Loan Options - Conventional Loan

What is a Conventional Loan?

A conventional loan is basically any kind of lender agreement that's not backed in full by the Veterans Administration or protected by the FHA (the Federal Housing Administration). All told, there are several broad categories of conventional loans. Fixed rate mortgages are simpler in some cases. A home borrower “locks in” at an interest rate, and he or she pays down the principal and interest on the mortgage every month at that rate.

Other so-called conventional loans include conforming loans. Basically, these are arrangements that meet stipulations set forth by Fannie Mae and or Freddie Mac, two very large mortgage trading companies.

While Fannie Mea and Freddie Mac don't actually approve or disapprove of loans, they buy and sell mortgages. Lenders enjoy signing borrowers up with conforming loan, since they can later sell these loans to Fannie Mea or Freddie Mac to get funds for other investments.

Nonconforming loans -- instruments which don't meet Fannie Mae or Freddie Mac qualifications -- are also considered conventional. Another category of loans, jumbo loans, falls outside of Fannie Mae eligibility but is also considered conventional. A jumbo loan is a loan that's too large to be eligible to be traded by the two main loan purchasers.

Current Fannie Mae guidelines for conventional homes put the maximum price for a conventional, conforming loan at just over $415,000 for a single-family arrangement. If you live outside of the 48 contiguous United States (in Guam, Hawaii, or Alaska), you may qualify for a larger loan limit.

What determines the rate for your conforming loan? First and foremost, the kind of loan you want will impact pricing both in the short-term and in the long-term. Lenders will also look at how much funds you have to close, your credit history, and your employment history. Finally, the financial details of your final arrangement will be intimately tied up with the location of your property and the kind of home you purchase or build.

Loan Options - FHA Loans

What is an FHA Loan?

Home ownership rates in America continue to increase at a steady rate due in a large part to the implementation of FHA home loans more than seventy years ago. Over the years, FHA has helped Americans gain the financial independence that comes with owning a home. By creating jobs and reasonable mortgage rates for the middle class, financing military housing, and producing housing for the low income and the elderly, FHA has helped Americans become some of the best housed people in the world with over 73 million Americans currently owning their own homes. Statistics show that by 2005, home ownership rates in the US have climbed to 69 percent.

HOW IT WORKS

By serving as an umbrella under which lenders have the confidence to extend loans to those who may not meet conventional loan requirements, FHA's mortgage insurance allows individuals to qualify who may have been previously denied for a home loan by conventional underwriting guidelines.

FHA loans benefit those who would like to purchase a home but haven't been able to put money away for the purchase, like recent college graduates, newlyweds, or people who are still trying to complete their education. It also allows individuals to qualify for a FHA loan whose credit has been marred by bankruptcy or foreclosure.

NUTS AND BOLTS

The most popular FHA home loan is the 203(b). This fixed-rate loan often works well for first time home buyers because it allows individuals to finance up to 97 percent of their home loan which helps to keep down payments and closing costs at a minimum. The 203(b) home loan is also the only loan in which 100 percent of the closing costs can be a gift from a relative, non-profit, or government agency.

Insurance on FHA mortgages are often rolled into the total monthly payment at 0.5 percent of the total loan amount which is roughly half of the price of mortgage insurance on a conventional loan. After five years or when the loan balance reaches 78 percent, the additional mortgage insurance is typically met and therefore drops off the total monthly payment.

GUIDELINES

It is not necessary to meet a minimum income requirement in order to qualify for a FHA loan but debt ratios specific to the state in which the home will be purchased have been put into place to prevent borrowers from getting into a home they cannot afford. This is done through a close analysis of income and monthly expenses.

Loan Options - Interest Only Loans

Lower Payments ... Greater Purchasing Power ... It is Possible ...

Before we explain interest only financing its important to clarify these loans are not for everyone and with rising interest rates more people have these loans than probably should. The success of benefiting from this type of financing often falls into whether or not the homeowner has enough self discipline to exercise the interest only payment option only when they need to. For homeowners who believe the only way to own a home is by securing an interest only loan than you should probably look at lowering your price range. These loans were originally created for wealthy consumers - not for the average income maker.

