Types of Mortgages

There are two types of mortgages:
I) Conforming
II) Non-Conforming

CONFORMING

Conforming loans are those that adhere to certain guidelines. These include:
A) FANNIE MAE
B) FHLMC
C) FHA
D) VA
E) GNMA

THE ADVANTAGES
A) Low fixed interest rate
B) No prepayment penalty
C) Low down payment

REQUIRED DOCUMENTS
A) Credit Score – minimum credit score of 620 on all credit bureaus (FHA & VA do not require a credit score)
B) Late Payments – No late payments/collections/charge-off within the past 12-24 months (VA is more lenient)
C) Outstanding Accounts – All charge-off, judgments and collections need to be paid.

INCOME
A) Salaried – need minimum of 2 years work history (W-2s for the past 2 years and 1 full month of recent pay stubs)
B) Commissioned – the commission is averaged over the past two years.
C) Self-Employed – must be self-employed for at least 2 years. (2 years of personal income tax returns with all schedules and a current YTD (Year-to-Date) Profit and Loss Statement). The taxes and the current P&L are averages for the proper income. The adjustable gross income or 1099 – whichever is the least – is the income used.

NON-CONFORMING LOANS

These consist of loans of every other type including creative financing. They are designed to get you a loan today and hopefully get you ready for a conforming loan. Over 50% of the market is made up of these loans.

ADVANTAGES
A) Credit – accepts all types of credit
B) Income – bank statements can be used to show cash flow. NO INCOME verification loans available/Stated programs.
C) Self Employed – as little as one year in some cases
D) No IRS forms 4506 required
E) No escrow account required
F) No mortgage insurance – this helps with overall monthly payment when compared to the lower interest rate conforming loans.
G) Most old charge-offs and collections do not have to be paid
H) 2nd mortgage is allowed on purchases. Seller can hold a mortgage to help with down payment fund, sometimes with as much as a 100% LTV e.g. lender will only give 80%, seller can give 20% as a second mortgage.

DIASDVANTAGES
A) Higher interest rates – larger down payments get better rates
B) Most have a pre-payment penalty i.e. you could not pay the balance in full until a certain period of time has passed. If you did it before that time, you would be penalized, normally 6 months to years of interest. This applies even if you refinance.
C) Mostly adjustable rate mortgages with fixed options. For example, 2/28 programs – the payment is fixed for 3 years. You can get a fixed mortgage but the rate is going to be much higher and the pre-payment penalty is longer.

ASSETS
A) Bank statements – 2 most recent statements on all bank accounts, CDs, Mutual funds, retirement accounts (401K) and all other assets.
B) Down Payment – a minimum of 3-5% of borrower’s own funds are required. FHA & VA will allow all funds to be a gift from a relative.
C) Reserves – A minimum of 2 – 6 months of the new full monthly payment in a liquid account. FHA & VA requires no reserves.

OTHER
A) Mortgage Insurance – (MI) is required for any loan when down payment is a less than 20%. This insurance insures the lender should you default on a loan. FHA requires mortgage insurance regardless of the down payment, & VA does not require mortgage insurance.
B) 2nd Mortgage – No seller held 2nd mortgage is allowed on purchases.
C) Escrow – An escrow account must be set up at closing for taxes, insurance and mortgage insurance. It should be included in your total funds to close.
D) Appraisal – A full appraisal is required by the lender and is a cost to the borrower. This is to ensure the value of the property is at least the amount of the purchase price.
E) Inspection – For the borrowers protection and is sometimes required by some lenders depending on the how long house was build.