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| In Your Best Interest!® |
| Home | Mortgage Process | Mortgage Programs | Mortgage Dictionary | Mortgage FAQ | Contact Bruce |
In Your Best Interest!® is a compilation of informative articles on mortgage trends and personal finance.
| Non-Conforming Lending by Bruce Specter |
| What is Better - A Big Down Payment or a Small One? by Peter G. Miller |
| Credit, Income Do Not Have To Be Barriers To Home Ownership by Edith Lank |
| The Importance of Pre-Qualification/Conditional Approval by Bruce Specter |
| Financing Mortgage Insurance by Bruce Specter |
What was once a small segment of residential lending is now becoming one of the fastest growing areas in mortgage banking. Nearly every major institution is entering the non-traditional lending market. These lenders are providing loans to borrowers that do not meet the traditional credit criteria of secondary market investors such as the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC). Some issues preventing borrowers from meeting these criteria are bankruptcies, defaults, foreclosures and chronic late payments on credit obligations. This article will review the salient points of non-traditional mortgage lending.
Credit Grades
Non-traditional mortgage lending is categorized into credit grade categories based upon credit and capacity to repay the mortgage loan. Those categories are A, B, C and D. The more serious the credit problems, the further the grade decreases. As the grade on loans decreases (B, C, and D), lenders generally assess higher rates and fees.
Several factors contribute to the credit grade on non-traditional lending such as past consumer credit history and mortgage payment history. Generally, lenders review the credit history for the past 12- 24 months.
Income Ratios
Besides credit considerations, non-traditional lenders review the capacity of the borrowers to repay the mortgage obligation. Lenders calculate a ratio (debt ratio) using the total monthly debts and the total monthly income. For example, if a borrower has a monthly income of $6,000 and a total monthly debt obligation (including housing expenses and other consumer debt) of $2,000, the debt ratio ($2000 divided by $6000) would be 33%. If a borrower has a low debt ratio, the grade will be higher. Conversely, if a borrower has a high debt ratio, the grade will be lower.
Income Documentation
Non-traditional lenders use three approaches in documenting a borrower's income: Full documentation, easy doc/simple doc and no income.
1) Full Documentation: Borrowers provide pay stubs, W-2s or federal tax returns for self-employed. Generally lenders require a two-year history to substantiate the borrower's income.
2) Easy Doc/Simple Doc: Borrowers provide bank statements to substantiate monthly income.
3) No Income: Lenders use the stated income from the loan application and the borrowers do not have to provide any documentation to substantiate the income. This type of loan is known as the "No Income Qualifier" or No Income Verification (NIV).
Lenders will assess a lower grade on loans when little or no documentation is provided to substantiate the borrower's income.
Loan-to-Value
Non-traditional lenders adjust the loan-to-value ratio as a method to reduce the risk of financial loss if a borrower defaults and there is a loan foreclosure. Most lenders believe borrowers with a low loan-to-value ratio have a lower probability of a foreclosure than a borrower with a high loan-to-value ratio. In cases where a borrower has a low credit grade and/or little income documentation, lenders may reduce the loan amount.
Loan Programs
There is little difference in the loan programs provided by traditional and non-traditional lenders. There are 30 and 15 year fixed rate mortgages, balloon mortgages, and Adjustable Rate Mortgages (ARMs). Non-traditional lenders assess higher rates and fees when there is a lower credit grade, a lack of income documentation, or a high loan-to-value ratio.
To discuss you specific financial picture as it relates to your residential mortgage needs, contact Bruce Specter.
The real question is whether it is better to put money into a home or elsewhere. Without knowing the rate of return for "elsewhere" and the level of risk and tax consequences when compared with putting money into your own home, any answer is speculation.As a practical matter, most first-time buyers have little choice - they cannot buy for cash or even with a large down payment. Those with property who are moving to a new home often have a different situation because they have equity built up over many years. For such individuals, how much down - a lot or a little - is an option.
If property values are rising, then a small down payment can make great sense because you are using other people's money (OPM) to acquire and hold real estate, maybe a larger and more expensive home than you could afford with a large down payment or an all-cash transaction.
If property values are falling, then perhaps no amount down is appropriate. In such situations it may be better to rent.
In addition to economics - where can you get the best rate of return considering risk, leverage, taxes, etc. - there are also matters of personal preference. Some people simply want a house that is free and clear of all debt, or as much debt as possible.
If you have a choice, ask some questions: What would make you happiest? What does your tax professional say? And then go with it.
So let’s just say American Express and Visa aren’t beating down your door. That’s a nice way of saying - you’ve screwed up.Fear not.
If you’ve had credit problems, or have difficulty proving your income to a lending institution, there are still ways to buy a house.
First off—bankruptcy. Yes, it stays on your credit record for ten years. Yes, you couldn’t declare bankruptcy again for seven years.
