MORTGAGE FINANCING

Books can be written about this subject. Here is a summary:

INTEREST RATES - risk determines the rate. The lower the risk, the lower the rate.

LOAN TYPES

  • Portfolio Loans
  • Conventional Loans
  • Jumbo Loans
  • Government Sponsored or Guaranteed Loans - FHA, VA, USDA, Reverse Mortgages

Portfolio Loans - Bank that underwrites and funds the loan retains the loan and servicing in-house.

Conventional Loans - Banks that fund loans that meet Fannie Mae or Freddie Mac underwriting guidelines as the bank that funds the loan will sell the loan to Fannie or Freddie and retain the servicing rights. Fannie/Freddie pay the bank an annual fee for servicing the loan (collecting and posting the payment and managing the escrow account). Fannie/Freddie only buy loans up to a certain dollar amount. The conforming loan limit is a standard loan limit unless you live in a higher-cost area. Collier County is a high-cost area and has higher conventional loan limits. Anything higher than the conventional loan limits that Fannie/Freddie would purchase are Jumbo Loans.

Jumbo Loans - Loan amounts that exceed what Fannie Mae or Freddie Mac will purchase from banks. Jumbo loans are typically funded by a bank or mortgage banking institution. Mortgage brokers will also have access to Jumbo Loan products that are funded by a bank they originate loans with. Jumbo loans typically require more down payment and higher credit scores than conventional loans. Interest rates on Jumbo Loans are typically a bit higher than conventional loans.

Government Sponsored Loans - loans that are either insured or guaranteed by HUD.

FHA - Loans that are insured by HUD. FHA insures the loan for the bank that funds the loan. In the event of a foreclosure, the lender can make a claim with HUD and are entitled to recover part of the loss from FHA. FHA offers conventional loans and Jumbo Loans. HUD has more information about the FHA program here.

VA - Loans that are guaranteed by the Department of Veterans Affair. If a VA loan goes into foreclosure, the government will repay a portion of the loan back to the bank that issued the loan. For more information about VA loans, go to the departments website here.

USDA - Loans that are guaranteed by the government. USDA Loans are limited based on geographic region and household income including all residents even if they are not on the loan. For more information about USDA loans, please go here.

Reverse Mortgage - Loans that are insured by HUD. Reverse Mortgages allow homeowners to use their equity to create a stream of income over time. For more information about Reverse Mortgages, please go here.


MORTGAGE APPROVAL

2-2-2

  • 2 years tax returns
  • 2 months asset statements
  • 2 most recent pay stubs

In addition, you will need to provide 2 forms of ID and an application typically referred to as a Uniform Residential Mortgage Application or simply 1003 (ten oh three).

The lender or mortgage broker will "pull" your credit and all the data from your loan application is all compiled into an online Automated Underwriting System (AUS). Fannie Mae's AUS is called Desktop Originator (DO), and Freddie Mac's AUS is called Loan Prospector (LP). Literally, within a couple of minutes, the AUS will issue "findings" which is an approval or denial. The AUS evaluates everything provided in the 1003 - Income, assets, liabilities, credit scores, length of employment, prior collections or bankruptcies. The AUS also analyzes the debt ratios and asset requirements and in just a few minutes the AUS can issue a conditional loan approval!  Conditional approval means that if all the data from the 1003 can be verified, the loan will be approved. Standard conditions are "clear and marketable title" and collateral evaluation (appraisal) subject to the underwriter's approval.

You do not need to do a full application to know what you could potentially qualify for. Many loan officers will advise you to fill out their online application but it is possible to find out what you may qualify for without going through this process. If you have your income available and know what you monthly car payments, credit cards, and student loans are, you can get a ball park idea of what you could be approved for.


WHAT IS PRIVATE MORTGAGE INSURANCE (PMI)?

When a lender looks at a loan application, their main question is "what risk do I take on by issuing this loan?" Credit checks, bank statements, employment verification – all the documentation required when getting approved for a loan is in service of assessing what the odds are that the loan will go into default. This is why a down payment is such a crucial part of obtaining a home loan. When a borrower has a substantial down payment (20 to 30% or more), the lender's exposure is lessened in the event of a default.

This 20-30% figure used to be required, yet clearly this kept a lot of people from realizing the benefits of home ownership, especially first time buyers. That is until 1957, when Max H. Karl, a real estate attorney, founded Mortgage Guaranty Insurance Corporation and invented the modern form of private mortgage insurance.

PMI is designed to address the hefty down payment hurdle. Instead of coming to the table with 20% or more for a down payment, a private mortgage insurance policy allows consumers to buy and finance a home without a large down payment. With PMI, the borrower pays a small percentage of the total loan amount (0.3 - 1.5%/year) in addition to their mortgage and insurance payments. As an example, a $200,000 loan with a PMI rate of 1% will come out to $167 dollars extra a month for a borrower. It's not nothing, but for many it's a manageable trade off.

Yet sometimes PMI can get a bad rap, as something to be avoided at all costs. Until the end of the 90's this attitude was understandable – homeowners had limited resources to cancel PMI and were often stuck with it for the life of their loan. That changed with the Homeowners Protection Act of 1998. It required automatic termination of PMI when the loan balance reaches 78% of the original value through natural amortization. Borrowers can often drop their PMI even before reaching that 78% figure – once a borrower reaches 20% equity in their home, they can request a cancellation of PMI. As home prices continue to rise, borrowers build up equity in their homes faster, meaning they can often drop PMI payments earlier than they think.

If you're curious about buying a home for the first time, or you're wondering how the value of your home has changed over time, reach out to me. I have up-to-date market information to help you make decisions with confidence.