualify for, can be obtained with less than perfect credit, costs less and requires a smaller down-payment.

Where can I find FHA forms and other literature?

What is the FHA loan limit in my area?

  • The loan limit across the country is different. Click here to see limits in your area.

Can I pay an FHA loan off early?

  • Yes, however be sure to check the pre-payment section of your contract before signing.

Can a FHA insured loan help me lower energy costs?

  • Yes, through the Energy Efficient Mortgages Program you can finance 100 percent of the cost of making your home more energy efficient. Contact us to see how.

Is there a FHA program to help me refinance my loan?

  • Yes, the recently create FHASecure is one of the ways that we can help you refinance your current home loan. Contact us now to see what we can do for you.

Can I refinance a fixed rate FHA loan?

  • Yes. Talk with one of our professionals today to see if refinancing makes sense for you.

What is the recommended debt-to-income ratio for FHA loans?

  • The recommended debt-to-income ratio for a FHA loan is 30%.

Are FHA loans assumable?

  • Absolutely, you can assume an existing FHA loan or allow a buyer to assume yours.

Will I have to pay mortgage insurance with an FHA loan?

  • Yes, in fact FHA mortgages often require you to carry mortgage insurance for longer than most conventional loans.

Can I get a "fixer-upper" of a home with a FHA mortgage?

  • Yes, however you might be required to fix certain problems in the home before you can get the full loan. Speak with us today for details on this.

It's easy to understand why many people looking for a new home are turning to FHA insured loan programs. Because FHA Loans are insured by the Federal Housing Administration homebuyers have an easier time qualifying for a mortgage. Those who typically benefit most by an FHA loan are first-time home buyers and those who have less than perfect credit.

The links to the right are articles aimed at helping you better understand FHA loans. With this information you can make a more informed decision on whether these government insured loans are right for you and your family.

New Changes in FHA Loans

In response to the growing housing situation in the United States the loan limits for FHA Loans has been temporarily raised. Depending on where you live you might find it even easier to qualify for a FHA loan.

As FHA Loan specialists we can help you understand any new changes to the FHA loan program. We're here to create a customized solution that works best for you and your family. To learn more call us at 901-476-9100 or contact us via email by clicking here.

When you're applying for an FHA loan the following list of documents will help expedite the process. We can help you understand any part of the FHA loan process so don't hesitate to contact us with any questions.


Serving the Great Mid-South Region
Offices: 901-388-1588 or 901-476-9100 | Toll-Free: 
888-580-1588 | Fax: 901-388-6202 | Email: info@1stophomeloans.com
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