Fact: it wasn't until 2002 that interest only loans become readily available in the mortgage industry - even though they have been around for decades.

What is an Interest Only Loan?

Unlike traditional principal and interest home loans these programs provide consumers with an option to enjoy lower "interest only" payments for defined period of the note. These programs have several advantages including Greater Purchasing Power, Payment Flexibility and Reduced Qualifying Income however they also include such disadvantages as Possible Payment Shock, Short Term Security and Larger Down Payment Requirements.

Benefits of Interest Only Financing

Fact: Interest Only Loans are not everybody however these programs do have a place in today's market, offering a number of benefits to the right homeowner

1.) Greater Purchasing Power
Interest only mortgage programs allow a consumer to use a lower qualifying payment on the mortgage application which in turn increases the maximum loan amount a lender is willing to lend.

2.) Payment Flexibility
Even with a prepayment penalty (many of these programs do not have them) it's common for mortgage lenders to allow a homeowner to prepay up to 20% of the loan's principal balance any calendar year. Of course, without a prepayment penalty you can pay more. Many consumers choose interest only loan financing because they are provided the opportunity to pay down the principal on their own time. Self employed, commission-based salespeople and consumers who receive paychecks at irregular times often appreciate this program benefit.

3.) Reduced Qualifying Income
Most lenders state that if a consumer is applying for an adjustable rate mortgage where the initial interest rate is fixed for a period of three (3) or more years than the borrower can qualify on the initial payment. If you choose an interest only loan with such terms then your lender qualifies your application on the lower payment. This varies from lender to lender so check before you apply.

4.) Choice between Fixed & Adjustable Rates
Interest only loans now make up a very large portion of mortgage loans so lenders continue to roll out new programs. With the increased popularity has also come many options including fixed rates for the entire term of the loan.

Loan Options - Adjustable Rate Loans

An adjustable rate mortgage (ARM) is a home loan program with an interest rate that adjusts periodically to reflect changes in a specified financial index. Such an index could be the one-year Treasury, the Cost of Funds Index (COFI), the LIBOR (London Interbank Offered Rate) or other popular indexes. ARMs may adjust every six months or once a year and most ARM programs include caps that protect your monthly payment from increasing too much, as well as a lifetime cap, a rate that your ARM will never exceed over the life of the loan.

Advantages

Adjustable rate mortgages (ARMs) generally have the lowest initial interest rates meaning a lower monthly payment. This initial rate is fixed for a defined period of time and usually corresponds to the name of the product. For example, a "5 Year ARM" would mean the initial rate is fixed for the first five years.
The most popular advantage behind ARM loans is the borrower tends to qualify for a larger loan amount than they would applying for a traditional 30 year fixed rate. ARMs are generally recommended for homeowners who plan to keep the loan for a short time and are confident their income will remain the same or grow during the life of the loan.

Dis-Advantages

The traditional ARM mortgage (one that does not include minimum payments or negative amortization) carries very little unknown risk at the time of origination.
The biggest risk for any homeowner is simply assessing the amount of savings over a fixed rate and understanding your comfort level with possibly being exposed to much higher interest rates should you be forced to keep the property longer than expected. Remember, it's not just a matter of where rates are in 5 or 10 years - it's also a question of whether you not will still be eligible for the same type of mortgage.

Loan Options - Fixed Rate Loans

Is a Fixed Rate Mortgage Always Your Best Choice?
It's well known that the Fixed Rate mortgage is still the the most popular home loan originated in today’s market and with very good reason. This type of mortgage loan provides a consumer with a guarantee of a fixed rate and a consistent monthly payment for the entire term of the loan. (common terms are 15 and 30 years with many lenders also offering terms up to 40 years). However, should you consider other loan options? Scroll below to read more about fixed rate home loans.

