Fixed-rate fully amortizing loans are the most popular type of mortgage loan, as they offer a monthly payment that does not change over time, and result in a portion of the loan’s principal being paid down every month. Many borrowers find fixed-rate home loans to be the best mortgage for their needs. Nearly all mortgage lenders including mortgage bankers and mortgage brokers, offer fixed-rate mortgages in all of their Conventional, FHA, VA and Jumbo loan products. Most fixed-rate mortgages are for loan terms of 15 or 30-years. A 30-year amortizing loan typically has lower payments than a 15-year loan, but a slightly higher interest rate than a 15-year loan. To pay off a fixed-rate loan sooner, check with your servicing lender to ensure these extra principal payments are accounted for in the correct manner so they get recorded correctly to your account. Most monthly mortgage statements have a box for you to enter the amount of extra principal you are making. In most circumstances, you should be permitted to make these additional principal payments anytime and for any amount, and without penalty.
Fixed Rate Loans
An adjustable-rate mortgage has a short-term fixed-rate term during which an interest rate is fixed. After this initial term, the interest rate on an adjustable-rate mortgage or “ARM” loan can change periodically at certain intervals. This adjustment permits the lender to adjust the interest rate to match changing interest rate environments. For example, a 3/1 ARM loan offers a fixed-rate for the first three years, adjusting once a year thereafter. A 5/1 ARM loan offers a fixed-rate for the first five years, adjusting yearly thereafter. At each adjustment the lender sets the interest rate by adding a margin or spread to the then current index rate.
Common Indexes Used in Adjustable-Rate Loans
The 11th District Cost of Funds Index: The Eleventh District of the Federal Home Loan Bank Board, which covers California, Nevada and Arizona, publishes a Cost of Funds Index. For more information on the index, visit the Web site of the Federal Home Loan Bank of San Francisco. The Treasury Bill Index: The yield on the 1-year T-bill, adjusted for a constant-maturity security, is widely used. Most ARM loans have a periodic rate cap and lifetime cap to limit the amount the interest rate can increase each adjustment period and over the term of the loan, respectively. Libor-based indexes: Libor, or the London Interbank Offered Rate index, is frequently used by lenders as many international investors in Mortgage-Backed Securities prefer this index. There are 1- month, 6- month, and 1- year Libor indexes used in many Conventional, FHA, VA and Jumbo loans.
What is Negative Amortization?
While many adjustable-rate loans have periodic caps that limit the extent to which an interest rate can rise or fall during an given period of time, some adjustable-rate loans have a payment cap which limits how high the actual mortgage payment can rise in dollars, as opposed to limiting interest rate changes. Unfortunately, in many cases, while the actual mortgage payment in dollars may seem attractive to your monthly budget, that “capped” mortgage payment may not cover the actual interest owed during a given payment period, and you may face negative amortization of your loan. Negative amortization has the effect of increasing the amount you owe on your loan every month, as opposed to paying down your loan every month, with a normal fully amortizing loan.
- Minimum Down Payment: 3.50% which can come from Immediate Family, Labor Union, Employer Group, Non Profit 501C3 and other approved sources
- Up Front MI of: 1.75%, added to Loan
- Monthly MI of: 1.25%
- Maximum Loan Amount SFR: Loan amounts are set by counties. In many northern California counties, the limit is $580,000. Loan amounts above $417,000 have additional costs and or rate increases. In the San Francisco Bay Area, FHA loan limits are as high as $729,750.
- Maximum Seller Concession: 6%
- No minimum FICO requirements but most investors are holding to their own established minimum credit score corporate overlays
- Declining market is not observed by FHA
- Refinancing is allowed, at high loan to value ratios
- Both Fixed-Rate and Adjustable-Rate loans permitted
- Roof & Pest inspections not mandatory unless noted by appraiser or called for in contract
- No Income Limits
- Do not have to be a first-time buyer
- Must be owner occupied
- No requirement for reserves
- Borrower can now pay previously non-allowable fees “processing, doc prep, underwriting, lender fees” *Except Tax Service fee
- Non-traditional credit “telephone, PG&E, etc” allowed if there is no FICO available. Rates and fees are adjusted higher for these loans.
- Non-Occupying co-borrowers allowed
- Can utilize other state, county and city programs, and Energy Efficient Mortgage options
- FHA requires 90 days from date of trustee sale before purchase contract can be written unless REO is a federally chartered bank
- FHA Loans are Assumable
FHA 203(k) Streamlined
FHA’s Streamlined 203(k) program permits homebuyers to finance up to an additional $35,000 of home improvements into their mortgage to renovate, improve or upgrade their home before move-in. With this new product, homebuyers can quickly and easily finance property repairs or improvements, such as those identified by a home inspector or FHA appraiser. FHA 203(k) can help:
- Repair a run-down or damaged property
- Increase sales with your buyers and sellers
- Expand your pool of buyers
- Help deliver the dream of homeownership to many in need
What Does FHA 203(k) Streamlined Cover?
