Choosing the Best Loan Program
Choosing a Loan Program
There isn't a single or simple answer to this question.
The right type of mortgage for you depends on many different factors:
- Your current financial picture
- How you expect your finances to change
- How long you intend to keep your house
How comfortable you are with your mortgage payment changing
For example, a 15-year fixed rate mortgage can
save you many thousands of dollars in interest payments over the life
of the loan, but your monthly payments will be higher.
An adjustable rate mortgage may get you started
with a lower monthly payment than a fixed rate mortgage, but your payments
could get higher when the interest rate changes.
The best way to find the "right" answer is to discuss your
finances, your plans and financial prospects, and your preferences frankly
with a mortgage professional.
Loan programs come in many forms and come from many sources.
Just as the loan structure, like a 30 year fixed rate mortgage, can affect
your interest rate and monthly payments, the source of funding for your
loan can also affect your rate and payments. The source of funding can
also affect the amount of your down payment and closing costs.
If you have at least 3% of the loan amount to use as a down payment,
you may consider the most common type of loan, a conventional
loan. These loans consist of conforming loans, which are secured by
government sponsored entities (GSE) such as Fannie Mae and Freddie Mac,
and jumbo loans, which are funded by private investors for loan amounts
higher than the limits set by the GSE's.
Conforming loans are funded by Fannie Mae (FNMA) and Freddie
Mac (FHLMC). These companies do not lend money directly to you,
but work with lenders across the country to offer mortgage loans to meet
your needs. As a secondary market for mortgage loans, they purchase mortgages
from lenders and package them into securities that can be sold to investors.
If you are looking for a large loan amount to purchase
or refinance your home, you could consider a jumbo loan,
which has a higher loan amount limit than the limits set by Fannie Mae
and Freddie Mac. Because jumbo loans cannot be funded by these two agencies,
they usually carry a higher interest rate.
With less than perfect credit, you can expect to pay
higher interest rates because of the higher risk associated with making
a loan to someone with a poor credit history.
In addition companies will look at your credit
and give you a credit grade, which will help them determine the best loan
for your situation.
If you have bad credit, you may not qualify for a conventional
loan. In this case, you could consider a subprime
loan. Like other loans, subprime loans come in many forms based on
the terms, loan amount and loan to value ratio you are looking for.
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Conventional Loans
Conventional loans are secured by government sponsored
entities or GSEs such as Fannie Mae and Freddie Mac. Conventional loans
can be made to purchase or refinance homes with first and second mortgages
on single family to four family homes.
In general, Fannie Mae and Freddie Mac's single family, first mortgage
loan limit is $333,700 in 2004. This limit is reviewed annually and, if
needed, changed to reflect changes in the national average price for single
family homes. The current loan limit applies to all conventional mortgages
delivered after January 1, 2004.
2005 Conventional Loan Limits
First mortgages
One-family loans: $333,700
Two-family loans: $427,150
Three-family loans: $516,300
Four-family loans: $641,650
Note: Maximum original loan amounts are 50 percent higher for first mortgages
on properties in Alaska, Hawaii, Guam and the U.S. Virgin Islands.
Second Mortgages
$150,350 (in Alaska, Hawaii, and the US Virgin Islands: $225,525)
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Jumbo Loans
Loans which are larger than the limits set by Fannie Mae and Freddie
Mac are called jumbo loans.
Because jumbo loans are not funded by these government sponsored
entities, they usually carry a higher interest rate and some
additional underwriting requirements.
A strategy to lower your overall interest payments if
your purchase or refinance balance is above $333,700 is to use a combination
of both first and second trust money, referred to as an 80/10/10, 80/15/5
or 80/20. Every situation is different, but it is one more option to consider.
In addition to common loan structures such as fixed rate, adjustable
rate and balloon loans, Fannie Mae and Freddie Mac also have
loan programs for low to no down payments, community lending and affordable
housing initiatives, construction to permanent, home improvement and reverse
mortgages.
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If you have bad credit, you may not qualify for a conventional
loan or a low down payment loan offered by FHA and VA. In this case, you
may consider a subprime mortgage. Because of the higher risk associated
with lending to borrowers that have a poor credit history, subprime loans
typically require a larger down payment and a higher interest rate.
You should study the specific terms of a subprime loan
that you qualify for to determine if it is a loan that will help your
financial situation. Subprime loans are one way for you to get into the
home you want at today's price. If you already own a home, a subprime
loan can give you an opportunity to clean up your credit and ultimately
refinance into a lower rate at a later time. If you have a mortgage, you
can look at refinancing more than what you currently owe on the house
and get cash back for the equity you already have in the home. This cash
out could be used to pay off higher rate credit cards, bankruptcy, foreclosure
or collections and liens. It could be a good way to clean up a troubled
credit history, save money each month and start rebuilding your credit
worthiness.
Whether for a purchase or refinance, subprime loans
should typically be used as a short term solution, approximately 2-4 years.
During that time, you can work to clean up your credit and qualify or
a refinance into a lower risk, lower rate loan.
Many borrowers with bad credit are good people who honestly
intended to pay their bills on time. Catastrophic events such as the loss
of a job or a family illness can lead to missed or late payments or even
foreclosure and bankruptcy. Now there are mortgage companies that take
into consideration events outside the borrower's control, but not without
a price.
Lenders are compensated for risk in the form of interest rates.
The higher the lender perceived its risk to be, the higher the rate they
will charge for the privilege of borrowing their money. The lower the
risk, the lower the rate. Several risk factors are taken into consideration
when evaluating a borrower for a subprime mortgage, the most important
being your payment and credit history.
Your debt to income level, employment history, type
of property and assets are other factors that are taken into consideration
when determining if you qualify for a conventional, government or subprime
loan.
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