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Mortgage 101

It’s a rare home sale that doesn’t involve a mortgage, so knowing the basics can pay off.

• Common Mortgages & Who They Fit
• New Green Mortgage for Environmentalists
• Understanding FHA Loans
• What Lenders Need From Buyers
• Recognizing Predatory Lending

Common Mortgages and Who They Fit

1. Conventional 30-year, fixed-rate mortgages

Pluses: Good for buyers who want the security of a fixed principal and interest payment and plan to stay in a home long-term.

Minuses: Higher overall interest than 15-year loans. May need to refinance if rates fall significantly.

2. Conventional 15-year, fixed rate mortgages

Pluses: Appeals to buyers who can afford higher payments and want to build equity quickly and pay less interest across a loan’s life. Payments remain the same over the life of the loan.

Minuses: Payments that are 25 percent to 30 percent higher can be a burden if income changes.

3. Bi-weekly mortgages

Pluses: Good for buyers who want to reduce the time needed to pay off a loan. By paying half the monthly payments every two weeks, the approach produces 13 monthly payments, rather than 12, per year.

Minuses: Little flexibility if income changes or emergencies arise.

4. Adjustable-rate mortgages

Pluses: Low interest in the first year. Good for those who know their income will rise over the coming years or those who are moving in a couple years and aren’t concerned with a rate hike. Allows borrowers to qualify for a higher loan amount.

Minuses: Monthly payments can increase significantly if rates rise, although most adjustables have some form of interest-rate cap.

5. Multi-year fixed, with balloon

Pluses: Lower closing costs than fixed mortgages; low payments.

Minuses: Need to refinance at end of fixed-rate period, no matter what interest rates are.

6. FHA and VA

Pluses: Lower downpayment requirements than conventional loans. Often easier to qualify for for those with low incomes.

Minuses: Requires additional inspections and insurance. In case of VA loans, limited to veterans.

TIP: Conventional wisdom says lock in a rate right away. But in a volatile market, rates could come down. Advise buyers to talk with the lenders and consider their advice about when to lock.

TIP: Some states prohibit real estate professionals from receiving referral fees for assisting lenders in loan origination. Other states require real estate practitioners to be licensed as mortgage brokers to receive this type of compensation. The U.S. Department of Housing and Urban Development also has issued a statement that individuals must do significantly more than just direct a borrower to a particular lender to earn a referral fee.

Need More Information?

Check out NAR's REALTORMagazine Website, http://www.realtor.org/realtormag for more great articles on mortgage choices and analysis.

There is a great article on Mortgage Roundup about specific pros and cons of different mortgage types.

Niche loans benefit “greens.”

Environmentally-conscious buyers who like the idea of living close to public transportation or who want to buy or retrofit a house with energy-efficiency features can choose from a new generation of specialty loans just for them.

The “Energy Efficient Mortgage,” available from Countrywide and other lenders, is designed for buyers of homes that meet a high energy-efficiency standard set by the U.S. Environmental Protection Agency.

“Energy-efficient mortgages usually are offered at a standard interest rate but are valuable because they have easier underwriting and allow buyers to buy a more expensive home,” says Perry. In part this is because the anticipated lower utility bills are factored into the costs of homeownership.

Another new, “green” loan product is the “Location Efficient Mortgage,” which will be offered in a pilot program by Countrywide and other lenders to buyers of homes near public transportation in Los Angeles, the San Francisco Bay Area, and Seattle. These loans, which will be purchased by Fannie Mae, allow lenders to stretch credit ratios, enabling borrowers to buy more house than they otherwise could. The loans factor in the homeowners’ reduced transportation costs to increase their overall income.

Having all these loan options now may require you to do a little more homework so you can best guide your clients. But staying up-to-date also keeps buyers in the fast lane to your door--looking for the perfect home–and the perfect loan.

Understanding FHA Loans

Loans insured or guaranteed by the Federal Housing Administration provide a good financing option for borrowers, such as first-time homebuyers, with good credit but little or no money for a downpayment. FHA terms include:

1. Downpayments of 3 percent on the first $25,000; 5 percent on the next $100,000; and 10 percent thereafter.

2. Maximum loan amounts, which vary by area. Check the U.S. Department of Housing and Urban Development site for specific limits in your area.

3. Property must be appraised by an FHA appraiser.

4. No secondary financing.

5. One-time mortgage insurance premium of 2.25 percent of loan, which can be financed as part of the loan.

6. Annual 0.5 percent insurance premium.

One hurdle to obtaining FHA insurance for a loan is the HUD/FHA Homebuyer Protection Plan. This plan, which was revised in 1999, was designed to ensure that homes backed by the FHA were in good physical condition. The plan requires that before a property can be approved for an FHA guarantee, an FHA-approved appraiser must make a comprehensive survey of the property’s physical condition.

If the appraiser notes significant defects, he or she must recommend a full home inspection. All defects found must be disclosed to potential buyers. This program doesn’t mandate home inspections, but buyers are required to sign a detailed disclosure form explaining why a home inspection can be helpful and how an appraisal and an inspection differ.

What Lenders Need From Buyers

Having the necessary information ready for the lender will make the mortgage application process go faster.

General
Social Security numbers
Divorce papers
Green cards for resident aliens
Employment verifications
Two most recent paycheck stubs
Tax returns for the last two years
Three most recent bank statements

Assets
Saving accounts (balances, account numbers, and institutions)
Credit union (balances, account numbers, and institutions)
Mutual funds (balances, account numbers, and institutions)
IRAs or 401(k)s (balances, account numbers, and institutions)
Equity in current home
Cash flows from rental properties
Pensions or annuities
Alimony
Life insurance—the face amount and cash value

TIP: Remind self-employed buyers that they’ll be subject to extra scrutiny. Tell such buyers to provide balance sheets and company tax returns.

TIP: If you’re working with an engaged couple, tell them about FHA Bridal Registry Accounts, which allow family and friends to make cash wedding gifts toward the purchase of a house.

Debts
Mortgage and home equity loans
Monthly bills
Credit card balances
Student loans
Car loans
Alimony and child support payments

TIP: If you have a car loan with only a few payments remaining, lenders may not count the balance toward your outstanding debt.

“Real Estate Update,” NATIONAL ASSOCIATION OF REALTORS^®, May 2001

Recognizing Predatory Lending

There’s no easy definition of what constitutes predatory lending. In some cases, subprime loans, loans made at a high interest rate because of a borrower’s poor credit, are justified. In other instances, subprime lending may grow out of abusive lending practices.

Some clues that a buyer may be a victim of predatory lending include:

1. Unnecessary services connected to the loan that have no benefit to the consumer.

2. Mischaracterization of the loan’s terms and conditions.

3. Deceptive disclosures of balloon payments.

4. Excessive prepayment penalties.

If any of these actions occur during the mortgage application process, suggest that the buyers look elsewhere for a loan.

Reprinted from REALTOR® Magazine [2005] (http://www.realtor.org/realtormag) with permission of the NATIONAL ASSOCIATION OF REALTORS^®. Copyright 2005. All rights reserved.