Mortgage Loans

Types of loans.

There are many types of mortgage loans. The main types of conforming loans are FHA, VA, USDA and Conventional. Conforming means that each TYPE of loan is configured or processed using a certain set of rules. Example, a VA loan follows a certain type of processes that follow the same rules as all VA loans no matter which bank processes it. The reason lenders do this is so that they can then turn them into securities by bundling them together.  They cannot mix conforming and non-conforming loans into a bundle. An example of this bundling loans, is highlighted in the movie The Big Short (link to this https://www.imdb.com/title/tt1596363/). Since then, and after the US government bailed out the banks, laws changed that regulate subprime lending, appraisers, the mortgage industry, and the real estate industry. A sub-prime (insert link https://www.investopedia.com/terms/s/subprimeloan.asp) loan is a loan that is given to individuals with a low credit history and score.

An FHA loan is a loan that us issued by HUD Housing and Urban Development. This type of loan requires a 3.5% minimum down payment. This loan carries a PMI. A PMI is mortgage insurance. This is insurance for the bank in case the loan is defaulted on. This insurance guarantees they will get all their money and not take a loss. The PMI is for the life of the loan. So, if it is a 30-year loan, the PMI will need to be paid for 30 years. PMI’s are paid for by buyers.

A USDA loan is a rural development loan that is based on income and credit score. This type of loan can be obtained without a down payment. This means that there will be no equity on the house from day one. This type of loan also requires a loan guarantee fee which is much like a PMI and it is also for the life of the loan. The loan guarantee fee is paid for by the buyers for the life of the loan.

A VA loan is similar to USDA loans where you can obtain this loan without a down payment. VA loans also have a funding fee which is the same thing as a PMI or guarantee fee that is also for the life of the loan and paid for by the buyers.

A conventional loan will require at least 5% down but be cautious if paying less than 20%. With this loan you might be able to avoid the PMI and get lender paid mortgage insurance. These loans may offer less interest than the other conforming loans.

Non-Conforming loans are types of loans that cannot be bundled as each loan is unique because it is processed by the lender. These loans will never be turned into securities and will not likely be sold. They are not obligated to use the rules that conforming loans use. These types of loans are harder to find but can be found through credit unions and other smaller banks. These loans are higher risks for the lenders because if the loan is defaulted on, the banks will take a financial loss. Most non-conforming loans will require a 20% down payment. This is because they want to cover themselves and have equity already installed at the beginning. A conventional loan can also be a non-conforming loan. A FHA, VA, and USDA loan will never be non-conforming.

Qualifying for the loan | Ability and willingness to repay

The process of qualifying for a loan is an important step to home ownership. Understand how this process works can help to ensure you are able to qualify for what you need.

The most important thing lenders look at is your credit history, report, and FICO score. This is a complex tool that will give lenders a look at your willingness to repay.  The next thing they look at is your ability to repay. This is your job. They take these two factors into consideration when deciding if they will lend you money and how much they will lend.

Let’s take a look at willingness to repay. This will show on your credit report as “good” history. Have you paid your credit cards on time? How much of a balance do you keep? How many loans do you have? Do you have any outstanding balances? Do you have any judgments, bankruptcies, repossessions collections, or charge offs? How many times have you been late? How many times have you applied for credit in the last two years? The reason they check all this is to see how you have handled your past debts. You can take a deeper dive into how the credit bureaus work on page Financing FAQ.

Amortization | Figuring out your payments and equity

Amortization is paying off an amount owed over time by making planned, incremental payments of principal and interest. To amortize a loan means “to kill if off” in accounting terms. Amortization refers to changing or writing off an intangible assets cost as an operational expense over its estimated useful life to reduce a company’s taxable income. Link to this article (https://www.hgtv.com/lifestyle/real-estate/mortgage-interest-deduction-homeowners-biggest-tax-perk)

Amortization is useful for mortgages so you can see how much equity you have built up and see how much you pay in interest each year. Interest can be written off as an expense. You will not be taxed on interest. Mortgage interest deduction is a homeowner’s biggest tax perk! You can download my amortization table here. It will upload in an excel spreadsheet.