CHAPTER 8
Loans for Good to Great Credit
If your credit scores are above 680 and you’ve gotten your automated loan approval, you mostly have your choice at a smorgasbord of loans. There are literally hundreds of mortgage types from which to choose, and you can get a headache trying to research them all. This chapter is your aspirin.
8.1 WHAT SHOULD I LOOK FOR IN A MORTGAGE LOAN?
Get a loan that you feel comfortable with, one you don’t have to worry about and that is easy to get in terms of qualifying and cost. You can knock yourself out on that one. Fannie and Freddie make up about two-thirds of all mortgages generated; the others are government-backed and portfolio loans. But instead of trying to find the absolute best loan for your situation, first ask yourself if indeed you are very different from most other borrowers. Do you have good credit? Do you have a down payment? Do you have a job and can you afford the new mortgage payment? If so, there’s no reason to get cute about your mortgage.
Forget perusing through your mortgage lender’s loan book exploring all the possible alternatives. Get a fixed or get an ARM. Get a fixed if you’re in it for the long term or are risk-averse. Get an ARM if you see this purchase as being short term, say, three to five years. Get a hybrid if you’re in between. Why such narrow choices? Pricing.
Look at it this way: If the single most common item on the market today is available with most every lender on the planet, and if the loans are exactly alike, then what do you think that does to the price? It keeps it low. If more people are trying to sell the same product and it’s available 24 hours a day, then you would think that such a commodity’s determining factor would be price, right? If a conventional loan is everywhere, then the only thing you accomplish by trying to find something better is a wasted effort.
Yet beware, the lowest-priced loan does not necessarily mean an enjoyable borrowing experience. Get referrals from friends, associates, and your real estate agent and find a lender with competitive pricing as well as a solid reputation.
8.2 SO EVERYONE SHOULD FIRST TRY FOR A CONVENTIONAL LOAN?
Yes, in most cases, you should try for a conventional loan first. There are more conventional loans and conventional lenders than any other type, which serves to keep the costs of these loans down. That’s if everyone were exactly the same. But the differences in loans for people with good credit lie in special circumstances. Special circumstances may mean not having any down payment money. Special circumstances may mean having a cosigner on a loan. Special circumstances may mean having difficult-to-prove income.
8.3 WHAT IF MY LOAN ISN’T A FANNIE LOAN? WHAT IF IT’S A JUMBO OR A PORTFOLIO?
Most loans still will accept a Fannie or Freddie approval using an AUS, and simply ask that the loan officer document the file just as if he were sending a loan to Freddie Mac. Why reinvent the wheel, right? Most jumbo and portfolio loans may actually require that the loan be submitted through Fannie’s automated system even though the loan isn’t eligible to be a Fannie loan because the loan amount is too high.
Another loan program that doesn’t fit Freddie limits will still require that the loan be submitted to Freddie Mac’s automated underwriting system and follow the guidelines from there. In many instances, a nonconforming approval will look identical to a conforming approval in that the loan was underwritten and documented the very same way.
8.4 THEN HOW DO I MANAGE TO FIND THE LOAN THAT’S RIGHT FOR ME?
The first and perhaps foremost consideration is how much you intend to put down. Loans with no money down have higher interest rates and can be more difficult to qualify for than loans with 20 percent down or more. The more down you have, the wider the selection of loans that are available to you.
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There aren’t many zero-down loans. If you don’t want to put anything down on a home, then you have a couple of choices: government or nongovernment. If you want to put zero money down, the absolute best loan program is a VA loan. If you have VA eligibility, you need look no further. The veteran gets competitive interest rates and a choice between a fixed or an adjustable rate. Hands down, this is the best deal, if you qualify.
Not a qualifying veteran? Then take a look at the USDA program to see if it’s a fit. If you’re a first-time buyer, check with local and state agencies to see about a grant that can be used to offset the cost of a down payment and closing fees.
8.5 SHOULD I ALWAYS TRY TO PUT AS MUCH DOWN AS I CAN?
Sometimes, but not always. If you can put a minimum of 20 percent down, that might be ideal, provided you have the funds available. It gives you both a strong equity position to offset any near-term price depreciations while avoiding any PMI requirements. Putting more than 20 percent down is a personal preference, but putting much more than that down might be too much if you have other things you’d like to do with your money. In fact, some mortgage loan officers might think it is better to put as little down as possible and invest the difference in other vehicles. Having some money in the transaction, though, keeps your payments lower and you have immediate equity in your home.
8.6 DO I HAVE A CHOICE IN MY LOAN TERM?
Of course you do, as long as the lender offers it. Most loans start as low as 10 years, but terms can be anything between 10 and 50 years as long as the lender offers the product. Most advertisements on fixed-rate loans are for 30-year loans and sometimes for 15-year fixed loans.
