Government Loans

FHA Loans

The Federal Housing Administration (FHA), which is part of the U.S. Dept. of Housing and Urban Development (HUD), insures various mortgage loan programs. An FHA Loan has lower down payment requirements, is easier to qualify for than a Conventional Loan and has statutory limits which they cannot exceed.

FHA 203K Renovation Loans

Most mortgage financing plans provide only permanent financing, which means the lender will not close the loan and release the mortgage proceeds unless the condition and value of the home provide adequate loan security. When rehabilitation/renovation is involved, a lender typically requires the improvements to be finished before permanent financing is provided.

When a homebuyer wants to purchase a home in need of repair, rehabilitation, or renovation, there are typically 3 different steps involved related to financing. First, the homebuyer has to obtain financing to purchase the home. Then they will need additional financing to do the rehabilitation/renovation construction which often times involves relatively high interest rates and short amortization periods. The third step is to obtain a Permanent Mortgage when the work is completed to pay off the interim loans acquired to purchase the home and to complete the rehabilitation/renovation.

The FHA Section 203(k) program was designed to simplify this process. The borrower obtains a single mortgage at a long-term fixed or adjustable rate to finance both the purchase of the home and the rehabilitation/renovation. The mortgage amount is based on the projected value of the property with the work completed and takes into account the cost of the work as well. HUD will insure the mortgage as soon as the proceeds are disbursed and a rehabilitation/renovation escrow account is established.

Please visit http://www.hud.gov/offices/hsg/sfh/203k/203kabou.cfm for more information about 203K Renovations Loans.

VA loans

VA Loans are guaranteed by the U.S. Dept. of Veterans Affairs, which allows veterans and service persons to obtain financing for their home with favorable loan terms and usually without a down payment. The U.S. Department of Veterans Affairs does not make loans, it guarantees loans made by lenders and determines your eligibility. If you are qualified, VA will issue you a Certificate of Eligibility to be used in applying for the loan. VA Loans are obtained by making application to private lending institutions and lenders generally limit the maximum VA Loan amount to $203,000. Additionally, it is easier to qualify for a VA Loan than a Conventional Loan.

State and Local Housing Programs

Many states, counties, and cities provide low-to-moderate finance programs, down payment assistance programs, or programs tailored specifically for a first time homebuyer. These programs are: typically more lenient on the qualification guidelines, are Fixed-Rate Mortgages, have interest rates lower than the current market, and are often designed with lower upfront fees. Loan assistance programs are also offered at the local or state levels such as MCC (Mortgage Credit Certificate) which allows you a tax credit for part of your interest payment.

Conventional Loans

Conforming Loans

Any mortgage other than an FHA or VA Loan is a Conventional Loan. Conventional Loans may be Conforming and Non-Conforming. Conforming Loans have terms and conditions that follow the guidelines established by Fannie Mae and Freddie Mac. These two institutions purchase mortgage loans from mortgage lending institutions that comply with these guidelines.

Fannie Mae and Freddie Mac guidelines establish the following: the maximum loan amount, borrower credit and income requirements, down payment, and suitable properties. They also announce new loan limits every year.

The 2008 conforming loan limits for first mortgages remain at the limits set in 2006 and 2007:

One-family:	$417,000
Two-family:	$533,850
Three-family:	$645,300
Four-family:	$801,950

The maximum loan amount is 50 percent higher in Alaska, Guam, Hawaii, and the Virgin Islands and properties with five or more units are considered commercial properties and are handled under separate guidelines.

The 2008 loan limit for second mortgages is $208,500. In Alaska, Guam, Hawaii, and the Virgin Islands the maximum second loan amount is $312,750. The sum of the original loan amounts of the first and second mortgages cannot exceed $417,000 and in Alaska, Guam, Hawaii, and the Virgin Islands, the sum cannot exceed $625,500.

