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This section will go over different mortgage loan
categories, actual loan programs, property classifications for loans,
residency types and income proof types, and try to help you understand
some of the differences. This section is just intended to give you
an overview. You should not make your loan decision without talking
to a loan officer. These brief explanations on this website do not
cover every requirement or detail involved to get a loan. All loans
must be approved by underwriting as per program guidelines &
policies. There is no way to replace an experienced
loan officer helping you through all of this and making the
right decision. I can explain the pros & cons of these loan
options better than any website and show you actual examples that
apply to your situation. You can see exact rates and terms on multiple
loan options and watch your approval run live in my office with most loans
- Conforming
- Jumbo
- Portfolio
- FHA
- Veterans Administration Loans (VA)
Conforming loans are the most common mortgage loans and are known
by many names. Some call them "A" Paper, Conventional,
Agency, bank loans and more. These are your standard loans. Conforming
loans have the lowest interest rates, lowest costs and best terms
of any loan category. Most 30 year fixed, 3/1 ARM or 5/1 ARM are
of this type. They are called "Conforming" because they
conform to the guidelines set by FannieMae (FNMA) and FreddieMac (FHLMC) who
control the mortgage industry in the United States. One of the
more well-known guidelines is the conforming loan limit they set
which is at $417,000 as of December 2009, but they have guidelines
for how income is calculated, credit scores, property, debt ratios
and more. Most lenders and all banks follow these guidelines and
run their automated underwriting system
for loan approvals. Usually you need good credit (650+, 680 &
up is common) and normal income proof (Paystubs, W2s, 1040s) to
get these loans, though there are exceptions that an experienced
loan officer can get sometimes.
A Jumbo loan is any loan over $417,000. Most every option for
conforming loans is available on Jumbo loans. The underwriting
or approval process is a little more strict and usually you will
pay 1.0%+ higher rates than conforming rates depending
on the lender. Jumbo loans typically have lower loan to value
(LTV) limits and they change depending on the loan amount. You
may be able to put 5% down conforming to any loan amount up to
$417,000 but you cannot get one Jumbo loan with 5% down at $700,000. Conforming
may let you get cash out on a refinance to 90% of value, but
most Jumbos will not, and charge a higher rate for it, if they
do. It's even more important to use an experienced loan officer
when doing a Jumbo loan as there are many ways for a newer loan
officer (less than 5 years in the business is "newer")
to make mistakes.
A "Portfolio" loan just means a lender is going to use their own internal guidelines and decisions to make a loan they keep forever, rather than doing a loan to meet Conforming guidelines that make it "salable". These are usually smaller lenders like local banks, credit unions or private investor groups, that will do a "Make Sense" loan to good credit borrowers. The interest rates and terms are competitive, this is not "Sub-Prime" lending at very high rates, but not as low as conforming loans either. I use Portfolio lenders when you have great credit, but have a special or unique circumstance that will not go conventionally. Knowing not only who to call, but what they look for, is important in shopping for these loans. I have done many unique properties that were turned down by 3-4 other mortgage lenders and the buyers or Realtors almost gave up hope of closing the sale. I've been told "It can't be done" and have done it. These loans may take some patience as they take a few weeks to get preapprovals many times, as opposed to instant online AUS approvals I usually do on conventional loans. I do shop your scenario with my Portfolio lenders within a few days of getting your application package and get a preliminary idea if they have interest in your loan with a rough idea of the terms, interest rates and costs of the loan. This is lending like 1980 and requires overall skills in underwriting, common sense, the three "C's" (Collateral, Credit & Capacity) and relationships to be successful. You need to be flexible as these lenders are doing things most others won't do.
To get a VA loan, you need to be a current or past veteran that
is eligible for VA home loan benefits. many veterans use VA loans
to buy their first home with no money down and no money out of
pocket. They are great loans in this circumstance. These loans
are highly regulated and must conform to VA guidelines. There
are special requirements on the appraisal, loan programs, loan
fees, sellers and mortgage lender to protect the Veteran. We can
show you the comparison of VA to Conforming loans so you can make
an informed decision. You can also go to the VA website which
we link to at Area Links.