The difference in term lies in the monthly payment and how much interest you can save over the long term. Even though the interest rate on a shorter term is usually lower, the monthly payments will be higher. For instance, for a 4 percent 30-year fixed rate on a $300,000 loan, the monthly payments are $1,654. For a similarly priced 15-year fixed loan at 3.75 percent, the payments inflate to $2,820. An increase of nearly 30 percent! Often this increase in monthly payment stops people from choosing a 15-year loan and they take the standard 30-year product instead. A benefit of choosing a shorter-term loan is that you’re building equity so much faster and your home is paid off sooner.
Another factor in choosing your payback period is how much interest you’re going to pay on that loan. Using the same example and taking both loans to term, you pay over $400,000 in interest with a 30-year loan and just over $175,000 with a 15-year note. That’s a huge difference. Yeah, I know that few people take loans to full term, but even then the math works because the bulk of mortgage interest is paid at the beginning of the loan, not toward the end. Again using this scenario, after 10 years the loan balance on a 30-year note is $251,312, while after 10 years the loan balance on a 15-year loan is already down to $111,400. That’s another reason to consider a shorter term for your mortgage.
8.7 WHY ARE PAYMENTS HIGHER ON A 15-YEAR LOAN EVEN THOUGH THE RATE IS LOWER?
Because the amortization term is squished in half. With a 30-year mortgage there’s plenty of time to spread out interest payments, but when you cut the term in half, then payments must increase to both meet the term and accommodate the interest over 180 months.
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While paying less interest makes a 15-year loan attractive, the higher monthly payments can make it less so. In fact, someone who can qualify on a 30-year loan may not even qualify for a 15-year mortgage—there’s that much difference. But guess what? There are other choices. One that might fit better is a 20-year mortgage. Or even a 25-year note. Many lenders simply keep the rate the same as a 30-year fixed mortgage but shorten the payback period. Using our example, payment on a 25-year loan at 7 percent would be $2,120 per month. It’s slightly higher than a 30-year loan but still a saving of over $63,000 in interest. A 20-year loan would save you $141,700 in interest yet only raise your monthly payment by a couple of hundred dollars instead of more than $500 with the 15-year note.
Most lenders will offer amortization periods other than a 30-year or 15-year fixed, although most of them limit the choices to five-year increments, with a 10-year minimum. Instead of just 30-year or 15-year loans, you now can choose 10, 15, 20, 25, or even 40 years.
Some lenders will even amortize your loan over goofy terms, like 18 or 23 years. It’s not common, but it’s usually used when someone is refinancing a current mortgage with a lender and only wants to amortize over the remaining term of the current loan. But you usually have to ask for different terms. Don’t assume that just because you only see 30-year and 15-year rate quotes that there’s nothing else available. If your loan officer stammers and states that you can’t set your own loan term, then find someone who can offer those terms. You just have to ask.
8.8 WON’T MY LOAN OFFICER HELP ME FIND THE RIGHT MORTGAGE?
Hopefully, yes. That’s one of their jobs. Good loan officers, especially good mortgage broker loan officers, always keep a keen eye out for the newest loan product on the market. But it’s not uncommon for a loan officer to get used to doing only one or two types of loans. Most every loan officer will do a conventional Fannie or Freddie loan. They’re easy, and the way technology is today with AUS, they’re fall-down easy. That can make some loan officers lazy, so they might try to pigeonhole you into a particular loan program simply because they know how to work that loan better than others. There’s really no way to tell if a loan officer is trying to make you take one program over another until you interview that person (see Chapter 12), but just know that human nature sometimes allows for the easiest path to be chosen.
Government loans like FHA, USDA, and VA programs are documented differently. Because they have different paperwork from conventional mortgages, they’re foreign to many loan officers. If you think that a VA loan might be a better deal for you, but the loan officer doesn’t offer that program or tries to push you away from it, then you need to hear a good reason why. Furthermore, some mortgage companies aren’t allowed or qualified to work with FHA loans. If you’re in a loan meeting and you have 3 percent down and FHA never comes up in the conversation, then you need to find out why.
In general terms, however, loan officers can help borrowers find a good mortgage fit, if they do their job right. Remember, though, that one of the first things you need to do is submit your loan application for an AUS approval to see what you might be qualified for and what loan documentation you’ll need for which particular product.
8.9 WHERE ARE THE “STATED” INCOME AND “NO DOCUMENTATION” LOANS?
They’re history, along with many of the lenders who made them. The CFPB essentially eliminated such programs with the introduction of QM loans. There are still portfolio programs that have some characteristics of a stated income loan. A true “stated” loan means the lender uses the income listed on the application without using income tax returns or pay stubs. However, there are a few programs that review bank statements in lieu of income verification.
