Types of Loans

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Conforming Loans and Qualified Mortgage Loans

Fannie Mae and Freddie Mac are the nicknames bestowed upon two government-sponsored entities - the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. These corporations have an active role in providing financial security to mortgage lenders and banks by purchasing certain mortgage loans from them. There are limits on the loan sizes the Fannie and Freddie accepts. These limits vary from county to county and are related to each county’s median home price.Fannie and Freddie only purchase loans that they deem as "conforming." There are various qualifications that a mortgage loan has to meet to conform to the rules, but one of the most important is the actual loan amount.

A conforming loan must follow the qualified mortgage rules that came into effect on January 2014.

The qualified mortgage rule, as defined by Consumer Financial Protection Bureau (CFPB), is designed to create safer loans by prohibiting or limiting certain high-risk products and features. Lenders that offer QM loans will receive legal protection against borrower lawsuits.

What Defines a Qualified Mortgage
The Consumer Financial Protection Bureau issued the definition of a Qualified Mortgage (QM) and basically contain the following key features:

No Excessive Upfront Points and Fees

In this context, ‘points and fees’ are additional costs charged by the lender during mortgage application, processing and closing. The QM rule puts a limit on these additional charges.
Generally speaking, the points and fees paid by the borrower must not exceed 3% of the total amount borrowed, if the loan is to be considered a qualified mortgage. Certain exceptions have been made for ‘bona fide discount points’ on prime loans.

No Toxic Loan Features

In this context, a ‘toxic’ loan feature can refer to any high-risk feature that may have contributed to the mortgage and housing collapse of 2008. Such features are prohibited by the qualified mortgage rule, as defined by CFPB:
No interest-only loans. These are mortgage products where the borrower defers the repayment of principal and pays only the interest, usually for a certain period of time.
No negative-amortization loans. These are loans where the principal amount borrowed increases over time, even while monthly payments are being made. This often happens as the result of the interest-only payments mentioned above.
No terms beyond 30 years. In order to meet the definition of a qualified mortgage, the loan must have a repayment term of 30 years or less.
No balloon loans. In most cases, balloon loans will be prohibited by the QM rules. But some exceptions have been made. Smaller lenders in ‘rural or underserved areas’ may still make such loans. Definition: A balloon mortgage is one that has a larger-than-normal payment at the end of the repayment term.

Limits on Debt-to-Income Ratios

In general, the qualified mortgage will be granted to borrowers with debt-to-income / DTI ratios no higher than 43%. As the name implies, the debt-to-income ratio compares the amount of money a person earns each month (gross monthly income) to the amount he or she spends on recurring debt obligations.

This aspect of the QM rule is intended to prevent consumers from taking on mortgage loans they cannot realistically afford.
Lenders that generate QM-compliant mortgage loans will receive some degree of legal protection against borrower lawsuits. The level of protection they receive will depend on the type of loan they make. QM loans can be both Fixed and Adjustable Rate Mortgage (ARM) loans:
30 Year Fixed, Amortized over 30 Years
20 Year Fixed, Amortized over 20 Years
15 Year Fixed, Amortized over 15 Years
10 Year Fixed, Amortized over 10 Years
3 Year ARM, Amortized over 30 Years
5 Year ARM, Amortized over 30 Years
7 Year ARM, Amortized over 30 Years
10 Year ARM, Amortized over 30 Years

FHA Loans

FHA Loans benefit buyers with little down payment. FHA requires only 3.5% down payment, whereas typically conventional loans require 5% and 10% down payment. FHA loans also allow for increased Debt-to-Income Ratios and lower FICO scores. Whereas the interest rates are typically lower than for conventional loans, FHA loans has higher fees, both upfront and monthly, which as a whole makes them more expensive than regular conforming loans.

Since April 2013, FHA’s monthly Mortgage Insurance (MI) is permanent, whereas previous to that date the MI was required only for a minimum of 5 years. Now, as long as the borrower has the FHA loan, no matter how much equity there is in the property, the borrower has to keep the MI. Before, once the property had at least 22% equity, the borrowers could request the MI to be removed after 5 years.

In addition to a monthly mortgage insurance, FHA also requires Upfront Mortgage Insurance. That is a one-time fee that is added to the closing cost (but can be financed).

However, the combination of low down payment, low FICO score requirement, and high Debt-to-Income limit, make FHA loans a very important alternative to home owners and buyers. FHA loans offer solutions to buyers and owners that otherwise would not exist, thus making FHA loans indispensable in the mortgage market place.

Veterans Affairs Loans

The VA does not make loans, but it backs loans made by private lenders and banks that offer loans for qualified veterans. In order to obtain a VA loan, a veteran should complete the VA’s form 26-1880 to request a Certificate of Eligibility (COE) from the VA. Potentially qualified individuals are: Veterans, Active duty personnel, Reservists/National guard members, and military spouses. The following services qualify: Public Health Service officers, cadets at the United States Military, Air Force, or Coast Guard Academy, midshipmen at the United States Naval Academy, officers of National Oceanic & Atmospheric Administration, merchant seaman with World War II service. Obtaining a COE does not automatically guarantee approval of the loan request but it allows for a veteran to apply for a home loan. The veteran must have been discharged under conditions other than dishonorable.