FHA loan's guidelines are administered by HUD. Many of our lenders
do FHA loans. You can buy a house with as little as 3.5% down.
You can refinance up to 95% LTV and get cash from your equity.
FHA is also very lenient on credit scores as long as there are
no lates in the last 12 months and do loans down to 620 scores
commonly. There are no special income or area limitations on most
FHA loans. FHA insures the lender that does your loan against
losses if foreclosure were to happen (like PMI) and the borrower
pays the two insurance premiums in the financing that go to HUD.
One in the monthly payment as in PMI and two, they add an upfront
fee of 1.75% of the loan amount, which FHA will finance above
the loan amount. FHA loans require a little more time to close
as there are more rules and paperwork to follow than conforming
loans. 45-60 days is common. While FHA loans have not been as
popular the last 10 years as they used to be (many of your parents
bought their first home FHA), they have gained market share as
conforming 100% first Time buyer loans & most Sub-Prime loans
have gone away. If you have credit scores under 700, FHA can have
lower rates than conforming sometimes and you should compare both
side by side. There are currently a lot of changes happening in
FHA loans and you should call me to get the most current information.
- 30 Year Fixed (and 15 year, 10, 20 or 25 year fixed too)
- 3/1 ARM, 5/1 ARM, 7/1 ARM & more ARMs
- Interest Only or Interest First
- 100%
- 1st and 2nd Combo Loans: 80/15/5, 80/10/10, etc.
- Lender Paid Mortgage Insurance (LPMI)
- Construction
- HELOCS or 2nds
The 30 year fixed is the industry standard and the most common
loan taken by far. The principle and interest portion of the housing
payment does not change for the entire period of the loan, hence
"Fixed". People like these as it is the safest &
most conservative loan to take usually. You can get them from
almost any type of lender. Many people are aware of the 15 year
fixed option too, but do not realize you can also get any 5 year
increment you want usually. We have done many 25 year fixed and
even a few 10 year fixed loans. You get an even faster pay off
for a small monthly payment increase on a 25 year fixed over the
30 year fixed. The rates are the same usually for the 20, 25 &
30 year loans and the same rates for the 5, 10 & 15 year loans.
Be careful when you are quoted a "30 year" loan that
it is really a 30 year fixed, no balloon payments, no adjustments
ever. Watch for pre-payment penalties. Some loan officers will
quote a rate that seems "too good to be true" (it is)
and it adjusts after 3, 5, 7 or 10 years or has penalties or balloons.
They will even put it in writing on a GFE but will never deliver
at close. Be careful and deal with reputable loan officers. See
more about this on our Rates & Costs page.
People usually take these loans because they think they will
be selling or refinancing before the loan turns into it's adjustable
period. They get lower start rates, so they have lower payments
than 30 year fixed loans. These are 30 year loans that have a
short fixed rate period and an adjustable rate period for the
remainder of the 30 years. The 3/1 ARM is fixed for 3 years, the
5/1 ARM is fixed for 5 years and so on. ARMs have margin, index,
fully indexed rate, initial/period/lifetime caps, adjustment periods.
You need a loan officer who understands these relationships and
can explain them to you. If they cannot, find a different loan
officer. When you choose an ARM loan with a lower initial payment
than a 30 year fixed, you are taking a higher risk loan. You are
trading off the lower payment now, for a much higher payment later.
There can be payment shock with a substantially higher payment
when the loan adjusts. It's safe to say, the best start rate on
a 3/1 or 5/1 ARM is not always the best deal or loan for you.
A 3/1 ARM runs about 1.0% - 1.25% lower rate at start than a 30
year fixed and a 5/1 runs about .75% - 1.0% lower. Be careful
not to confuse a 5/1 with a 5/25. Some loan officers will try
to confuse you as 5/25s usually have lower rates than 5/1s. A
5/1 ARM is a true 30 year loan. A 5/25 is a 5 year loan with a
balloon payment due at the end of 5 years that may be able to
be "extended" for an additional 25 years (30 total)
if you meet numerous "conditions". The terms on the
loan for the extensions are usually pretty vague.