The FHA Streamline 203(k) covers most non-structural improvements up to $35,000, with a minimum improvement of $5,000 necessary. Covered improvements include:
- Roofs, gutters, downspouts
- Heating and air conditioning
- Upgrade/repair plumbing, septic, well, and electrical systems
- Replacement of flooring, windows, doors, siding
- Weatherization, painting, basement waterproofing
- Minor remodels that don’t involve structural repairs
- Purchase and installation of appliances
- Handicapped accessibility improvements
What items are ineligible for the Streamline 203(k) program?
Properties that require the following work items are not eligible for financing under the Streamlined 203(k):
- Major rehabilitation or major remodeling, such as the relocation of a load-bearing wall
- New construction (including room additions)
- Repair of structural damage
- Repairs requiring detailed drawings or architectural exhibits
- Landscaping or similar site amenity improvements
- Any repair or improvement requiring a work schedule longer than 6 months
- Rehabilitation activities that require more than 2 payments per specialized contractor
- Necessitate a “consultant” to develop a “Specification of Repairs/Work Write-Up”
- Require plans or architectural exhibits
- Require a plan reviewer
- Require more than 6 months to complete
- Result in work not starting within 30 days after loan closing
- Result in the borrower to being displaced from the property for more than 30 days during the time the rehabilitation work is being conducted. (FHA anticipates that, in a typical case, the borrower would be able to occupy the property after mortgage loan closing.
FHA 203(k) Application Process
- Homebuyer locates property and signs a sales contract (purchase subject to home inspection)
- Homebuyer schedules an inspection with a 203(k) cost consultant, home inspector or appraiser to budget the home improvements
- Once budget is approved by borrower, cost consultant completes the work write-up and prepares contractor bid packages to obtain cost estimates
- Appraiser uses work write-up to determine “as-is” and “improved value”
- Loan closes with an FHA-approved 203(k) lender
- Construction begins within 30 days of loan closing.
- Must be completed in 6 months or less
- 100% financing with no down payment!
- Property must be 8 acres or less
- Property can’t have a pool
- Flexible Underwriting!
- Properties must be located in eligible rural areas (generally towns with a population of 20,000 or less that are removed from an urban area)
- Income limits are 115% of the U.S. Median Income (for most counties, the 4 person household income limit is $65,000 maximum)
- No cash reserves are required
- Borrowers are not required to be first time homebuyers
- No Loan limit restrictions
- Minimum credit score of 620 from most lenders
- One of the only 100% LTV programs around. No down payment required
- Loan amounts up to $650,000
- Must have DD214 with honorable discharge
- Fairly reasonable underwriting guidelines
- Must be owner occupied
- Multi-Unit by two or more eligible veterans may consist of up to 6 family units
- Bankruptcy and foreclosures do not necessarily eliminate veteran from qualifying– looking for 2 years in most cases
- No cash reserves required
The Loan Process
The first step – the loan application: As might be expected, the first step in getting a loan is to fill out a loan application (also called a “Fannie Mae 1003″, or “Uniform Residential Loan Application”). Our experienced loan officers will be happy to assist you in filling out the application, or answer any questions so that you can obtain the best mortgage for you. They can also make an appointment to meet with you at your convenience if you desire. Whether you choose to meet with us in-person or fill in our online application, you will eventually need to provide us with some personal and financial information (see our Loan Checklist). If you are unable to provide some of the required documents, you can provide them to your loan officer at a later date. (Note: the area in yellow currently is not linked)During the application discussion, your loan officer can help you understand the different types of loans that may be suitable for your situation, including the benefits of fixed-rate and adjustable-rate loans, FHA or VA loans, Conventional and Jumbo loans. Do I have to meet in your office? No, it is possible to complete the loan process without attending a meeting in our office. This can be done by doing one of the following: filling out our online application on our site, having the loan officer fill it out for you by telephone, or fax you a blank application which you can fill out by hand and return. During our conversation, we will discuss different possible loan programs available to you that might best meet your needs, current interest rates available, and your qualifications for the loan program you’ve chosen. In anticipation of this call, please feel free to use our mortgage calculator to estimate a monthly payment based on the loan you think you will need. After I fill out the application, what happens next? Once you have chosen a loan program, and have provided the necessary documentation to support your income and assets, the application is completed and we will then send verification forms to verify your employment history and bank account information, obtain your credit report, order your preliminary title report from the title company and order your property appraisal. Once this information is returned to us, we will complete your loan submission documents and submit the file to the underwriter for approval. What does it mean when my loan is approved “with conditions?” Your loan may be approved as submitted, approved with conditions, or a counter offer