VA loans are offered for the purchase of a primary residence only (i.e. not for investment properties). The main benefits of a VA loan are:
No down payment required (100% financing)
Increased affordability: because VA loans allow for significantly higher Debt-To-Income ratios than most other loans, a VA loan applicant can therefore qualify for a higher loan amount than other loan programs would normally allow
VA refinances allow for cash out to 100% LTV

Limits and Costs:

In most cases, the VA charges a funding fee of 3.3% (as of this writing). That fee can be financed (‘rolled into the loan’) and thus a VA potentially can reach 103.3% LTV.
There is no Mortgage Insurance required no matter what the Loan-to-Value ratio is.

Jumbo Loans

The median value of a home in California is more than double the median values of homes for United States as a whole, even though the median income is only slightly higher. Certain home loans are secured by government-sponsored entities (Fannie Mae and Freddie Mac) if they conform to certain loan limits (called ‘conforming’ loans). Higher loan amounts are called jumbo loans and are not secured by those entities. Jumbo Loans can but must not necessarily follow the qualified mortgage rules. If they don’t follow the qualified mortgage rules, then they are considered ‘Non-Qualified Mortgages’ (or simply ‘Non-QM loans’). Whether or not a loan is considered QM or Non-QM is mainly a question how well the ability of the borrower to pay back the mortgage is documented, whether the loan has certain features, and whether the fees charged are within certain parameters. QM loans receive better legal protection by the government from future potential law suits by the borrower and thus carry fewer risks. The guidelines regarding QM/Non-QM have been issued by the Consumer Financial Protection Bureau (CFPB) in January 2014

In Los Angeles County, loan sizes above $625,500 (as of this writing) are generally considered Jumbo Loans.

Non-Qualified Mortgage Loans (Non-QM)

Any mortgage loan that does not fall into the definition of a Qualified Mortgage (QM) is considered a Non-Qualified Mortgage (Non-QM) loan. The new regulation introduced in January 2014 does not prevent a lender from offering Non-QM mortgages. As a matter of fact, there are now an ever growing list of new Non-QM mortgages being offered that take advantage of the new regulations. One key feature that applies to both QM and Non-QM mortgage loans is that the lender must be able to document the borrower’s ‘Ability to Repay’ the mortgage loan. The rules specify that the lender must retain proper evidence to demonstrate that ability-to-repay has been carefully analyzed by the underwriters and that the more strict underwriting guidelines have been applied to the rules. Because the lending risk of Non-QM mortgage loans is generally higher than for QM loans, interest rates are higher for Non-QM loans as opposed to QM loans. Most Non-QM mortgage loans are ARM loans, rather than the traditional 30 or 15 year fixed loans.

Non-QM mortgage loans include features such as:
Interest Only Mortgages
High Debt To Income Ratios
Alternative Income Documentation Mortgages
Income Verified through bank statements (no tax returns, W2s, pay stubs etc)
Documented (Self-)Employment history less than 2 years
Foreign National Mortgages
Mortgages for borrowers with recent Bankruptcy, Short sale, Foreclosure activity (e.g.as little as 1 day out of BK)
Super Jumbo Mortgages
Cash Out Refinances for Investment properties with larger loan amounts
Mortgages for borrowers with a large number of investment properties

Reverse Mortgages

Reverse Mortgages have been a lending option for decades but has only in recent years become a popular alternative for seniors who are looking to leverage the equity in their primary home. The most popular reverse mortgage program is the Home Equity Conversion Mortgages (HECM) program. Not all homeowners can qualify for this program, only those that are at least 62 years of age can. Financial institutions such as banks and mortgage lenders fund HECM programs, while the federal government backs them. HECMs are popular because they have the least expensive reverse mortgage rates available.

Here are a few key features of a Reverse Mortgage:
The home owner keeps possession and ownership of their property and passes on that ownership to their heirs.

A reverse mortgage borrower will never have to pay mortgage payments ever again as long as they are alive and live in their home, even if the owner has negative equity (i.e. the property is upside down)

The heirs inherit the property from the owner and will have six months subsequent of the passing of the owner to either refinance the property or sell

It is recommended that the home owner regulates the transfer of ownership of the property subsequent to their passing through a trust

These privileges also come with simple obligations by the owner as it relates to the lender:
Must pay property taxes and insurance
Must maintain the property in good condiiton
Requirements to qualify for a Reverse Mortgage:
Applicant must be 62 or older at the time of application (if married, the younger of the spouses must be of the minimum age)
Must obtain Counseling Certificate. In order to apply for a Reverse Mortgage, borrower MUST have obtained a Counseling Certificate. Most counseling session cost about $125.00. Counseling can be done in person or over the phone. A phone counseling session may take about 30-45 minutes. This certificate must be obtained PRIOR to applying for a Reverse Mortgage but it is recommended to speak to a Reverse Mortgage Specialist before obtaining the certificate. Speak today to one of our Reverse Mortgage Specialists to answer any questions regarding Reverse Mortgages.
As a good rule of thumb, borrowers should have about 50% equity in their property. However, the older the borrower, the less equity is required.
Income and Credit Requirement:
Documenting sufficient income is not part of the eligibility requirements. The credit report is checked however neither the FICO score nor the details on the report are a condition of loan approval (with very few exceptions).

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