The payment is lower by the principle amount normally paid on
a conventional loan payment of principle and interest. These loans
are getting more popular lately. They are not really loans but
instead a variation of a loan. You can get Interest Only on 30
year fixed, 3/1 ARM, 5/1 ARM and more loans. The Interest Only
period is a fixed term, usually 36, 60 or 120 months. Then the
loan has to increase the payments to pay off by the end of the
30 year term. The problem is, now the principle has to be paid
off in the remaining 324, 300 or 240 months instead of 360 months
at the start of a 30 year loan. This increase in monthly house
payment can sometimes be severe. You can pay extra principle on
the loan each month if you wish to during the Interest Only period.
When you chose an Interest Only loan, it is so you could have
a lower payment initially realizing your payment will increase
substantially when the loan starts to amortize. You have to pay
a higher interest rate and/or costs than if you had taken a conventional
loan with principal and interest payments. You can have severe
payment shock when the payment increases at amortization. As an
example, on a $300,000 30 year fixed loan at 6.25% with the first
ten years Interest Only, your initial payment would be $1562.50
interest only. But after 10 years paying the minimum payment,
the payment would increase to $2192.78 to amortize the loan over
the remaining 20 years. This is a risky loan option and should
be considered very carefully.
People used to do these to avoid mortgage insurance (MI) with
less than 20% down. You would put 5% down cash, get a 1st mortgage
for 80% of the price and the 2nd mortgage for 15%, hence "80/15/5"
or 10% down and a 10% 2nd for a 80/10/10. These higher LTC/CLTV
2nds are much more difficult to get these days and may not be
available at all. MI is the normal today. Usually lower LTV/CLTV
like under 80% or 85% overall will work well for someone that
needs to borrow a Jumbo loan (over $417,000) but is close to under
that. They can take two loans, one Conforming at the $417,000
limit and the 2nd to cover the difference to avoid having to pay
Jumbo rates. I have saved some customers a lot of money this way.
These loans have been around a few years but are much harder
to get these days. Normal MI is the standard today. They simple
raise the rate slightly and you do not have to pay mortgage insurance
with less than 20% down. At 5% down it's about .375% higher rate,
at 10% & 15% down it's about .25% higher rate. These are standard
Conforming loans in all other aspects. The approval standards
are slightly more strict, but not that much different. People
take this option because the payments are lower than a normal
loan with MI, they don't have to take two loans like a 80/15/5,
and the extra interest is tax deductible where MI is not.
Please go to the Construction Loans
page for much more detailed information on these loans. Construction
loans are available to build a stick built standard construction
home, log home or to do a major remodel on an existing house.
We have lot loans, One Time Close (OTC) and more. Our major remodel
loans can be done as part of a purchase transaction so you can
buy a house and add a bedroom or bath, or just remodel the kitchen,
all in one loan with as little as 10% down. We have four excellent
sources for Construction loans and are experts in this area. Some
builders (especially when building 100+ homes in a sub-division)
use their own funds to construct the house and just need you to
finance the loan at the end of construction. This is a "Take-Out"
mortgage loan and we can lock these rates for up to 270 days and
if the rates are lower at closing months later, give you the float
down to the current rate. Every Construction loan is unique so
call us to go over your situation and goals.
2nd mortgages can be a fixed rate, normally 2.5% higher than
30 year fixed rate mortgages, or Adjustable Rate Mortgage (ARM).
Most 2nd ARMs you see are tied to Prime (index) rate and you pay
so much "over Prime" which is the margin. "Prime
+ 1" would mean your rate will be 1% (margin) over Prime
(index), whatever Prime is at that time. A 2nd ARM is usually
a Home Equity Line Of Credit (HELOC). This means to can pay down
the principle and then later borrow the money again you paid down
principle. They have periods you can draw the funds again (Draw
period) and periods you cannot (Repayment periods). Most HELOCs
have interest only payments during the draw period. These loans
can be very complicated even though they seem simple. A HELOC
is like having a BIG Visa card on your home's equity. They can
be very nasty if mishandled. Prime rate is very volatile and most
of these do not cap until well over 20%. They can be a good tool
in your financial belt if you understand them and handle them
responsibly. Give us a call to see what option is best for you.
Up to $500,000 HELOCs available and we do $100,000+ ones frequently.
