This section of the Home Financing Guide give you information and hints on how you can choose available ‘creative financing' options to obtain the mortgage loan that fits your particular needs or challenges. This is the area that you may need to most assistance from a Loan Officer since there are many different choices and inherent complexities. The Team at Allied Home Mortgage is here to help you make the right choices for your situation. Our goal is to make sure you make sound and informed decisions on what is and is not right for you based on your unique and individual situations. Not all loans are created equally, just as not homes are created equally. We will guide you through today's complex lending options through the most transparent lending and disclosures available in the industry today. Call us any time with any questions and we will be happy to answer them for you. Our belief is that the more educated we make our consumer, the better decisions our clients will make, and the better we can serve our communities.
Many times a ‘vanilla loan' won't quite meet your specific requirements or circumstances. Maybe there is no money available for a down payment, maybe the monthly payment is too high to qualify for the loan or there are other challenges that make it difficult to qualify or live with a ‘standard' loan. This is where the help of an experienced mortgage professional can mean the difference between getting a loan that works for your needs or even being able to obtain home financing in the first place. This document will give you some ideas and encouragement but certainly work with a professional who can sort it all out for you.
Down Payment Challenges:
One of the biggest challenges to home ownership is the initial cost. There are two parts to the initial cost; they are Down Payment and Closing Costs.
Down payment requirements vary by loan program. Conventional loans typically require 20% down payment otherwise monthly Mortgage Insurance premiums are required (unless there is a second mortgage, that will be discussed a little later). But loan programs such as FHA have a lower down payment minimum of 3.5% and other programs such as VA and USDA Rural require no down payment at all. That is one of the reasons that Government Loan Programs are so popular.
For conventional loans there are some lenders which offer a second lien loan which reduces or eliminates the amount of down payment required. Please know that having a second lien is typically at a higher interest rate than the first lien. Also the presence of a second lien and may increase the interest rate on the first lien as well. In recent times the option of splitting a loan has become increasingly difficult if not nearly impossible. With the state of the current financial system most lender's are not willing to take a second position lien due to the inherent risk. This option was popular a few years ago, but is becoming more and more rare in the new world of lending and risk assesment.
For some cases there are special State or Local Bond programs that will provide a second lien loan that may preclude the need for a down payment. In a few cases that second lien may be deferred or "forgiven" if one stays in that home/mortgage for a specified period of time and makes all of their payments on time. Because of the large number of programs available and their varying qualification requirements, it is highly recommended that you contact your Loan Officer for more information.
If you still have down payment challenges then another option may be a bona fide gift. A bona fide gift is from a relative or qualified non-profit and can be for the entire down payment amount and even more than the minimum down payment. A bona fide gift may not be paid back to the party that provided it and a formal letter must be available with proof of where the money came from. Again this can be a somewhat complex process so check with your Loan Officer for more details as to when gifts are allowed and what the specific requirements are.
Another way you can address down payment is to borrow from a 401K or other long term investment. That may be a better option than cashing out your investment prematurely or receiving an early withdrawal penalty. Discuss this with your Investment Company or Tax Advisor.
Closing Costs Challenges:
Closing costs are one time charges of which many are related to home financing. These include costs such as Lender Fees, Appraisal Fees, Title Insurance, Closing/Settlement Fees, Taxes, Insurance and other miscellaneous costs. These costs can amount to around 3% or more of the loan amount depending on the size of the loan and the loan type. Government Loans which require additional fees such as the FHA Up Front Mortgage Insurance, The USDA Guarantee Fee or the VA Funding Fee can increase closing costs even more.
One of the most common ways to reduce out of pocket closing costs is to have the Seller of the home cover some or all of the costs. Most loan programs allow up to 3% of the loan amount to be covered by the seller. Still others allow up to 6% depending on the loan program and situation.
If you are not buying a home in Florida, but are refinancing the most common way to reduce out of pocket closing costs is to add those costs to the new refinanced loan balance. Some people may not want to increase the loan balance but given the monthly cost savings of a refinance it may not take long to cover the costs given the monthly savings.