Advantages

Fixed rate mortgages provide a number of tangible benefits over adjustable rate and hybrid home loan options. These advantages include:
Long Term Interest Rate Security
Consistent Monthly Payments
Automatic Principal Reduction
Flexible Down Payment Requirements

Disadvantages

Many home loan professionals believe there are no disadvantages with a fixed rate mortgage however by simply comparing programs to programs one extremely important variable is not factored in - the Homeowner.
Because of this variable it can also be argued that fixed rates do not provide the greatest advantage for some homeowners. Remember, this is a false statement for the majority of homeowners however there are still a quite a few people who have:

Great Self Discipline
Opportunity and Affordability to Assume Risk
A Stable Income Environment
Short Term Homeowners with Realistic Timeframes

(Part 2) Six Signs That Could Mean Expensive Trouble…

All of these things can indicate moisture – any sort of water leak. Depending on how big and how long the leak has been there, the damage can be as little as discoloration or as much as rotten framing timber.

The sixth sign is in the bathroom.
Take the time to flush each toilet and run water in each sink. If the water pressure is overly high or overly low, there’s rusting, or poor drainage, there could be a problem with aging pipes or sewerage.

These six things are easy to spot, but a professional home inspector can tell you the real underlying problems and estimate the cost of repairs.

Four Things You Can Do To Qualify For a Bigger Mortgage

Say you started the home buying process backwards and started LOOKING at homes before you pre-qualified yourself for a loan. Now you’ve found that none of the homes in your price range will measure up. What do you do? Short of robbing a bank, there are four things you can do to qualify for a bigger mortgage.

1. Reduce long-term debt.

The first thing that Lenders look at is your income-to-expense ratio. They compare how much money you have coming in against how much money you have going out every month. We all know that a dollar will only go so far – and Lenders know this particularly well. So, if you can pay off car loans, credit cards, or any other obligations against your income, you’ll have more money to spend on a loan – and a Lender will let you borrow more money.

2. Wait until you get more income.

Another way to look at the income-expense ratio is from the income side. If you have more money coming in, you can borrow more money. If you’re expecting a raise within the next year, maybe you should wait until that comes through, before asking to borrow money for a new home.

3. Add someone else to the loan.

Another way to demonstrate to a Lender that he will be repaid is by having someone (with a good income and stable job) co-sign on the loan.

This way, the Lender is looking at MORE income available to repay the loan. Family members Bank of Dad) are the typical source of someone willing to co-sign.

4. Use financing that requires lower down payments.

The basic idea is this…the more money you have available to spend, the more money that a Lender will let you borrow. You’re trading off having the money available NOW or later. If you put a large down payment on a home now, that means you may have less income available to repay a loan later.

By the same token, if you make a smaller down payment, then you’ll have more money available to repay a loan – and the Lender is likely to let you borrow more.

Six Signs That Could Mean Expensive (Hidden) Trouble…

Cracks, bulges, stains, odors, squeaks, and tilting are easy to spot and can mean a little or a lot of trouble in any home.

The first sign of trouble that you should look for is in the foundation. You can do this by looking around the outside of the home. If you can see cracks, bulges, mold, wood rot, or listing there may be severe problems with the foundation. Bearing in mind that all concrete and asphalt will crack as it settles, hairline cracks will be acceptable; anything larger is not. These things could mean a large foundation settlement because of soil instability, or that the builder didn’t use steel reinforcements, indicating potentially slipshod work throughout the home.

You’ll have to look high to see the second sign. Are shingles rough, broken, curled, bubbled, warped, or split? Are there rotted eaves, fascia, soffits?Make sure to look for old, faulty gutters that can hide these problems. These things could indicate a leaky roof, or one that will need to be replaced in short order.

The third sign of trouble hits you when you walk in the door. How does it smell? If it smells like Fluffy or last night’s dinner – that can be fixed by carpet cleaning, and a little time and fresh air. A moldy smell could suggest mold in the ductwork, which would require a complete replacement to remove.

You’ll feel the fourth sign of trouble as you walk around inside the house.
Are you walking on a slant? Do the floors squeak when you step down? Can you feel or see lumps, breaks, or cracks? As you look at the joining of the floors and walls, is there a separation?