may be made for your consideration. If there are conditions to the loan approval in order for it to be approved, our loan officers will work with you to satisfy these conditions. Conditions might include explanation letters, copies of financial documents, divorce papers, or any number of items that will clarify your qualifications for the loan. After the loan conditions are met (if any) and the loan is approved, the necessary documents are prepared for closing. The lender will draw up the necessary documents along with any (prior-to-funding) conditions that have yet to be met, and in most cases send them to a title or escrow company near to where you live or your attorney to be signed by you. Your escrow officer or attorney will arrange for an appointment with you when the loan papers are ready to be signed. What does “Close Escrow” mean? The task of closing the loan is normally the responsibility of the escrow officer, attorney, or lender, depending on the state the property is in and the customs in the area. This person or company is responsible for gathering together all of the necessary documents (deed of trust, promissory note, etc.) and making sure all documents are signed. Following the lenders instructions, the escrow officer, attorney or lender then calculates the various pro-rations, charges and adjustments (interest on your old loan, interest on your new loan, money for impound accounts for taxes and insurance, etc.), makes sure all of the funds are deposited (if any) and provides you with a HUD-1 settlement statement showing all of the costs involved in the loan. Whoever handles the escrow responsibilities also makes sure that all of the parties involved in the loan process are paid after the loan funds by your lender. At this point, your loan “closes escrow” and your new loan will be recorded. What is a “Right of Rescission?” After you sign the documents at closing, they are sent by the escrow officer to the lenders funding department where they do a final check to see that everything is in order. On a refinance transaction, there is a 3-day right of rescission period. This means that you have 3 days from the day you sign the papers to change your mind about following through with the loan. If you have not exercised your right to rescind during the 3-day right of rescission period, the loan funds are released, distributions are made to the proper parties and the documents are recorded at the county recorder’s office. The loan is done! NOTE: There is no right of rescission on a purchase.
This helpful and concise checklist will provide you with the types of information you should prepare prior to your loan application appointment. Identification
- Current photo identification (driver’s license or ID card) for each borrower
- Resident alien card
- Current pay stubs (one full months)
- W2s/1099s (last two years) and names and addresses of each employer
- Evidence of social security/retirement income (i.e. copy of check or award letter)
- Federal tax returns, with all schedules/attachments (last two years)
- Partnership/corporate tax returns (last 2 years)
- Signed year-to-date profit and loss statement
- K1s for all partnerships
- Evidence of child support income (i.e. 12 months cancelled checks)
- Rental agreements on all rental properties
- Bank statements, all pages (last two to three months)
- Money market statements (last two to three months)
- 401k statements
- Original gift letter
- Copy of transfer of gift funds to escrow or your bank account (ask us first)
- Verification of donor’s ability to give gift funds (i.e. bank statement)
- Copy of current mortgage Note (refinance only)
- Declaration page from current hazard
- Insurance policy or preferred insurance provider
- Landlord addresses (last two years)
- Complete divorce settlement documents
- Complete bankruptcy papers
- Explanation of derogatory credit
What is my Credit Score?
Ever wonder why you can go online and be approved for a credit card within 60 seconds? Or get pre-qualified for a car without anyone even asking you how much money you make? Or why you get one interest rate on your home loan, while your neighbor gets another? The answer has to do with your credit score. Credit scores are used extensively, and if you’ve gotten a mortgage, a car loan, a credit card or auto insurance, the rate you paid was directly related to your credit score. The higher the number, the better you look to lenders. People with the highest scores get the lowest interest rates. Your credit score is a number generated by a mathematical algorithm — a formula — based on information in your credit report, as that information is compared to other credit profiles with similar matching characteristics as your credit file. The resulting number is a highly accurate prediction of how likely you are to pay your bills on time, or conversely, go delinquent on a debt. Credit scores are used extensively, and if you’ve gotten a mortgage, a car loan, a credit card or auto insurance, the rate you received was directly related to your credit score. The higher the number, the better you look to lenders. People with the highest scores get the lowest interest rates. Scoring categories Lenders can use one of many different credit-scoring models to determine if you are creditworthy. Different models can produce different score ranges. However, lenders use some scoring models more than others. The FICO score is one such popular scoring method. The FICO scoring models range from 300 to 850. The vast majority of people will have scores between 600 and 800. A score of 720 or higher will get you the most favorable interest rates on a mortgage, according to data from Fair Isaac Corp., a California-based company that developed the first credit score as well as the