Historical Loan Limits:

Loan Limits for:	2006/2007	2005	2004
One-family	$417,000	$359,650	$333,700
Two-family	$533,850	$460,400	$427,150
Three-family	$645,300	$556,500	$516,300
Four-family	$801,950	$691,600	$641,650

Loan Limits for:	2003	2002	2001
One-family	$322,700	$300,700	$275,000
Two-family	$413,100	$384,900	$351,950
Three-family	$499,300	$465,200	$425,400
Four-family	$620,500	$578,150	$528,700

Loan Limits for:	2000	1999	1998
One-family	$252,700	$240,000	$227,150
Two-family	$323,400	$307,100	$290,650
Three-family	$390,900	$371,200	$351,300
Four-family	$485,800	$461,350	$436,600

Jumbo Loans

Loans above the maximum loan amount established by Fannie Mae and Freddie Mac are known as Jumbo Loans. Jumbo Loans often have a little higher interest rate than Conforming, however, the spread between the two varies with the economy.

Fixed-Rate Mortgages

With Fixed-Rate Mortgages the interest rate and your mortgage monthly payments remain fixed for the period of the loan. Fixed-Rate Mortgages are available for: 40, 30, 25, 20, 15 and 10 years. Generally, the shorter the term of a loan, the lower the interest rate.

The most popular mortgage terms are 30 and 15 years. With the traditional 30 year Fixed-Rate Mortgage your monthly payments are lower than they would be on a shorter term loan such as a 15 year. However, if you can afford higher monthly payments a 15 year Fixed-Rate Mortgage allows you to repay your loan twice as fast and save more than half the total interest costs of a loan with a 30 year term.

The payments on Fixed-Rate Fully Amortizing Loans are calculated so that at the end of the term the mortgage loan is paid in full. During the early amortization period, a large percentage of the monthly payment is used for paying the interest. As the loan is paid down, more of the monthly payment is applied to principal.

If you can afford it, paying one extra mortgage payment a year, dividing it up at your discretion, will repay your loan much faster. For example, a 30 year loan can be paid off within 18 to 19 years.

Balloon Loans

Balloon Loans are short-term Fixed-Rate Loans that have fixed monthly payments commonly based upon a 30 year fully amortizing schedule with a lump sum payment at the end of its term. They typically have terms of 3, 5, and 7 years.

The advantage of a Balloon Loan is the interest rate is generally lower than 30 and 15 year mortgages, resulting in lower monthly payments. The disadvantage is that at the end of the term you will have to come up with a lump sum to pay off your lender, either through a refinance or from your own savings.

Based upon the outstanding principal balance and if certain conditions are met Balloon Loans with refinancing options allow borrowers to convert the mortgage at the end of the balloon period to a Fixed-Rate Loan. The interest rate on the new loan is a rate that is current at the time of conversion and there might be a minimal processing fee to obtain the new loan, however, if you refinance the loan at maturity you do not need to be re-qualified and the property does not need to be reappraised. The most popular terms are the 5/25 Balloon and the 7/23 Balloon.

Adjustable Rate Mortgages (ARM)

An ARM is a variable or adjustable loan whose interest rate and monthly payments fluctuate over the period of the loan. With this type of mortgage, periodic adjustments based on changes in a defined index are made to the interest rate. The index for your particular loan is established at the time of application. Well known ARM indexes include:

• Constant Maturity Treasury (CMT)
• Treasury Bill (T-Bill)
• 12-Month Treasury Average (MTA or MAT)
• 11th District Cost of Funds Index (COFI)
• London Inter Bank Offering Rates (LIBOR)

Example:
The index is 5.3% and the margin is 2.5%, then the new interest rate = 5.3% + 2.5% = 7.8%.
The nearest to 0.8% is 0.75% = 6/8%.
The result will be 7.75%.

The margins remain fixed for the term of the loan and are not impacted by the financial markets and movement of interest rates. Lenders use a variety of margins depending upon the loan program and adjustment periods.

Most ARMs have interest rate caps to protect you from enormous increases in monthly payments. A lifetime cap limits the interest rate increase over the life of the loan. A periodic cap, also known as an adjustment cap, limits how much your interest rate can rise at one time.

