10 Common Mortgage and Financing Related Questions Answered By The Experts

meet-the-expertsASK THE EXPERTS will be an occasional feature where I interview industry professionals and get their insight to the most commonly asked questions in their field.

This post features Michael Lappin with Stellar Mortgage, Beth Cork with Academy Residential Mortgage, Amy Tyson with Envoy Mortgage and George Sayegh with First Metropolitan Mortgage.  I asked all of them to provide answers to these questions.  Click on read the rest of the story for the full interview.

1) What types of loans are currently available for buyers?

Michael:  There are many different loan programs.  The most common is the 30 year fixed rate mortgage, but there are shorter term fixed rate loans, adjustable rate loans, interest only loans, loans with and without mortgage insurance and Home Equity Loans and Lines of Credit (HELOC).

Beth: Conventional, FHA, VA….Fixed or Adjustable, interest only.  No more Stated or No Doc loans.    Some lenders may still offer a “reduced documentation” loan but that only pertains to assets.  Income is always documented these days.  Jumbo loans are still available but at a high interest rate.

2) What’s the difference between a conventional loan and FHA loan?

Michael: The biggest difference between conventional loans and FHA loans are which Government entity is backing the loan.  Both types offer fixed and adjustable rate loans with and without mortgage insurance.  The requirements differ among the different types of loan and different lenders with regard to loan size, credit score, downpayment, and income requirements.

Beth: Conventional loans are based on your standard Fannie Mae and Freddie Mac loan guidelines.  FHA loans are backed by the government with different guidelines.  FHA guidelines offer more flexibility regarding credit because they do not look at score but your entire credit situation.  FHA also offers lesser down payment requirements.

George: The big difference is that FHA requires smaller down payment on a purchase. It has increased from 3% to 3.5% but conventional loans still requires 5%. FHA also tends to have better rates when the borrower has lower credit scores.

Amy: Conventional loans include all loans under the current Fannie Mae (Federal National Mtg. Assoc.) & Freddie Mac (Federal Home Loan Mtg. Corp.) lending limits, they are not insured by FHA or guaranteed by the VA.   Down Payments range from 5 to 20% or more. The Conventional/Conforming loan limit is currently $417,000 for a single family dwelling.  A loan to value above 80% requires PMI (Private Mtg. Insurance).

FHA (Federal Housing Administration) provides a loan guarantee program in lieu of PMI (Private Mtg. Insurance). Loans are insured by the Federal Housing Administration.  FHA loans are attractive, but not limited to first time home buyers,  because they require a lower down payment of 3.5% and have a higher qualifying ratio than a conventional loan.  FHA loans have an upfront MIP (Mortgage Insurance Premium) that is financed into the loan amount and a monthly premium.

3) How much money do I need to put down?

Michael: The amount of money required to buy a house depends on different things.  There are loans that require no downpayment and some that require 25% and everything in the middle.  Most common loans are FHA and conforming loans. FHA loans require as little as 3.5% down for a primary residence and investment property on a conforming loan requires 20 to 25% down.

Beth: 5% down on conventional loans or 3.5% down on FHA loans

Amy: The minimum down payment is 3.5% for an FHA loan.  If you are a Veteran and have full eligibility you are eligible for 100% financing.

4) How do I find out my credit score and why is it important?

Michael: Credit is a large factor in determining the interest rate for your loan.  While some loans do not have a minimum credit score required, the interest rate will be higher, the lower your credit score.  You can obtain a free credit report every year from each of the three major credit reporting agencies at www.annualcreditreport.com If you want to find out your credit scores that closely represent the score that a lender will obtain, go to www.myfico.com.

Amy: You can contact any of the three repositories (Equifax, Experian & Trans Union)  and request one free credit report per year, or better yet contact
a mortgage professional to help you with the pre-qualification process.  When applying for a mortgage,  a tri-merge report from all three repositories we be used to determine your score.  The middle of the three scores is used for qualification purposes.

George: You can go on line and get a free copy which may give you scores and some general info. However any mortgage professional will need to pull a full tri-merged credit report in order to accurately determine if you qualify. Your middle score or second highest of the 3 is what lenders use to determine if you qualify and in some case to determine rate.

5) Are there any 100% financing options still available?

George: There are some programs like the HUD 100 program where you can buy a HUD repossessed home for as little as $100 down and the Rural Housing program which finances up to and sometimes over 100%. BUT programs like these are very specific to certain properties or areas.

Beth: Georgia Dream is a 100% financing program with strict income limitations.  Not all lenders are licensed to do these loans.  You can also search for local down payment assistance programs to help you with the down payment requirement for FHA although they are few and far between.  Restrictions do apply if you do find a down payment assistance program so make sure you ask about all requirements.  Finally, you can go to your local Credit Union for possible no down payment loans.

6) What if I filed for bankruptcy?  Does this mean I can’t get a loan?

Amy: To purchase a home using Conventional financing  4 years seasoning (time period that must elapse before a borrower is eligible for a loan ) is required & 3 years seasoning for FHA financing.   On  a case by case basis at the lenders discretion,  the lender may consider two years as an acceptable interval for re-establishing a credit history when the derogatory information in the borrower’s credit history resulted from “documented” extenuating circumstances.  Guidelines can vary based on Chapter 7 vs Chapter 13 bankruptcy.

