KNOWLEDGE IS POWER
KNOWLEDGE IS POWER
The internet is both a wonderful and intimidating place to find quality information on the mortgage lending process. Here are a few sites for homebuyers and homeowners alike.
Conforming Loans are loans that adheres to the underwriting guidelines published by FNMA or FHLMC. These guidelines proscribe specific requirements for income and assets, thresholds for LTV, CLTV, DTI, and FICO Scores, as well as a host of other items that relate to the overall risk profile of the loan. One of the most publicized guidelines is the maximum loan amount. Each year, the FHFA is responsible for reviewing and re-establishing the maximum loan amount (referred to as the “Conforming Loan Limit”). The Conforming Loan Limit for 2018 is $453,100. Conforming Loans are eligible to be sold to FNMA or FHLMC and are viewed as a ‘benchmark risk’ by the secondary markets, where investors buy and sell bundles of mortgages and mortgage-backed securities. Because the guidelines are well known to investors, bundles of ‘conforming’ loans generally benefit from strong investor demand and are typically priced more efficiently than ‘non-conforming’ loans.
CONFORMING HIGH BALANCE
Conforming High Balance Loans are Conforming Loans that adhere to all of the underwriting guidelines published by FNMA or FHLMC, except the loan amount. For certain counties designated as ‘High-Cost’ areas, the FHFA allows for an exception to the Conforming Loan Limit. This exception is intended to accommodate the need for higher loan amounts due to higher median home values. Commonly referred to as the “High Balance Loan Limit,” these higher loan limits, if available, vary from county to county. Conforming High Balance Loans are eligible to be sold to FNMA or FHLMC but are commonly viewed as somewhat riskier (than Conforming Loans) by secondary market investors.
Jumbo Loans have a loan amount above the Conforming Loan Limit or the High Balance Loan Limit (as applicable). While a larger loan amount may not necessarily seem like a bad thing, Jumbo Loans often have underwriting requirements that are more restrictive than those of a typical Conforming Loan. Higher down payment requirements, lower DTI thresholds, higher FICO limits, and more stringent income qualification rules are just some of the ways investors try to limit the perceived incremental risk of Jumbo Loans. Because Jumbo Loans are not eligible to be sold to FNMA or FHLMC, these loans are typically aggregated and securitized by banks / finance companies (in the form of Private-Label Mortgage Backed Securities) or held directly in bank portfolios.
Government Loans are regulated and insured by the federal government. The three primary types of Government Loans (related to housing) are regulated through the FHA, the VA and the USDA. FHA Loans are the most common type of Government Loan. Available only through approved lenders, FHA loans are explicitly insured by the Federal Housing Authority. Originally intended to promote home ownership, the FHA loan program provides expanded mortgage options for households that may have limited access to funds for a down payment, or credit histories that make the terms of a Conforming Loan relatively unattractive. FHA loans are subject to separate FHA county loan limits. VA Loans are subject to the oversight of the US Department of Veterans Affairs. Originally established as a benefit for veterans of the armed forces and national guard, the VA guarantees a portion of the loan so that private lenders are able to offer more favorable terms to qualified veterans. One of the most significant benefits of a VA Loan is that qualified veterans can obtain up to 100% financing for their primary residence. USDA Loans are regulated by the US Department of Agriculture. Focused on housing in eligible rural areas, USDA Loans are intended to assist low- and moderate- income households to obtain mortgage financing for their primary residence.
REVERSE MORTGAGES (FHA HECM)
While there are a few different variations of the FHA HECM reverse mortgage, the two most common include (i) a fixed rate lump-sum loan used to eliminate a traditional mortgage payment (thereby improving monthly cash flow) and (ii) an adjustable rate line of credit, which provides government guaranteed access to accumulated home equity that can be used to fund retirement cash flow needs in the future. First created by an act of congress in 1988, the FHA Home Equity Conversion Mortgage (‘HECM’) was established to provide a mechanism for America’s retirement-age population to access the equity in their homes. Often referred to generically as a ‘Reverse Mortgage’, the HECM program has undergone significant changes recently and is now viewed by many as a viable retirement planning alternative. An FHA ‘HECM’ loan (unlike other reverse mortgages) is insured by the Federal Housing Authority. A HECM allows homeowners age 62 or older to borrow money based on the accumulated equity in their primary residence. Unlike other home loans, a HECM does not require any payments until the last remaining Borrower moves or passes away. The Borrower remains the owner and, while the HECM loan is outstanding, is obligated to: (i) keep the home in good repair, (ii) continue paying property taxes, and (iii) maintain property insurance on the home. The FHA HECM loan is a non-recourse loan, which means that in the event of default, the lender can only look to the sale of the property and not to any other assets of the Borrower or the Borrower’s heirs.