Examples:
1. The initial interest rate is 4.5%, the index is 7%, and the margin is 3%, then the new interest rate = 7% + 3% = 10%.
If the lifetime cap is 5% then the actual new interest rate will be 4.5% + 5% = 9.5%.
2. The initial interest rate is 6%, the index is 5%, and the margin is 3%, then the new interest rate = 5% + 3% = 8%.
If the periodic cap is 1% then the actual new interest rate will be 6% + 1% = 7%.

Your mortgage disclosures will tell you the following: the exact index used, whether the weekly or monthly value applies, the lead time for your index, the margin, and any caps.

Negatively Amortizing Loans

Some types of ARMs, for example, Option ARM Loans, offer payment caps rather than interest rate caps, which limit the amount the monthly payment can increase. If a loan has a payment cap but has no periodic interest rate cap, then the loan may become negatively amortized, meaning; if the interest rates rise to the point that the monthly mortgage payment does not cover the interest due, any unpaid interest will get added to the loan balance, so the loan balance increases. However, you always have the option to pay the minimum monthly payment or the fully amortized amount due.

Example:
Your loan has a payment cap of 7.5%. If your payment is $1,000 per month and interest rates rise, your new payment would normally be $1,200/mo (for example). But your capped payment is only $1,075. The other $125 get added to your loan balance, to be paid off over time, unless of course you decide to pay that additional amount now.

The advantage of Negatively Amortizing Loans is a relatively stable payment, low interest rates relative to the market at any given time, and the ability to pay back the money borrowed today at a depreciated value years from now because of natural inflation. Negatively Amortizing Loans are a great tool for homeowners if your understand the mechanics of them, but are not for every buyer.

With most ARMs, the interest rate can adjust: every month, every three or six months, once a year, every three years, or every five years. The interest rate on Negatively Amortized Loans can also adjust monthly and a loan with an adjustment period of 6 months is called a 6-month ARM, with an adjustment period of 1 year is called a 1-year ARM, and so on.

Most ARMs offer a teaser rate, an initially lower interest rate than the fully indexed rate; index plus margin, during the initial period of the loan, which could be one month or a year, or more.

All ARMs are available with 30 year terms and some with 15 or 40 year terms and they generally have a lower initial interest rate than Fixed-Rate Loans.

Fixed-Period ARMs

With Fixed-Period ARMs homeowners can enjoy fixed payments for three to ten years before the initial interest rate changes. At the end of the fixed period, the interest rate will adjust annually. Fixed-Period ARMs: 30/3/1, 30/5/1, 30/7/1, and 30/10/1, are generally tied to the one-year Treasury Securities Index. ARMs with an initial fixed period have both a lifetime cap and a first adjustment cap which limits the interest rate you will pay the first time your rate is adjusted. First adjustment caps vary with the type of loan program. The advantage of these loans is you get a fixed rate for a period of time and the interest rate is lower than for a 30 year Fixed-Rate Loan.

Convertible ARMs

Some ARMs come with options to convert them if you see interest rates starting to rise. You may convert them to a Fixed-Rate Mortgage at designated times, usually during the first five years on the adjustment date. The new rate is established at the current market rate for Fixed-Rate Mortgages. The conversion is typically done for a nominal fee and requires almost no paperwork, however, the interest rate is typically a little higher than the market rate at that time.

The other kind of Convertible Mortgage is a Fixed-Rate Loan with a rate reduction option. It allows you under some prescribed conditions and for a small conversion fee to adjust your mortgage to the going market rate if rates have dropped since the time your loan closed. Typically the interest rate or discount points may be a little higher for a Convertible Loan.

Graduated Payment Mortgages (GPMs)

Graduated Payment Mortgages have payments that start low and gradually increase at predetermined times. A lower initial payment allows you to qualify for a larger loan amount. The monthly payments will eventually be higher in order to catch up from the lower payments. In fact, your loan will be negatively amortizing during the early years of the loan, after this time you will be paying off the principal balance at an accelerated pace through the remaining term.

Lenders offer different GPM payment plans, which vary in the rate of payment increases and the number of years over which the payments will increase. The greater the rate of increase or the longer the period of increase, the lower the mortgage payments in the early years.