These things can indicate a problem with the sub-flooring or an underlying moisture condition – either a leak or a moisture problem beneath the floors.

Look to the walls and ceilings for the fifth sign of trouble. Walls that are cracked can indicate a problem with the foundation – particularly around doors, windows, and ceilings. The cracking, peeling, and bubbling of paint can indicate mold or moisture in the walls or above the ceiling. Is there a round-shaped discoloration? Is there any bubbling, cracking, or bowing in the sheetrock or paint?

(Part 2) Eight Steps To Follow When Buying A Home!

6. Open an escrow account.

Once you and the seller have agreed on a price through your consultant, you’ll open an escrow account. What this does is put a “good faith deposit” in a third party’s hands, to demonstrate that you’re serious about buying this home. Many buyers offer five to 10% of the selling price of the home.

7. Have an inspection.

The home inspection is to protect you from buying a home that may have serious hidden structural problems or defects.

8. Sign the final documents, get the key and move into your new home.

Finally! The home has been inspected, you’ve cleared the title to the property, and you’ve “closed” on the deal. All you have to do now is move in. Don’t forget to put out the welcome mat!

Here’s Why You Shouldn’t Buy A Car Right Before You Buy A House...

When an individual’s income starts growing and they manage to set aside some savings, they commonly experience what may be considered an innate instinct of modern civilized mankind.

The desire to spend money.

Since North Americans have a special love affair with the automobile, this becomes a high-priority item on the shopping list. Later, other things will be added and one of those will probably be a house. However, by the time home ownership has become more than a distant and hopeful dream, you may have already bought the car.

It happens all the time, sometimes just before you contact a Lender to get pre-qualified for a mortgage.

As part of the interview, you may tell the loan officer your price target. He will ask about your income, your savings and your debts, then give you his opinion. “If only you didn’t have this car payment,” he might begin, “you would certainly qualify for a home loan to buy that house.”
You see, when determining your ability to qualify for a mortgage, a Lender looks at what’s called your “debt-to-income” ratio.

What are debt-to-income ratios?

A debt-to-income ratio is the percentage of your gross monthly income (before taxes) that you spend on debt. This will include your monthly housing costs – including principal, interest, taxes, insurance, and homeowner’s association fees, if any. It will also include your monthly consumer debt, including credit cards, student loans, installment debt, and….
CAR PAYMENTS!

How a New Car Payment Reduces Your Purchase Price

Suppose you earn $5,000 a month and you have a car payment of $400. At current interest rates (approximately 8% on a 30-year fixed-rate loan), you would qualify for approximately $55,000 less than if you did not have the car payment. Even if you feel you can afford the car payment, mortgage companies approve your mortgage based on their guidelines, not yours.

If you haven’t already bought a car, remember one thing: Think ahead. Think about buying a home first. Buying a home is a much more important purchase when considering your future financial well-being.

Eight Steps To Follow When Buying A Home

1. Decide to buy a home.

That sounds reasonable, doesn’t it? Yet, so many of us are really “just looking” rather than seriously considering changing the location of our home. Why is it that you want to find a new home? Has your lifestyle changed enough to warrant this type of investment? Until you identify your NEEDS and your WANTS, you’ll find it very hard to find just the right home for you.

2. Find a great real estate consultant.

Once you’ve decided to buy a home, find a great real estate consultant. What you’re looking for is a Buyer’s Agent. This means that the consultant represents YOU as the buyer, rather than the person selling the home. They will have YOUR best interests at heart.
Really good consultants know their markets, and will help you find the best match for your needs and wants. They can also recommend mortgage brokers with whom they’ve worked in the past. Check Out Our Web Page (http://www.reelestate.com/) For More Info About The Reel Team

3. Secure financing.

If possible, get “pre-approved” for a loan in the amount you’re willing to borrow. With this pre-approval, you’re in a stronger position to buy a home when you’re ready – rather than finding your dream home, only to lose it to another buyer, because you were waiting on the approval.

4. Find your dream home.

Now that you have your “wish list,” your consultant, and your “pre-approval” in hand, go forth and find yourself a home.