PIGGY-BACK SECOND MORTGAGE
For most conventional loan programs, borrowers with a down payment of less than 20 percent will need to pay for mortgage insurance. The cost of mortgage insurance can vary, and is influenced by both credit score and down payment amount. A “Piggyback” Second Mortgage is a subordinate mortgage loan that is made simultaneously with your primary mortgage. It can be a fixed rate amortizing loan (similar to a 30yr fixed rate mortgage) or it can be a variable rate loan such as a Home Equity Line of Credit (HELOC). The purpose of a “Piggyback” mortgage is to fill the gap between your down payment and the 20 percent down payment required to avoid mortgage insurance. A “Piggyback” structure is sometimes referred to as an “80/10/10” (or similar numbers) – where 80% of the purchase price comes from a primary mortgage, 10% comes from a subordinate mortgage, and 10% comes from the down payment. It is generally used when the combined monthly payment for a primary mortgage and a subordinate mortgage is less than the monthly payment for a primary mortgage with mortgage insurance. It may also be used if the borrower anticipates receiving a large sum of money that would allow them to payoff the subordinate mortgage in a short period of time or to accommodate other situation-specific considerations.
LOT & LAND
Secured solely by land (and not a housing structure), Lot Loans and Land Loans provide a mechanism to finance the purchase of vacant land – most often as part of a plan to build a home on the land. A “Lot” loan refers to the fact that the underlying property has road access and utility infrastructure, whereas a “Land” loan is more typically associated with raw, undeveloped property. Because the property has a different risk profile than a typical home purchase and there is limited secondary market demand for these loans, the economic terms may be significantly different than what most borrowers expect. Higher down payment requirements, higher interest rates, shorter repayment terms and additional collateral (e.g. personal guarantees) are some of the ways investors offset the perceived risk profile of these loans.
Used to fund the construction of a new home, a Construction Loan is used to fund the materials and labor costs necessary to construct a house. Construction loans may or may not include the purchase of the lot on which the home is being built. Most often, Construction Loans include an initial outlay, followed by a series of ‘draws’ as the construction progresses. Construction Loans require substantial planning and close coordination between the investor, the borrower, and the contractor. There is a great deal of work that goes into reviewing the plans, scheduling advances, performing periodic inspections, and coordinating payments to the contractor and their subcontractors. Like other specialty loan programs, the terms of a construction loan may be different than what most borrowers expect. Investors typically require the borrower to maintain at least 20% equity in the project and traditional construction loans have repayment periods measured in months rather than years. Interest rates are typically higher as well, reflecting the risk profile of financing something that has not yet been built, as well as the property inspection and construction oversight required while administering the draw schedule. During the construction phase, payments are often interest-only (and in some cases, may include an interest reserve to fund interest payments from the loan proceeds), with principal payments beginning when the home is completed.
INVESTOR FIX & FLIP
Similar in many ways to a construction loan, an Investor Fix & Flip Loan is geared more toward a real estate investor purchasing a home to be renovated and sold rather than a homeowner purchasing a home to be built and occupied. The availability of these types of loans can vary widely based on the real estate investor’s experience in a particular market geography and/or property type. Real estate investors with a track record of successfully purchasing, renovating and selling homes in a timely way… for a profit… will often have access to more favorable terms. Because the underlying collateral is viewed from the perspective of an ‘investment’, Fix & Flip lenders typically demand higher interest rates and may require personal guarantees and/or cross collateralization with other projects to ensure they are repaid. There is, however, the opportunity to borrow a higher percentage of the project’s value if the real estate investor has a success track record.
If a mortgage loan is secured by something other than a residential building with 1-4 units, it likely falls into the category of a Commercial Loan. Collateral for a Commercial Loan can include apartment buildings (large or small), office buildings, warehouses, retail buildings, or mixed use projects.