MiamiRealEstateKing

Your Mortgage Matters

In Uncategorized on February 24, 2008 at 10:42 pm

The market may be turning and therefore, the time has come to reevaluate your mortgage situation by studying the different types of mortgages that are still available for most people out there.  In general, consider the following:Conventional Conforming:

These are mortgages that are funded by banks but eligible to be backed by FNMA aka “Fannie Mae” (Federal National Mortgage Association) and FHMLC aka Freddie Mac (Federal Home Mortgage Loan Corp).  Both FNMA & FHMLC are Government Sponsored Entities are were designed by the Government to make mortgages available to the general public.

  • Maximum Loan Amount is $417,000 (higher in HI & AK-plus changes in the law may increase these limits nationwide), but can be higher for 2, 3 or 4 unit properties.
  • Available for Owner Occupied, Second Homes and Investment Properties.
  • Generally require borrowers to document income & assets that justify their ability to repay the loan.
  • Generally require borrowers to have fair to excellent credit.
  • Generally available with minimum 5% down payment.

Government Loans:

These are mortgages that are funded by banks but eligible to be backed by the Department of Housing & Urban Development (HUD).  There are 2 common kinds of Government Loans:

FHA: Federal Housing Administration.

  • For Dade County the maximum loan amount is $380,000 (higher for 2, 3 or 4 unit properties).
  • Available for OWNER OCCUPIED PROPERTIES ONLY (second homes and investment properties not allowed).
  • Allow for minimum 3% down payment which can be a gift from a family member, church, civic group or non-profit organization.
  • Always require borrowers to document income & assets that justify their ability to repay.
  • Poor credit is allowed with compensating factors.

VA: Veteran’s Administration.

  • Designed as an option for eligible Veterans which must get an “eligibility certificate” from the local VA office.
  • 100% financing allowed (subject to eligibility certificate).
  • Always requires documentation of income & assets that justify the ability to repay.
  • Uses the same loan amount limits as FHA.
  • Poor credit is allowed with compensating Factors.

Non Conforming Loans
Jumbo Loans:

  • Loans from $417,001 to $1,500,000
  • Generally meet the same criteria as Conventional Conforming Loans except that down payment requirements are higher.
  • These loans are not eligible to be backed by HUD, FNMA or FHMLC.
  • Generally requires good to excellent credit.

Super Jumbo Loans:

  • Loans from $1,500,001 to $3,000,000
  • Generally slightly more restrictive than Conventional Conforming Loans
  • Down Payments generally range from 20% to 40%.
  • These loans are not eligible to be backed by HUD, FNMA or FHMLC.
  • Generally requires good to excellent credit.

Mega Jumbo Loans:

  • Loans over $3,000,000.
  • Much more restrictive than Conventional Conforming Loans
  • Significant income & assets must be demonstrated.
  • Down Payments generally 40% to 50%
  • These loans are not eligible to be backed by HUD, FNMA or FHMLC.
  • Generally requires excellent credit

Expanded Criteria Loans

  • Generally not eligible to be backed by HUD, FNMA or FHMLC.
  • Down Payments generally as low as 10% or as high as 50%
  • May not be required to document income, assets, employment, etc.
  • Generally requires excellent credit

Other factors to consider which will help you understand how loans are priced are as follows:

Risk Based Pricing

Recently nearly every loan program (except those backed by HUD) are moving to a “risk based pricing” model.  The lower the risk – the lower the rate.  The higher the risk – the higher the rate.

Risk Factors that may INCREASE the rate:  Any loan with these factors has a higher probability of default and or loss to the lender and therefore the rate charged to the borrower is higher.  The more risk factors layered into the loan results in a progressively higher rate.