FICO score. Currently, each of the three major credit bureaus uses their own version of the FICO scoring model — Equifax uses the BEACON model, Experian uses the Experian/Fair Isaac Risk Model and TransUnion uses the EMPIRICA model. The three models can come up with varying scores because they use different algorithms. (Variance can also occur because of differences in data contained in the source data from each credit bureau.) That could change, depending on whether a new credit-scoring model catches on. It’s called the VantageScore. Equifax, Experian and TransUnion collaborated on its development and will all use the same algorithm to compute the score. Its scoring range runs from 501 to 990 with a corresponding letter grade from A to F. So, a score of 501 to 600 would receive an F, while a score of 901 to 990 would receive an A. Just like in school, A is the best grade you can get. Why? No matter which scoring model lenders use, it pays to have a great credit score. Your credit score affects whether you get credit or not, and how high your interest rate will be. Whether you are dealing with a mortgage banker, mortgage broker, or any mortgage company, a better score will result in a lower interest rate. The difference in the interest rates offered to a person with a score of 520 and a person with a 720 score is 4.36 percentage points, according to Fair Isaac’s Web site. On a $100,000, 30-year mortgage, that difference would cost more than $110,325 extra in interest charges, according to Bankrate.com’s mortgage calculator. The difference in the monthly payment alone would be about $307. It Matters If you rented an apartment, got braces, bought cell phone service, applied for a job that involved handling a lot of money, or needed to get utilities connected, there’s a good chance your score was pulled. If you have an existing credit card, the issuer is likely to look at your credit score to decide whether to increase your credit line — or charge you a higher interest rate, according to a credit scoring study by the Consumer Federation of America and the National Credit Reporting Association. Improve Your Score Make an appointment with one of our counselors on our home page.
Am I able to refinance my first mortgage?
Possibly. Most refinance programs require the property to have sufficient value in order to refinance. Refinancing is subject to credit approval and your ability to repay the new loan. If you’re not behind on your mortgage payments but have been unable to get traditional refinancing because the value of your home has declined, you may be eligible to refinance through the Home Affordable Refinance Program (HARP). HARP is designed to help you get a new, more affordable, more stable mortgage. HARP refinance loans require a loan application and underwriting process, and refinance fees will apply.
If I refinance, will I have to pay off my NeighborWorks® Sacramento loan?
It depends on what type of loan you have and the terms of your refinance. You may be able to keep your NeighborWorks® Sacramento loan if the refinance is to a lower interest rate to reduce your monthly payment and does not include any cash out or debt consolidation. All refinance transactions are subject to NeighborWorks® Sacramento Subordination policy.
What does it mean to subordinate my NeighborWorks® Sacramento loan?
Loan subordination will allow you to obtain a new first mortgage and keep your NeighborWorks® Sacramento loan. Your lender would submit a subordination request package that would include the details of the refinance transaction: Reason for refinance, the new loan terms (loan amount, interest rate, etc.), cost of the new loan, and property value. If the request is approved, NeighborWorks® Sacramento will agree to subordinate its loan behind the new first mortgage to remain as the second mortgage.
What does it cost to subordinate my NeighborWorks® Sacramento loan?
We charge $250 subordination fee.
What if I have additional mortgage loans? Do I have to pay them off too?
Possibly. It depends on the lender who owns your second or third mortgage, such as SHRA or CalHFA. They may or may not allow you to refinance and/or subordinate their loans. It’s best to contact them directly to find out what their programs allow.
Does NeighborWorks® Sacramento offer refinancing?
Yes we do! We offer refinancing for conventional, FHA and HARP loan programs. For more information on these programs and how they can lower your monthly payment, please contact Paul Glushku, Mortgage Loan Officer, at (916) 452-5356 Ext.1226 or firstname.lastname@example.org. You can also apply for a loan online: http://www.nwsac.org/lending
Are there any consequences of Refinancing?
If the refinance is increasing the loan amount of the first mortgage, then this is in effect reducing the equity in your property. If there is a cost for the refinance and it is financed into the new loan, you are further reducing the equity in your home. The cost of refinance should be paid for by the total monthly savings within two years.
When is Refinancing not a good idea?
If you’ve had your mortgage for a long time or if the savings doesn’t pay the cost of the new within two years or less. If you are planning on moving or selling your home in the near future.
What will refinancing cost?
It is not unusual to pay 3 percent to 6 percent of your outstanding principal in refinancing fees. These expenses are in addition to any prepayment penalties or other costs for paying off any mortgages you might have. You may pay this at closing or see it in the new mortgage. There are many “Break even” calculators on the internet to demonstrate the value of the refinance.
Licensed by the California Department of Business Oversight under the California Residential Mortgage Lending Act