As you go through homes, make sure to keep the listing notes of your impressions of the house, and a photo (if possible) in a notebook, so you can remember all the homes you’ve seen.

5. Make a written offer and negotiate the price.

Once you find your home, work through your consultant to make an offer. Typically your first offer is going to be lower than the listing price. Listen to your consultant; they’re representing you and know what homes have sold for in that neighborhood. Rarely will the seller accept this first offer, so they’ll counter with another price. Back and forth you’ll go until you settle on a price. (This is where the consultant is really using their expertise).

(Part 2) How Do Sellers Price Their Homes And How Much Should I Offer?

4. Priced Below Fair Market Value…

These homes are priced below value. Perhaps the seller wants a fast sale.

Perhaps the real estate consultant recommended too low a price.

These homes usually sell within seven to 10 days, at or above the listed price.

There usually are competing offers in this situation, and you may need to make your first offer your best offer.

Here’s A Quick Way To Figure Out – How Much House Can You Afford?

The stock answer given to this question is – if you rent and have cash for a down payment, you can purchase a home. But what if you don’t rent? Then, here’s the simplified version of what a mortgage broker would do with you.

Step One: Annual salary ÷ 12

What is your gross monthly income from all sources? If your annual salary is $75,000, divide this by 12 and you’ll see that your monthly income is $6,250.

Step Two: Monthly salary x percent you want to spend

Brokers and financial planners will recommend that you spend anywhere between 25% and 36% of your monthly income on household expenses. We’re going to use 36%.

$6,250 x .36 = $2,250

Step Three: Calculate your debt

Add up your current monthly debt. This includes things like a car loan, insurance, school loans, credit cards, and any other personal debt you may have. All of this added together gives you your total debt. Just a guess, but let’s say that these add up to $750 a month.

Step Four: Amount you want to spend – total debt

Now, take that total debt and subtract it from the amount that you were willing to spend per month to get your maximum monthly payment: $2,250 – $750 = $1,500

Step Five: Monthly payment x12

Multiply that house payment by 12 months, and you have $18,000 to spend each year.

Step Six: Annual payment ÷ interest rate

Divide this annual amount by the current interest rate (I’m using 10%, because it’s a nice, round number, and a good average). So, $18,000 ÷ .10 leaves you with $180,000 available for a mortgage!

Step 7: Mortgage + down payment

Now, take the amount you’ve calculated that you can afford to pay for a mortgage, add the amount of cash you have on hand to make a down payment, and you get your purchase price!

So, using the current example: The mortgage was $180,000 plus you have $20,000 on hand for a down payment, then you can afford to purchase a home for $200,000.

How Do Sellers Price Their Homes And How Much Should I Offer?

We're often asked by our clients, “How much under the listing price should we offer?” This is an excellent question. The answer is difficult. There are four basic ways that sellers price their homes.

1. Ridiculously Overpriced!
These sellers have listened to a real estate consultant over-inflate the value of their home in an effort to obtain the listing. There’s a natural tendency on the part of sellers to list with the real estate consultant who gives them the highest promise. Some real estate agents give the seller a high “value” in an effort to obtain the listing.

These homes can be 10 to 20% overpriced. These sellers may need a “dose of reality” for a few months before they begin to realize that their home is way overpriced as compared to others in the area.

The longer an overpriced home is for sale, the more likely we can get the seller to face reality and sell at a fair price.

2. A Little Overpriced…

Perhaps 75% of all homes for sale are priced in this range.
These sellers fall into two categories:

• Those who feel their home is worth every penny of their asking price.
• Those who want to leave a little “negotiating” room. These homes can be four to 10% overpriced.
  

3. Priced At Fair Market Value…

These sellers have carefully and realistically studied other homes for sale. They’ve priced their homes very competitively. These homes usually sell within four weeks at or very near the listed price.

In an active market, timing is everything.

In the good old days, you might have the luxury of viewing a home several times – even dragging your relatives to see it – before you actually made an offer.

“He/she who hesitates is lost” aptly explains buyers who dally when making a buying decision today.