  • Low Down Payment
  • Lower credit score
  • Inability to document income (stated income / no income programs)
  • Cash out refinances
  • Multi-family properties
  • Condos (high rise or low rise)
  • Second Homes
  • Investment Properties
  • Multi-family properties
  • Properties needing renovation or construction
  • “Piggyback loans” where there is also a 2nd mortgage involved
  • Job instability
  • High Debt-to-income ratio
  • Lack of reserves / cash on hand / savings

Risk Factors that may DECREASE the rate:

  • Large Down Payment
  • Excellent Credit Score
  • Single Family Residence (condo or house)
  • Low Debt-to-income ratio
  • Ability to document income & assets
  • Excellent / lengthy job history
  • Significant reserves / savings
  • Minimal use of credit card & other consumer debt
  • Property values near or below the median for the area (in a slow market more expensive properties are often harder to sell)

Broker vs Banker

Loans can be arranged through a “mortgage broker” who acts independently and “sells” the loan to a bank.  The broker gets paid a fee for his / her work from either the bank, the customer or both.  Loans can also be arranged through a “loan officer” who works directly for the bank.

Key Differences:

Broker:

  • Generally can arrange loans through several different banks
  • Generally earns income by charging the customer fees

Loan Officer:

  • Generally works for only one bank / lender and the line of products offered by them only
  • Generally earns salary or commission paid by the bank – not the customer

Other factors necessary to provide financing for the purchase or refinance of any real estate are:

Appraisals

Federal Law Requires:

  • Appraisals be ordered by the bank – not the Realtor, customer or other interested party
  • Appraisals be ordered through licensed appraisers and not by appraisers selected specifically by the loan officer or other interested parties

Other Important Facts:

  • Generally used to determine MARKET VALUE not to evaluate the quality of the home, functional defects or condition
  • Generally good for 90 days
  • Compares the subject property to other SIMILAR homes in the market area.
  • Will utilize past sales as well as current listings to determine market value.

Misconceptions:

  • A house that has recently been given $200,000 in remodeling upgrades will appraise for $200,000 more than the comparable, unimproved houses.
  •  Not true … improvements do not add dollar-for-dollar to the bottom line.
  • An appraisal ordered by the seller, customer or other party is acceptable.
  •  Not true … appraisals must be ordered by a regulated lender to be acceptable for a loan transaction.  The lender may not accept all appraisals ordered from other lenders.

As you can see, there’s a lot involved in obtaining a loan, regardless of weather you are looking to buy your first home, second or investment home, or to refinance your present mortgage. 

Typically, weather you go to a bank or to a broker, all necessary paperwork needs to be reviewed and compared for accuracy, making sure it all makes sense and in order to avoid issues down the line.

Brokers for example, don’t get paid until after closing.  Bankers are paid a salary regardless of a loan closing.  Both have a lot to protect, however.  Some will argue that brokers will tend to do things that may not be quite “apropo” in order to get a loan closed, while arguing that bankers are not motivated at all to bend in any way to ensure a loan closes.  If the numbers don’t make sense, they typically don’t try any harder than they must.  5pm is quiting time while brokers must come up with all the ways they can in order to ensure they get paid.

All great arguments but, think about it.  Once you find a good honest broker, they have access to products from many sources, and will not rest until you close.  Just make sure to check out their record before signing up.

This, in my opinion, is no different than the homework you must do when you need a mechanic, doctor, lawyer, accountant, bank, banker or mortgage professional.  Even buying big ticket items, it is typically much better to buy a bed mattress for instance from a reputable house than at a flea market, don’t you think?

The bottom line is this, regardless of how many homes you’ve bought or sold or how many loans you have secured, hiring the right professional for the job is as important a decision as the decision to not going at it alone.

Consider doing your taxes on your own, repair jobs for your home or auto, or even medical, investment or any other venture.  Many attempt to go at it alone and many of those succeed.  Most however, end up short changed when compared to the results they would have obtained using the help of a professional who knows their business.

Of course, if you seek professional help, just ask me and you shall receive it.

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  1. Fha Appraisers

    I enjoyed reading your blog. It is so interesting reading other peoples personal take on a subject.

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