Conventional Mortgages
There are many options available to the homebuyer or homeowner through the conventional mortgage market. Conventional mortgages include fixed rate, government loans, adjustable rate mortgages (ARMs), interest only mortgages, and balloon mortgages.
Fixed Rate Mortgages
The standard fixed rate mortgage is a popular product with a range of loan term options from 10 to 30 years. The interest rate and monthly payment are fixed and do not change during the life of the loan. This mortgage appeals to borrowers who plan to remain in their homes for more than two years, and want the stability of a fixed rate.
Zero/Low Down Payment Mortgages
Fannie Mae and Freddie Mac have programs that allow 100% of the purchase price or appraised value to be financed. These can be one loan, or the more popular financing using an 80% first mortgage, and a 20% second mortgage or line of credit. The 80/20 plan eliminates the borrower from having to pay mortgage insurance (PMI). These programs also allow some percentage of down payment to be applied, so there could be an 80% first, and a 15% second, with 5% down payment.
Adjustable Rate Mortgages
Adjustable rate mortgages are fixed for a specific length of time, and then adjust periodically according to the market. They typically are fixed for the first 3, 5, or 7 years, and then become an adjustable rate. Initial rates start lower than a 30 year fixed rate. These are great for borrowers who want a lower, more affordable payment for the first several years, and may want to refinance into a fixed rate later. They are also popular when the borrower is only planning on being in the house for 3 to 7 years.
*ARMs are also available as interest only, so the minimum payment required is based on the interest rate, and does not include principal. There is no pre-payment penalty, so the principal can be paid down in any amount at any time.
FHA Mortgages
HUD insured mortgages are designed to help provide home financing with no down payment or a low down payment of 3%. This loan allows gift funds for the down payment. The gift can come from a family member, or the seller through a down payment assistant program. The seller can also pay the borrower’s closing costs. FHA guidelines are more lenient for borrower’s who have had some derogatory credit issues. Family members are allowed to be co-borrowers if there are income qualification issues.
VA Mortgages
Department of Veterans Affairs mortgages allow 100% financing and, like HUD, have more lenient guidelines for credit and income issues. Borrowers are required to have an updated Certificate of Eligibility from VA. The seller is allowed to pay the borrower’s closing costs.
Non Owner Occupied Mortgages
Fannie Mae and Freddie Mac both have numerous programs for purchases and refinances of rental/investment properties. These mortgages are for single family homes, up to four unit apartment buildings. Guidelines allow up to 100% financing for qualified borrowers!
Balloon Mortgages
A Balloon mortgage is a fixed rate mortgage with a fixed rate term, in which the principal and interest payments are amortized over 30 years. At the end of the fixed term, the borrower may pay off the balance with a lump sum, or refinance into another loan. The interest rate is usually lower than a standard 30 year fixed.
Sub Prime Mortgages
There are many reasons a borrower may need to consider a Sub Prime loan. The programs generally are the most forgiving mortgages available. Some borrowers fall outside of the standard conforming guidelines, but that does not mean the borrower does not qualify for a mortgage. The Sub Prime (non conforming) mortgage market exists for those borrowers that have had recent derogatory credit problems, including bankruptcies. Or, the income ratios exceed the conforming guidelines. These programs have generous loan to value financing, and allow the seller to pay the borrower’s closing costs. For self employed individuals, there are bank statement programs that use an average of deposits rather than tax returns.
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