These “bank statement” programs look at the most recent 12 months of bank statements and use the deposits shown on the statements as income. Such loans require excellent credit and anywhere from a 20 to 30 percent down payment.
8.10 DOES THE TYPE OF PROPERTY AFFECT THE KIND OF LOAN I CAN HAVE?
Most definitely. Conventional mortgages finance a maximum of four units, including duplex, three-unit, and fourplex buildings. More than four units attached and you’re looking at a commercial loan or apartment building loan. But if your property is simply a single-family dwelling, then you have access to most every loan there is.
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Other properties that might take special consideration are condominiums. Condos offer individual ownership in the living unit while all common areas, such as sidewalks and recreational areas, are shared. Condos also carry their own hazard insurance, so you won’t have to take out an insurance policy for structural damage; on the other hand, you’ll have to pay homeowners association dues. Condos have a few special requirements, but if your condo meets them, then almost every loan available also works for a condo. Special requirements for condos can be guidelines that restrict the number of units in a condominium project that can be rented out or limit the number of condos one person can own.
Lenders have to approve your condominium project, and they do so by evaluating how many units are in the complex, how many condos are rented out, and if the project is completed or not.
Lenders like to see a condominium project that is “owner occupied” rather than having most of the complex rented out. Generally, the “owner occupancy” percentage is 60 percent, and no one person or entity can own more than 10 percent of the project. The project must also be 100 percent complete, including all of the common areas, and the control of the project must have been turned over by the developer to the homeowners association. Once the control of the project is turned over to the homeowners association, that signals that construction is 100 percent complete and the builder has no more legal interest in the property. These classification requirements can be waived or relaxed with a higher down payment. Some loans may have additional requirements based on the height of the structure. For example, loans may require more money down if the building is more than four or eight stories tall.
There are two types of condominium classifications as defined by lenders: “warrantable” and “nonwarrantable.” Warrantable condos meet the specifications I’ve just described with regard to owner occupancy, completion of common areas, and such. But what if the condos are brand new and still being built? Then they are nonwarrantable, and they have higher rates than warrantable condos.
What makes for a nonwarrantable condo? Typically the differences lie in phase completion. Most condominium projects are constructed in phases. Phase I is completed and buyers move in, while phase II and perhaps phases III and IV are still being built. Warrantable condos need to have all phases completed, while nonwarrantable just means that the subject phase is done.
8.11 WHAT TYPES OF PROPERTY CAN I EXPECT PROBLEMS WITH?
Units that are bought under a time-share agreement, condotels, mobile homes, and properties that are particularly unusual.
Time-Shares
A time-share is a property that you have partial ownership in, and you live there periodically throughout the year. A common time-share is a condominium or beach house in a vacation spot, so various owners share time to vacation there. Time-shares present a problem, regardless of whether the unit is part of a condominium. Lenders can’t make a loan to someone who doesn’t own the property 100 percent. Should the borrower default on a time-share loan, the lender can’t foreclose, since the property has other owners.
Condotels
A similar situation arises with condotels, which are condominiums that are owned individually but function more like a hotel than a home. Someone will buy a condotel and let a management company rent out the unit just as if it were a hotel room. There’s a check-in desk, just like in a motel, and the management rents out the unit weekly or monthly. The owner gets the rent, paying a portion to the management company. Lenders view such properties not as a house but as a commercial deal, more like a motel loan.
Mobile Homes
Are you considering buying a manufactured house or mobile home? A main requirement for a mobile home loan is that the property being bought has to be considered real estate and not personal property. With personal property, financing is more akin to an automobile or boat loan.
When is a mobile home personal property? When it’s not permanently attached to the ground using specific methods or when the owner doesn’t own the land the mobile home sits on.
There are fewer sources for manufactured housing mortgages than there are for “stick-built” homes. Conventional lenders may not be your first resource for financing although conventional and government-backed programs do allow for mobile homes under proper conditions. Your best bet is to find a lender that specializes in mobile homes.
Unusual Properties
You can also expect problems getting loans when there are no similar properties, or comparable sales, in the area. The lender needs to see three similar properties that have sold within the preceding 12 months and compare those sales with your new home. If you’ve got a 2,500-square-foot three-bedroom home in an established community, it’s likely that similar three-bedroom homes will be found. If not, you’ll have a hard time getting a good appraisal. No appraisal, no loan.
Many times this happens with rural property on acreage. If your house is in the country and sits on 10 acres, you’ll probably be okay, as long as there are similar homes throughout the area that show up as sales. But what if you have a home that sits on 100 acres? What if your house is the only home in a 10-mile radius that sits on 200 acres? If you can’t find properties that are like yours, with homes on large acreage, be prepared for some trouble. Lenders are less inclined to make loans when there are no comparable sales to be found.