Aspects of Home Loans

		Loans have several different aspects which are used to determine their viability and pricing.  The pricing you generally see on TV and in ads is the pricing for the “perfect” loan.  Now, no loan is perfect but lenders have determine the most common and least risky category of loans and that is what we mean when we say the “perfect” loan. The perfect loan could commonly be seen as a traditional full documentation conventional conforming loan for a borrower with excellent credit on home located in a strong residential value area. Unfortunately most people don’t fit into this “perfect” loan category and so they do not have access to the “perfect” loan pricing; this is why it is important to understand the aspects of loans and how they affect your ability to obtain a home loan that is right for you.  Below we outlined some of the basic aspects home loans for you so that you may better understand the lending process.         Loan Amounts          Loans less than 417,000 are considered conforming loans, loans above the conforming loan amount (417,000) are considered jumbo loans.  Jumbo loans are typically more costly to the borrower than conforming loans.  For FHA loans, the department of Housing and Urban development (HUD) recently has increased FHA loan limits temporarily in order to try and help borrowers. The conforming limit for FHA loans is 362,790, above that are considered FHA jumbo.  Like conventional jumbo loans, FHA jumbo loans mean higher pricing however FHA jumbos do not have higher mortgage insurance costs.   Loan to Value (LTV)              Lenders gauge risk by how high the Loan-to-Value (LTV) is.  Loan-to-value is determined by comparing loan amount to value or purchase price. For instance, the LTV for a home that has a loan amount of 90,000 and has been appraised for 100,000 (or has a purchase price of 100,000) is 90%.  (90,000/100,000).  High loan-to-value’s may mean higher mortgage insurance costs for conventional loans and higher pricing.    Documentation Types   Full Documentation Programs           The most common documentation type is called full documentation.  Full documentation generally consists of proving income, assets, and liabilities in full. This could require disclosure of tax returns or W2s, verification of assets by a bank or another institution, and full disclosure of all current liabilities or what you owe.   Alternative Documentation Programs           There are many different takes on the alternative documentation programs such as bank statement, no asset and many more.  However, stated income programs are an extremely common type of alternative documentation programs.  There are several versions of stated income programs but the two main types of stated income programs are Stated Income, Verified Asset (SIVA) and Stated Income, Stated Asset (SISA).  In a stated income verified asset program, income is stated by the borrower and not verified by the lender and assets are stated by the borrower and verified by the lender. In a SISA program lenders do not verify the borrower’s income or assets.            Stated income programs are generally pricier than full documentation programs and require excellent credit.  In today’s market, stated income programs can be difficult to find and usually carry high pricing.       Government Loans            There are two types of government loans, FHA and VA.  Government loans traditionally have been used to help less qualified or higher loan-to-value borrowers.  However, due to recent turbulence in the mortgage industry and changes in FHA guidelines government loans are becoming a more economical choice for even the most well qualified borrowers.  In order to originate FHA and VA loans the lender must be approved to do so,  AMAC is approved to originate both.                 FHA         FHA stands for the Federal Housing Administration, the FHA is a under the perview of the Department of Housing and Urban Development (HUD).  Although FHA has acquired a slight stigma over the years as the loan for less qualified borrowers, recent changes to the program have made FHA loans highly beneficial for even the most well qualified of borrowers.  Benefits of the FHA program are acceptance of lower credit scores, high loan-to-values, higher acreage and rural properties and manufactured homes.  With recent increases in FHA loan limits FHA loans are becoming an ever more prominent type of lending.     VA           VA loan are offered specifically for our qualified veterans. The Department of Veterans Affairs (VA) guarantees these mortgages allowing for easier qualification for eligible veterans.  VA loans were introduced after World War II and utilize a flat fee to help fund future VA loans.   Fixed Rate vs. Adjustable Rate        Fixed Rate Mortgages            Fixed rate mortgages have fixed payments for the life of the loan.  Typically 30 or 15 years in length, fixed rate mortgages are becoming more and more popular again due to the problems some borrowers have experienced with adjustable rate mortgages. Fixed rate mortgage amortize principal and interest payments over the life of the loan, payments to fixed rate mortgages are initially made up of mostly interest and very little principal but as the loan ages amount of the payment that is applied to principal increases and the amount applied to interest decreases.   Adjustable Rate Mortgages                                Adjustable rate mortgages have a fixed payment for a certain period of time, typically 3, 5, 7, or 10 years, the interest rate then adjusts to current market conditions.  Adjustable mortgages are typically cheaper although carry a greater risk of increased payments down the line.  Most adjustable rate mortgages are based off the 1 Year Treasuries or the London Interbank Offer Rate (LIBOR).                      Adjustable rate mortgages have set periods of adjustment, for instance a 5/1 ARM has a fixed payment for the first five years of the loan and an adjusted payment every 1 year thereafter.  Adjustable rate mortgages also have caps on both how much the rate can adjust at any given time and how much the rate can adjust over the life of the loan.  For instance a 5/1 ARM with 3/2/6 caps has an initial cap of 3, so the first rate change cannot be more than 3%; a periodic payment cap of 2, meaning that changes after the initial change are limited to a 2% change and a lifetime cap of 6% meaning that over the life of the loan the rate cannot increase or decrease more than 6%.    <<<Back to Mortgage Basics
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