LOAN TYPES AND PRODUCTS

There are several loan types and literally hundreds of products available to borrowers today. When considering which is right for you it is important to seek the counsel of an experienced mortgage broker with the highest ethical integrity…in other words, someone who knows the industry and will truly look out for your well-being instead of trying to sell you on a “pet” loan program. To make good decisions and recommendations a loan counselor must have an in-depth conversation with you to identify your intentions, circumstances and goals for your real estate investment(s). The following is a short general list of the typical loan types.

30 year fixed – the traditional loan program with no fluctuation in interest rate or monthly payments (of principle and interest). If all payments are made your loan obligation will be paid after 360 consecutive monthly installments. To most people’s surprise, a few lenders will allow you to make “interest only” payments during the first five or ten years and still retain a firm fixed rate.

20, 15 or 10 year fixed – Whereas the 30 year fixed amortizes over 30 years, these loans amortize over the period of time the interest rates are guaranteed. These loan types are NOT adjustable rate programs (ARMs) and anticipate complete loan satisfaction within the fixed period of time. The monthly payments will be higher than 30 year fixed programs even though the interest rates may be lower.

Adjustable Rate Mortgages (ARMs) – These loan types offer initial, shorter periods of time for a specific interest rate. Typically, 1 yr, 3 yrs, 5 yrs, 7 yrs or 10 years. These products adjust based on market conditions after the initial fixed interest rate period. The amount of adjustment and the financial index the loans are based on vary. The majority of ARMs are based on the treasury or LIBOR indices. Be sure to understand the maximum adjustment per period and the maximum total adjustment.

Interest Only Mortgages – Some Lenders offer initial periods of time, with both Fixed Rate and Adjustable Rate Mortgages, where borrowers are required to make payments of interest only. Following the specified I/O period, borrowers are required to amortize principle so the loan is fully paid back within the original term of the loan (usually 30 years). Interest only loans allow borrowers to pay principle; they just don’t require principle for a period of time.

Equity Loans – Equity loans or Lines of Credit (HELOC) while usually a second lien on a property can also be the primary mortgage. HELOCs are flexible and allow the borrower to have a revolving feature associated with their mortgage. Generally interest rates are adjustable based on the WSJ Prime Rate. For the first several years, HELOCs only require interest payments but can be paid in full at any time.

Payment Option ARMs – This complex loan product offers a very low minimum payment plan as well as interest-only or fully-amortized options for the borrower on a monthly basis. Most popular due to the low payment requirement and flexibility, this product allows for potential of negative amortization also known as deferred interest. This product is great for some borrowers in certain circumstances but when considering, please seek the counsel of a knowledgeable and ethical mortgage broker to explain the risks and benefits.

LOAN DOCUMENTATION TYPES

Full Documentation-The borrower provides all third party verification required by FMNA/FHLMC guidelines to prove income, assets, employment and credit. All documents are reviewed by lender underwriters and may require verbal verification on some items as well as supplemental documents. Debt to income ratios must conform to underwriting guidelines and/or receive favorable status when uploaded into automated underwriting engines.

Generally, when full documentation is presented with very good to excellent credit scores, the best rates and terms are available to the borrower.

Stated Income or Reduced Documentation - All documentation is presented to the lender except for income documentation. Income is stated but not proven. Many self-employed borrowers and employees who receive cash, commissions or unusual types of compensation utilize this documentation type because they are not able to prove by conventional means the true amount of their earnings. Income stated must be reasonable for profession.

Most stated income loans are slightly higher in interest rate than full doc loan but many of the ARMs are about the same.

Stated Income Stated Asset – Income and assets are stated on the loan application but neither are verified. A borrower may chose to state assets (source of funds to close) when they can not be sourced or seasoned in accordance with FMNA/FHLMC guidelines.

Most stated/stated programs have LTV restrictions and carry a slightly higher rate.

No Ratio (Documentation) - no income amount is stated or verified on the loan application therefore no debt-to-income ratio is calculated. All other typical loan documentation is required. A borrower may chose this option when their true income will not meet debt-to-income guidelines.

This option is not available for all loan programs. Rates are slightly higher than stated income rates

No Income No Asset (NINA) – No income or asset numbers are mentioned on the loan application. This option is used when the borrower is not able to provide the necessary documentation for both income and assets but has the credit and employment qualifications.

Rates are higher than stated income and no ratio loan programs

No Documentation – Neither income, assets nor employment is mentioned on the loan application. Credit must be reasonably good. Most (not all) no-doc loans require prior mortgage history without any late payments and depending on the LTV (loan-to-value) payment shock may become a factor.

Not surprisingly, rates for these types of loans tend to be higher and less terms are available.

It is important to keep in mind that every lender has different guidelines and programs. Only certain loan types offer certain documentation types. Underwriting guidelines vary greatly from one lender to another. Property types must fit within the loan guidelines also.