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Conventional Loan FAQs
Question
How are loans for investment properties different from owner-occupied programs?
Answer
Investment properties are harder to qualify for and generally require a down payment. There are 100% financing options for investors, but the interest rates will be several points higher than for 100% on an owner-occupied home and the investor will need to meet other minimum requirements. If the investor has a signed lease, he/she may be able to use 75% of the rental income as personal income in qualifying for the investment property, but that is not always the case. Also, experience as a landlord is important when an investor purchases multiple properties in a short period of time. A documented level of success as a real estate investor gones a long way.
Question
What are the criteria for business loans?
Answer
Business loans specifically on commercial real estate generally require a minimum 10% down payment and the borrower needs to prove that the cash flow of the business can more than cover the debt servicing of the new loan. If you are referring to business loans not secured by real estate, than you want to check with a local bank for those guidelines.
Question
How do you (the mortgage broker) stay current on 1,000’s of different mortgage products?
Answer
We don’t. In fact, no one does. However, many loans are cookie-cutter deals, and there are basically just a handful of programs to cover the majority of situations. Specialists, such as Chad, play an important role in that they are able to focus on just one area of the market and to build expertise in an area that most other lenders only have a basic understanding of. That being said, he does spend several hours every week reading about developments in the industry and consulting with local lenders on new products and changes in qualification requirements a variety of loan programs.
Question
What are the advantages for I/O (Interest Only) mortgages and when do they make sense?
Answer
Interest only mortgages are most beneficial when interest rates are historically low. As rates increase they become less beneficial. The main advantage to an interest-only mortgage is that your monthly payment is reduced because you are only paying interest, not any principal. Most programs allow you to do this for 5 years or 10 years. So, if you borrow $100,000 for 30-years on an interest-only loan, then after the interest-only period, the balance of your mortgage will still be $100,000.
The big negative to these types of loans is that after the interest-only period, the borrower has to play catch up. So now that 30-year mortgage has to be paid off in 20 years, so the monthly payments go through the roof. Also many times these programs are sold on ARMs (Adjustable Rate Mortgages), so borrowers get a double-whammy when they have to start paying on their principal and the interest rate jumps at the same time. Many borrowers find their monthly payments more than double. So, you might go from a $700 interest-only payment to a new payment of $1,500 after the interest-only period.
This type of mortgage is one of the top reasons for the increase in foreclosures in recent years. The only time we think interest-only mortgages make sense is when the area is experiencing a strong ongoing increase in home prices, the borrower has better use for the money he/she would have paid to principal, AND the borrower does not plan to stay in the house beyond the interest-only period. Loan officers who use interest-only mortgages for the sole purpose of helping someone qualify for a bigger house are doing that borrower a HUGE disservice. For most borrowers, these types of loans should not even be considered.
Question
How much of a down payment should I make?
Answer
There is no single answer to that question. First of all, do you have money for a down payment? If so, are there better places to put your money then in your home? Remember, appreciation on the value of your home is not in any way affected by the balance of the mortgage on your home. There are several advantages to making a down payment. The most obvious is that it reduces the amount of your loan which in turn reduces your monthly payment. The second thing is that it reduces or eliminates the need for mortgage insurance, or the need for a second lien at a higher interest rate. For others, the idea of having immediate equity in their home gives them a sense of protection from a downturn in the real estate market. The disadvantages of not making a down payment include having higher interest rates and additional costs associated with a second lien or mortgage insurance. It is also harder to qualify for 100% financing programs. The VA program is an exception.
Question
When does 100% financing make sense?
Answer
The answer to this question will vary greatly depending on who you talk to. Some financial advisors do not recommend 100% financing because they believe every homeowner should make a down payment of 20% when buying a home to help protect them against a down turn in the real estate market. We think there are at least two times when making no down payment makes sense. The first is when a renter has no money for a down payment, but would be better off financially owning a home rather then continuing to rent. That is perhaps the biggest user of 100% financing. The other scenario is when a buyer has money for a down payment, but has better use for the money such as funding a college fund or a retirement account. Homes typically appreciate in value, and they do so regardless of the amount of money someone owes on the home. So if you put $20,000 cash as a down payment to buy your $100,000 home, and someone else puts down nothing to buy their $100,000 home, the larger loan amount will obviously give them a higher payment, but their return on investment (ROI) will be much, much higher. At the same time, if the homes are identical and side by side, they are likely to appreciate at the same rate, so a 5% increase per year, means $5,000 in additional equity for both of you, for which you paid $20,000 and they paid close to nothing.
Question
Are 0% down programs good for first time buyers?
Answer
Sometimes yes and sometimes no. For many first time buyers, the only alternative to a zero down program is to keep renting from someone else. And sometimes that is actually better for someone who can’t really afford the PITI (principal, interest, taxes, and insurance) payment on a home or does not have income stable enough to risk buying a home. Obviously if you do not make a down payment and you borrow 100% of the value of the home, it may be several years before you have much equity in the property. As long as you can comfortably afford the mortgage payments, you shouldn’t be concern about the changing market value of your home. The big risk is when you use 100% financing giving you no equity, and something happens that makes you want or need to sell the house quickly in a market where home prices have plummeted. A 20% down payment would have given you some room to breathe.
Question
What is the best type of loan to get into at this current time?
Answer
That answer changes not only with the current market conditions, but for each person’s specific circumstances. Answering that question for each individual buyer is one of the main purposes of working with a mortgage broker. We frequently “run the numbers” on various programs to figure out what works best at the time and for that specific scenario. In terms of ARM vs Fixed Rate, at this point in the interest rate cycle, the fixed rate usually makes the most sense. In terms of 15-yr vs 30-yr, the 30-year is generally best at this time because the rate on the 15-yr year is not much better. For people who want to payoff their mortgage in 15 years, we usually recommend the 30-yr fixed loan, and then we tell them the payment amount for the 15-yr mortgage. That way they can pay it off in 15 years, but they always have the option of making the lower 30-yr payment amount if they want to.
Of course, there are plenty of exceptions. If an investor came to us for financing on a home that he intended to fix up and sell within the next year or so, we’d probably use a very short-term ARM to get the best rate possible. Financing always needs to consider the buyer's short-term needs and long-term objectives.
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