- Single Family Residence (SFR)
- Duplex, Triplex & Fourplex
- Condo
- PUD or Townhome
- Manufactured Home
- Log or Modular Homes
One living unit on one tax lot. Metro rules usually allow a
"Mother-In-Law" apartment under this classification.
They are usually not attached to other living units. They are
standard construction or "stick built" (not a manufactured
or log home) unless otherwise stated.
A duplex is two living units on one tax lot. They can be attached
to or detached from each other. There is no such thing as two
SFRs on one tax lot. This would be a duplex by definition. Triplex
is three living units and Fourplex is four living units on one
tax lot.
These can be attached or detached multiple living units, where
the land & buildings are owned by the group in whole. You
will hear statements such as "You only own inside the walls."
There are very special guidelines required by lenders on Condos
because of this joint ownership of the buildings and land. This
is called "agency" or "non-agency" approvable.
The lender must accept the Homeowners Association (HOA) and its
financials as well as approve you for the loan. There are requirements
for small downpayments on Condos as to how many of the units can
be occupied by renters and how many one person can own. Is it
a true Condo or an old apartment building converted? There is
a type of Condo where there is an onsite rental office, manager,
maid service and other amenities designed to rent out the condo
when not occupied, like a hotel or motel. These are popular at
the coast or near ski areas. This type of condo has special financing
requirements. Be sure you
use a loan officer familiar with Condos
when you purchase or refinance one.
A PUD is a Planned Urban Development. They can be SFRs, attached
or detached. Many times they may appear to be really nice attached
"condos" with attached garages (frequently agents will
refer to some condos as "townhomes" inaccurately). The
difference between a condo and a PUD (or townhome) is that you
actually own the small piece of land it sits on yourself, not
the group. Lenders only recognize the term PUD, not Townhome.
Loaning on a PUD is identical to a SFR.
These are completed factory built homes that are delivered to
a site for final assembly of large sections. There are very restrictive
lending guidelines on these. We can do loans with manufactured
homes on land (not in a park) that are doublewide or larger, and
newer than July 1976 usually. Rates are slightly higher and some
of the LTV limits are reduced for different programs. Getting
an expert loan officer is critical for these.
These are factory built homes that are delivered to a site in
pieces and have to be completely assembled. When you are buying
the land and installing one of these new, it is treated as a Construction
loan and we can do these. Refinances or purchases of existing
structures are treated like any other SFR loan except the appraisal
is critical. Our appraisers do an excellent job on these.
- Owner Occupied
- Vacation or 2nd Home
- Rental or Investment Property
As it says, the owner applicant will occupy the home and it
will be their primary residence. This is how you get the best
rates and highest LTV on any loan category. Never buy a home using
an owner occupied loan unless you intend to occupy the house as
your primary residence. It is a Federal offense and loan fraud
to do so. You are allowed to buy a home with an owner occupied
loan you intend to live in, live in it a few years, then change
your plans and make it a rental.
This is also owner occupied, but not full time. It is not your
primary residence but your secondary residence, hence "2nd
Home". Loan rates and terms are almost identical to owner
occupied. Lenders will only approve this status if it is reasonable.
A house at the beach or in the mountains will usually qualify,
but a second house down the street from your current residence
will not. You cannot rent out or collect rent on a 2nd home. There
are exceptions where you can buy a 2nd home locally for a disabled
child or parent that cannot make payments themselves.
These are homes that are bought to rent out to tenants. You
will pay about .5% higher rates than Conforming if you put 20-25%
down and about .75% higher if you only put 10% down. There are
lenders that will do 5% down at higher rates with MI and also
80/10/10 or 80/15/5 loans to avoid MI again at higher rates. You
can get 30 year fixed, 3/1 ARM, 5/1 ARM, 7/1 ARM and Interest
Only on any of them, for Investment Property loans. See Purchasing
for more on buying a rental.
- Full Document
- Alternative or Reduced Documentation
These are the standard loans where you provide income proof
as required by guidelines. Usually paystubs and the last year's
W2s for employed people, Federal Tax Returns for self-employed.