But the good news is that when two years have passed since the discharge (not the filing), most mortgage lenders will ignore it. Sometimes lenders will overlook it even earlier than that, if you had a good credit record until one financial disaster that wasn’t of your own making.
If you have judgments against you, paying them off helps clear your credit record. You’d have to do it anyhow, before you could place a new mortgage.
There’s no need to send money out of town to companies that promise to fix up your credit record. There are no magic remedies out there, and you’ll only waste money you can’t really spare.
The place to go for skilled assistance in solving money problems that have got out of hand is the non-profit agency known as Consumer Credit Counseling. To find the name of a local office, call 1-800-388-CCCS. They can work with your creditors, guide you through the process of repairing your credit, and tell you when you’re qualified for a mortgage loan. They can even go to bat for you with mortgage lenders—and all for nominal fees.
Another resource is the various federal and state programs aimed at buyers, particularly first-time buyers, with less than perfect credit. Some offer you special mortgage programs after you’ve taken courses in money management.
For the self-employed who have no W-2s to prove income, most lenders will accept instead two years’ past income tax returns. If your down payment is high enough, there are even a few mortgage plans out there that require no proof of your income: no-doc (no documentation) or low-doc loans.
Some mortgage brokers can guide you to mortgage loans specifically intended for borrowers with less than A+ qualifications. You’d be charged higher interest rates, but with rates in general as low as they are these days, you might find something you could handle.
Before you start seriously looking at homes to buy, it’s a good idea to get pre-qualified for a mortgage. Then you’ll know how much you can afford. After that, if you decide that you’re really serious about buying a home, you should get pre-approved for the mortgage you’ll need to complete the purchase.Pre-qualification can be accomplished by simply talking to me. You’ll need to provide information about your income, your assets and your debts. This process takes all of about 10 minutes.
Pre-qualification gives you a rough estimate of what you can afford. In order to know definitely what you can afford, you’ll need to get pre-approved for a mortgage. This involves a more involved process, but one of the benefits is that I will issue a letter of pre-approval when you’re financial documentation is approved. This comes in handy when you’re negotiating a home purchase, particularly if you’re competing with other buyers. A pre-approval letter should remove any concerns the sellers might have about your financial ability. Also, if you’re pre-approved you can usually close more quickly than a buyer who isn’t pre-approved.
How much house you can afford to buy depends on your income, your debts, your credit history and the amount of cash you have available for a down payment and closing costs. To get conditionally approved, we’ll complete a loan application (this can be done in person or over the phone), verification of your employment, proof you have the down payment money and authorization to check your credit.
In addition, we’ll need the following: W-2’s for the last 2 years and your most recent monthly pay stub if you’re salaried; tax returns for the last 2 years and a year-to-date profit and loss statement if you’re self-employed or if you receive commission income; copies of the last 3 monthly statements from financial institutions that verify your source of down payment and cash reserves; and copies of payment coupons on any outstanding loans like an auto loan or home mortgage.
First-Time Tip
The amount of paperwork required to qualify for a mortgage may seem overwhelming to first-time home buyers. That is why I take the time to explain the process, answer any questions that will arise and make the purchase transaction exciting, not anxious!
Loan approval for some mortgages requires less paperwork. For example, minimal documentation is needed to qualify for a no-income verifier (NIV) mortgage (also called a stated income mortgage). You need good credit to be approved for one of these loans. But basically I take your word in lieu of a formal income verification.
Most NIV mortgages require a 20% cash down payment (though there are programs with as little as 5% down). And the borrower is usually charged about a half percent higher interest rate on the loan. Home mortgages with the most competitive interest rates often require the most documentation.
The Closing
Before final loan approval, the lender’s underwriters will need to review the purchase agreement, a title report and a property appraisal. After the recording and funding of your loan, grab the keys move in and unpack (that’s where that is!!!).
I am available to assist you in obtaining the mortgage that best fits your financial goals and situation. I pride myself on treating each loan as if it were my own, working In Your Best Interest! ®
Get Conditional Loan Approval on Your Conforming Loan at the time of application! Call me for details.
Traditionally, borrowers looking to avoid the "no advantage to you" mortgage insurance (MI) premium on purchases with less than 20% down have turned to "Piggyback" or "Blended" mortgages. These are typically a combination of a first and second mortgage (hence the above mentioned terms). The first mortgage is usually 80% loan to value, satisfying the Fannie Mae minimum requirement to fund without mortgage insurance. The second can be an additional 5, 10 or 15%, with the balance being cash from your buyer. This does the job, but your borrowers do have another option that may make better financial sense. This determination, as always, is based on your specific financial situation and goals. In recent months, most of the major mortgage insurers have introduced new programs under which borrowers making at least a 10% down payment can finance a lump-sum MI premium. Financing this cost accomplishes 4 things:
NO monthly MI payment, lowering your monthly cost (effectively increasing affordability)
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This page was last updated on 02/14/08.