Beth:  In order to get a mortgage, you will need to be discharged or released from the bankruptcy for 2-3 years before you can get financing.

7) If I don’t have enough money for a down payment, can I borrow it from a friend or relative?

Michael: You cannot borrow money from a relative or friend for a down payment.  You can have a relative or close established friend give you the money for a downpayment.  They will have to prove that they have the funds to give you and sign a letter stating that the money is a gift and is not expected to be repaid.

Beth: Yes, FHA allows the down payment to come from a relative in the form of gift funds.  A gift letter would need to be signed along with documentation of the funds by your relative.

George: Both Fannie and FHA loans allow for gift funds from a 3rd party, usually a family member. However the borrower needs to have a certain amount of their own funds, money that they have had for 60 days, in the deal.

Amy: FHA and VA loans allow for 100% gift from a blood relative.  Conventional loans require 5% of your own funds unless you are putting down 20%.  If your putting down 20% –  100% of the funds can come from a gift.

8) What does having a co-signer do for me?

Michael: Co-signers can help depending on the loan that will work best for you.  Sometimes a co-signer with better income or assets, or stronger credit can help strengthen your application.  Because loan requirements depend on many factors, a co-signer is not always enough to allow someone to purchase a home.  An example of where a co-signer will not help is when any single borrower has a recent bankruptcy or foreclosure.  An example of where a co-signer will help is when someone has stable income but has significant current debts and their parents have strong income and no debt.  That improvement in the total debt to income ratio can help approve a loan.

Beth: A co-borrower can help you qualify for a loan if they qualify.  Usually a co-borrower is helpful if you need more income to qualify for the loan.  Both the borrower and co-borrower’s credit and debts would have to qualify in order to receive financing.

9) Are ARMS bad?   Aren’t they the “bad” loans that caused all of these problems?

Michael: ARMs (Adjustable Rate Mortgages) are not bad.  They work for some people and not for others.  Everyone should talk about their financing needs and make decisions based on accurate information.  Adjustable rate mortgages are not ideal for someone with a stable income that is not anticipated to increase greatly, who plans on staying in their home for a long time.  They are sometimes advantageous for someone who is early in a career that will show strong income increases that is paying down other bills in the short term.  In a typical financial market (and things have been very atypical lately) a shorter term interest rate (3, 5 or 7 year ARM) would have a lower interest rate than a 30 year fixed.  That is why many people signed up for ARMs.

Beth: Several factors lead to the problems that we are currently facing.  Adjustable rate mortgages are not the only culprit.  Irresponsible lenders and borrowers, uninformed buyers, inflated home values, mortgage fraud and several other factors can be blamed but if you know your financial situation and understand the loan product you’re getting, the ARM product was once a cheaper option.  Today, ARM rates are not that much cheaper so the best option would be a fixed option.

George: Many of the “bad loans” that are out there were ARMs that originated for Sub-prime borrowers with little or no income verification and with little to no money down. Both Fannie Freddie and FHA offer ARM loans and qualify borrowers on full documentation.

Amy: ARM (Adjustable Rate Mortgages) is a mortgage loan where the interest rate on the note is  periodically adjusted based on a variety if indices.  This type of mortgage product isn’t bad,  however it may be for the more financial savvy borrower.   The borrower benefits if the interest rate falls and loses if interest rates rise.

10) What are closing costs and how much are they?

Michael: Closing costs are the fees involved in obtaining a mortgage.  They are paid to the lender, attorney, appraiser, real estate agent, state and county.  It takes many people to coordinate and conduct a loan closing and everyone gets paid for doing their job.  Many of the costs vary with the amount of both the purchase price (if a purchase) and the loan amount (for both a purchase and refinance).  Some are fixed regardless of the purchase price so the percentage can vary.  We like to say that typcial borrower/purchaser closing costs range between 1% and 3% of the loan amount.  Total closing costs for both buyer and seller typically run between 3% and 6% of the sales price.

Beth: Closing costs are comprised of lenders fees, attorney fees, escrows for property taxes and insurance and state taxes.  Some fees are percentage based so your loan amount will determine your closing costs.

Amy: Closing costs are incurred at settlement by a borrower/seller in completing a loan transaction. These customary costs are above and beyond the sales price of the property that must be paid to cover the lender/title fees and transfer of ownership at closing.   At the time of application  the lender will disclose the closings costs and prepaids (cost to establish the escrow account &  pre-diem interest) to you in the form of a Good Faith Estimate.

George: Closing costs are any 3rd party fees that are associated with closing the loan. These can be fees to Broker, Attorney, Appraisers, Lender and State Taxes to mention a few. These fees vary on who it is that you are doing business with. Remember interest rate and fees are directly related. If you have no fees in your loan then you are not getting the lowest rate possible. Also you can pay additional fees called “discount points” you can get a lower rate. Most important you need to get a Good Faith Estimate from the lender or broker to see what the breakdown of fees actually is and then GFEs. Also look at APR, this is a fiqure that includes your closing costs in the rate. The APR is always higher than your actual note rate but is a good way to compare fees. You may have a rate of 4.5% but an APR of 6.0%, that means you are paying a lot of fees to get to that rate.

Do you have more questions? Simply post your comments and questions below.

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