You can also have direct deposited Social Security, pensions,
VA, child support or other or other verifiable sources of income
for these loans. Underwriters expect the income to reasonably
have a chance to continue for at least three years to be used
to qualify you. Most Conforming & Jumbo loans are in this
category. The best interest rates always require full document
income proof.
Normal Full Documents would entail:
- Income
- Two current paystubs each person employed
- 07 & 08 W2s
- If any self employed income/loss, or you are on commission,
or you have other schedules on your tax returns, in addition
need:
- 06 & 07 or 07 & 08 (if 2008’s are done)
Fed 1040s with schedules (don’t need state return
or any “statements” pages, just Fed)
- Assets
- One month’s (most recent you have) statement, or last
quarterly all pages please, (not just cover/balance page or
internet printout of activity. Internet printout of “Statement”
is okay):
- Any Checking, Savings, Investment or Retirement
This type of income documentation is not available any longer
at normal lending sources.
If you are considering any type of income documentation other
than Full Documented, be very careful how you do it. If a loan
officer suggests you lie or inflate your income to qualify for
a home loan, you want to go elsewhere for your loan. It is fraud
to use the “family” or “household” income
as an individual’s income unless that individual makes all
the household income. If something doesn’t make sense to
you, don’t do it. You are signing the application and are
liable for the contents regardless of what some loan officer tells
you to do.
Most borrowers are able to readily document income/assets using
recent W2(s), paystubs, tax returns or asset statements. If you
choose to use an alternative or reduced documentation, you will
have to pay a higher interest rate and/or costs than if you had
documented your income/assets in the conventional format. If you
inflate your income by stating more than you actually make, you
may not be able to afford the house payment, the lender may find
out later you inflated your income resulting in them requiring
the mortgage be paid off immediately and the IRS may subpoena
your mortgage loan application to review your stated income, among
other negative things. You may be required to sign IRS Form 4506-T
which will authorize your lender to request a copy of your tax
returns for quality control purposes or to verify the income figures
that you provided on your application. When you choose a mortgage
that does not require any disclosure of income you could get approved
for a mortgage you can not afford. With alternative or reduced
documentation mortgages, your risk is higher than conventional
mortgages, that you could lose your home to foreclosure and destroy
your credit rating.
We at Northwest Mortgage Group, LLC want to be sure you understand
some of the negative factors of the loan products you may chose.
For years customers have taken out 30 year fixed rate mortgages
and adjustable rate mortgages (ARM) that some call “Conventional”,
“Conforming” or “Traditional”. To help
more customers, lenders came out with mortgage products that among
other things, allow customers to defer payments of principal and,
sometimes interest which allows customers to exchange lower payments
during an initial period for higher payments during a later amortization
period. Some of these loan products have been available for 20+
years and have helped many customers. These products are called
by some “Non-Traditional”, “Alternative”,
“Exotic” or other names. It is important for you to
fully understand the Mortgage Product you have chosen, whether
“Traditional” or “Non-Traditional”. Be
sure you read and understand; HUD booklet
“Settlement Costs”, “Consumer Handbook on ARM
Mortgages” (if ARM), ARM Disclosures provided at application
or later during the process, and your loan documents at closing.
If you have questions, please ask your loan officer or your attorney
for help understanding the Mortgage Product you chose.
Some of the factors of Non-Traditional Mortgage Products are:
- Alternative or Reduced Documentation
- Interest Only
- Option ARM with Negative Amortization
- Pre-Payment Penalty
- 100% Financing: 100% One Loan, 1st & 2nd Combos, 80/20,
75/25, etc.
Combining two or more factors SUBSTANTIALLY increases your risks
of losing your home to foreclosure and destroying your credit
rating. As you combine more factors, the risks not only increase
more, but accelerate in intensity. As with any mortgage, and especially
combining factors, you need to be sure you have contingency plans
to be able to pay your payments to protect your home from foreclosure
and credit rating.
“
Shopping for Your Home Loan, HUD’s Settlement Costs Booklet”
(4.03MB)
“Consumer Handbook
on Adjustable Rate Mortgages” (4.9MB)
“Interest-Only Mortgage
Payments and Payment-Option ARMs – Are They for You?”
(2.8MB)
“When Your Home is
On the Line” (203KB)
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