Monthly Payment Challenges:
For some individuals their challenge is reducing the monthly mortgage payment either because it feels a bit higher than they are comfortable with or they are not able to qualify for the loan because their total monthly payment ratios are too high.
The primary lever that most people use to reduce their monthly payment is to lower the loan interest rate. If the quoted interest rate is as low as the market allows for your scenario then you may want to consider other creative ways to finance.
Adjustable Rate Mortgages - ARM loans typically have a lower interest rate to start than a Fixed Rate Loan and that in turn reduces the monthly payment. Given that most ARM loans have a fixed period (number of years) where the rate does not change allows the flexibility of acquiring a loan where the scheduled interest rate change occurs after the borrower no longer needs that loan or has sold the home. ARM loans have gotten a lot of bad press as of recent times and for the most part rightfully so. Irresponsible lending practices with regard to ARM loans partially are what led to the financial crisis and the downturn in the Real Estate Market. Many of the risky ARM loans are all but gone now, and the conventional ARM's are what remains available. Not all Adjustable loans are bad, and some offer greatly reduced rates for a period of 3, 5, 7, and 10 years. If you know that your loan will be short term, essentially 10 years or under some of the convetioanl ARM loans offer reduced rates, with fixed caps, meaning the increases are going to fixed, and predictable. These products are far more stable than the risky adjustable loans that led to the housing down turn. ARMS can be the right solutions under the right circumstances, but these decisions should never be taken lightly. It is important to understand exactly how the adjustable rate mortgage will work, when the adjustment periods will begin, what the the maximum adjustment at each period will be, as well as what type of index will be used in determining the adjusted rate at the adjustment periods. Allied will be more than happy to explain the different options to you, and help you determine if you should even consider this type of financing. For the most part, we would discourage this type of loan today, unless you fit the cicmustances perfectly and it is clearly right for you.
Buydown Loans - There are special loan programs where the interest rate is ‘bought down" on a temporary basis. For example a 2/1 Buydown on a 6% loan means that at the first year the interest rate is at 4%, the second year at 5% and the third year and beyond it is at 6%. This is a good loan for those borrowers who believe that their ability to pay a higher house payment will increase in the near future.
Interest Only Loans - Interest Only Loans are loans where for a period of time the requirement loan payment consists only of the accumulated interest (It is assumed that you still may be paying tax and insurance escrow reserves). This can drop the monthly loan payment substantially. But the caution is that at the end of the Interest Only Period the required payment will increase sharply to cover the mortgage principle required to be paid over a shorter period of time than the original mortgage term (e.g. 20 years rather than 30). This kind of loan needs to be treated with caution just like the Adjustable Rate Mortgage so that either the schedule payment increase is avoided by the sale of the home or refinancing. Interest Only Loans are not as widely available as they used to be given this inherent risk. For the most part, we will discourage this type of financing today, for many different reasons. If you are considering this type of loan today, please call us immediately before proceeding and we will be happy to explain why this may not be the best option for financing today.
Loan Term - A longer loan repayment term will also reduce the monthly payment but your accumulated equity grows slower than with a normal loan. The standard loan repayment term is 30 years and there are some loan offerings of 40 years but this is not very common. What is more typical is that borrowers want to pay their mortgage off earlier. In those cases the borrower chooses a shorter loan term. They are able to pay off the loan earlier or increase their home equity faster but the monthly payments will be higher. Interest rates drop a bit when the loan term reaches 15 years or lower. Typical loan repayment terms are 30yr, 25yr, 20yr, 15yr and 10yr.
Call me anytime to discuss the different loan options available to you today. Our commitment to you is to always provide the best educational tools, and the most transparent lending available. We want you to be our client not only today, but we also want to be your Lender for Life. The only way for us to do that is to make sure we help you make sound financial decisions that will benefit you today as well as many years into the future. We look forward to working with you on your home loan transaction and hope to hear from you soon regarding all of your Florida Real Estate financing needs.
Allied Home Mortgage Capital
4117 Mariner Blvd.
Spring Hill FL, 34609