Example
The following table compares the monthly payment schedule of a 30 year Fixed-Rate Loan with the most frequently used GPM plan. In this plan payments increase 7.5 percent each year for 5 years before leveling off.
The example uses a mortgage with a loan amount of $60,000 and an interest rate of 10 percent.

Year	30 year fixed	GPM loan
1	526.80	400.22
2	526.80	430.24
3	526.80	462.50
4	526.80	497.20
5	526.80	534.49
6	526.80	574.57
7 - 30	526.80	574.57

Buydown Mortgage

A Temporary Buydown Loan has an initially discounted interest rate which gradually increases to an agreed-upon fixed rate usually within one to three years. This initially discounted rate allows you to qualify for more house with the same income and gives you the advantage of lower initial monthly payments for the first years of the loan when extra money may be needed for furnishings or home improvements. To reduce your monthly payments during the first few years of a mortgage you can buy down the principal balance by making an initial lump sum payment to the lender. If you do not have the cash to pay for the buydown, the lender will pay this fee and then it is reflected in your rate, which will be slightly higher.

A very popular buydown is the 2-1 Buydown.

Example
If the interest rate on the note is 8% with a 2-1 Buydown Mortgage your initial discounted rate is 6% and you would have 6% interest rate for the first year, 7% for the second year, and 8% afterwards. You will need to prepay the difference in payments between the 6% and 8% rates the first year, and between the 7% and 8% rates the second year. 3-2-1 and 1-0 Buydowns are also available, though less common. A Compressed Buydown, works the same way, but with the interest rate changing every six months instead of on a yearly basis. The lower rate may apply for the full duration of the loan or for just the first few years. A buydown may be used to qualify a borrower who would otherwise not qualify . This is because a buydown results in lower payments which are easier to qualify for.

Reverse Mortgages

Reverse Mortgages are becoming increasingly popular in America. They can give older Americans greater financial security to: supplement social security, meet unexpected medical expenses, make home improvements, and much more.

Borrowers must be at least 62 years old and occupy the home as their principal residence. The maximum loan amount depends on the age of the borrower, the expected interest rate, and the appraised value of the property.

There are many payment options available. For example, borrowers may receive monthly payments for a fixed period they select or for as long as they occupy the home as their principal residence.

Reverse Mortgages do not need to be repaid until the borrower moves, sells or refinances the property, or dies. FHA insures the lender against the risk that proceeds from the sale of the property may not be sufficient to pay off the mortgage balance. If the property is sold, the homeowner or heir receives any proceeds in excess of the amount needed to pay off the mortgage.

Construction-Perm Loans

A Construction-Perm Loan is performed at the end of the construction phase that refinances the Construction Loan to a common mortgage. Typically a Construction Loan is interest only for the building period and most construction lenders require that their Construction Loan be paid off at the time the home is completed.

This type of loan is designed for borrowers who choose to finance the construction of their home, who desire to build a major addition, or who want to make major renovations to their home. The loan is made directly to the borrower and not to the builder. The Construction-Perm Loan consists of two phases, the construction phase and the permanent phase. During the construction phase, the borrower is charged interest at either the permanent note rate or a floating interest rate based on the lender's prime lending rate plus a margin. When construction is complete, the loan is modified into a Permanent Loan. The Construction-Perm Loan is only offered in conjunction with permanent financing.

Construction/Perm Program fills these needs:

Borrower Need	Feature
Low Cash to Close	All closing costs can be rolled into loan Reduced transfer taxes with the exception of Prince George's county. Taxes are based off lot price versus sales price as opposed to permanent financing
Home Affordability	Doesn't tie up builder's funds -- potentially reduces cost of house Rate lock options include availability of float down Variety of permanent loan products available
Speed	One closing or two depending on individual situation " Lot loan financing in conjunction with Construction-Perm
Saves Money Over Life Of Loan	Doesn't tie up builder's funds -- potentially reduces cost of house Tax Savings " Construction interest is tax deductible for the buyer but is paid by the builder in most cases during the construction period