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Mortgage Resources: Available Loan Programs
FHA loans have been helping people become homeowners since 1934. How do we do it? The Federal Housing Administration (FHA) – which is part of HUD – insures the loan, so your lender can offer you a better deal.
- Low down payments
- Low closing costs
- Easy credit qualifying
FHA loan requirements
To qualify for an FHA home loan, you’ll need to meet these requirements:
- A 3.5 percent down payment if your credit score is 580 or higher
- A 10 percent down payment if your credit score is 500-579
- A debt-to-income ratio of 50% or less
- Documented, steady employment and income
- You’ll live in the home as your primary residence
- You have not had a foreclosure in the last three years
These FHA loan requirements are a lot more lenient than other mortgages.
For instance, FHA allows credit scores as low as 500, while the lowest allowable for most other loan types is 620 or higher.
And FHA allows debt-to-income ratios up to 50% in some cases, while conventional loans max out at 43%. That means if you have a lot of current debt, you’ll be more likely to qualify for a home loan with FHA.
Overall, these guidelines make it possible to buy a house with FHA even if you don’t have a super high credit score or a ton of money saved up.
Buying your first home?
FHA might be just what you need. Your down payment can be as low as 3.5% of the purchase price. Available on 1-4 unit properties.
Financial help for seniors
Are you 62 or older? Do you live in your home? Do you own it outright or have a low loan balance? If you can answer “yes” to all of these questions, then the FHA Reverse Mortgage might be right for you. It lets you convert a portion of your equity into cash.
Want to make your home more energy efficient?
You can include the costs of energy improvements into an FHA Energy-Efficient Mortgage.
How about manufactured housing and mobile homes?
Yes, FHA has financing for mobile homes and factory-built housing. We have two loan products – one for those who own the land that the home is on and another for mobile homes that are – or will be – located in mobile home parks.
What is a VA Loan?
The VA loan is a $0 down mortgage option available to Veterans, Service Members and select military spouses. VA loans are issued by private lenders, such as a mortgage company or bank, and guaranteed by the U.S. Department of Veterans Affairs (VA).
The VA home loan was created in 1944 by the United States government to help returning service members purchase homes without needing a down payment or excellent credit. This historic benefit program has guaranteed more than 24 million VA loans, helping veterans, active duty military members and their families purchase or refinance a home.
Today, the VA mortgage is more important than ever. In recent years, lenders nationwide have tightened their lending requirements in the wake of the housing market collapse, making the VA loan a lifeline for Veterans and active Military homebuyers, many of whom find difficulty when faced with tough credit standards and down payment requirements.
Like all home loans, VA mortgages can be complex. We encourage you to use this VA loan guide to learn about the specifics of this exclusive home loan benefit. If you’re ready to start your VA loan, check your eligibility or have specific questions on the VA loan, talk with a Veterans United Home Loans specialist today.
Adjustable Rate Mortgages (ARMs)
What Is An Adjustable Rate Mortgage?
As the name suggests, an adjustable rate mortgage is a home loan with an interest rate that adjusts over time based on market conditions. This type of mortgage comes with a 30-year term. The initial rate stays fixed for a specified number of years at the beginning of the loan term before it adjusts for the remainder.
How Does An ARM Loan Work?
To comprehend the functionality of ARMs, there are a few terms to understand.
Index: This is an economic indicator used to calculate interest rate adjustments for ARMs. The index rate can increase or decrease at any time. As of this writing, the two most commonly used indexes are the London Interbank Offered Rate for conventional loans and the Constant Maturity Treasury for loans backed by the U.S. government.
Margin: This is a percentage point predetermined by your lender that remains the same throughout the life of the loan. It’s used to determine the interest rate for loans.
Once the initial fixed-rate term ends on an ARM, the interest rate typically adjusts annually. This new rate is determined by adding the index to the margin. While this may cause the interest rate to increase, there are caps on how much it can increase.
Initial cap: This cap is the maximum amount the interest rate can adjust the first time it’s changed after the fixed period.
Periodic cap: This cap puts a limit on the interest rate increase from one adjustment period to the next. The initial cap and the periodic cap may be the same or different.
Lifetime cap: This cap puts a limit on the interest rate increase over the life of the loan. All adjustable rate mortgages have a lifetime.
These limits are put in place for rate increases. It’s important to note that interest rates can decrease, too, and there are no minimum limits on that. However, since the margin stays the same throughout the life of the loan and is added to the index to get the interest rate, the rate will never fall below the margin.
Cap structure: A numerical representation of each cap for the loan. This is presented in a series of three numbers that represent the three caps: initial cap/periodic cap/lifetime cap.
Here’s an example of a common rate cap: (2/2/5). This means that your interest rate can only change by up to 2% the first time it adjusts. Each annual rate change after that is limited to 2% each year. Throughout the rest of the loan term, the highest the interest rate can go is 5% higher than the fixed rate. So, if your original rate was 3.5%, your interest rate can only go up to 8.5% during the life of your loan.
Different Types Of ARMs
Numerical form is also used for the different types of ARMs. This structure is presented with two numbers. The first number is how long your fixed-rate period will last. The second number is how often the rate will change every year. Here are the most common ARMs:
A 5/1 ARM has a fixed rate of interest for the first 5 years of the loan. After that, the interest rate will adjust once annually over the remaining 25 years.
A 7/1 ARM has a fixed rate of interest for the first 7 years of the loan. After that, the interest rate will adjust once annually over the remaining 23 years.
A 10/1 ARM has a fixed rate of interest for the first 10 years of the loan. After that, the interest rate will adjust once annually over the remaining 20 years.
ARM Vs. Fixed-Rate Mortgage
As their names imply, one of the biggest differences between ARMs and fixed-rate mortgages is that one has an interest rate that changes and one has an interest rate that stays the same throughout the life of the loan. While an ARM does have a fixed interest rate for a certain amount of time in the beginning, it eventually goes up or down throughout the loan term. A fixed-rate loan has the same interest rate from start to finish. Here are a few other differences between an ARM and a fixed-rate mortgage.
- Fixed-rate loans are most commonly offered as 15- or 30-year terms or custom-term loans. ARMs are typically 30-year terms.
- Your starting rate may be lower for an ARM than a fixed-rate mortgage.
- Your monthly mortgage payment may be more affordable in the first few years of an ARM.
The minimum down payment for an ARM is 5%. The minimum down payment for a fixed-rate mortgage can be as low as 3%, depending on the loan.
Like any loan, ARMs come with advantages as well as certain considerations to bear in mind.
The biggest advantage of an ARM is the initial fixed-rate term, which, as mentioned above, can provide you a lower initial rate and monthly payment than other loans. Here are a few other benefits:
- If you plan to move or sell your house within a few years, you can reap the benefits of a low fixed rate and sell the home before it adjusts.
- Remember, interest rates can go up and if mortgage interest rates fall, you could get an even lower monthly payment than you had before.
- If rates do fall, you’ll be able to reap the benefits without having to go through the costs or paperwork of a refinance.
When deciding whether to get an ARM, mull over these other factors:
- You may plan to move or sell your home within a few years, but things happen. You may not be able to sell the home when you want or some life event could keep you from moving than originally planned.
- While your interest rate could go down, it could also rise. If your interest rate increases, you’ll have a higher monthly payment, one you may not be prepared for.
- Some ARMs may have a prepayment penalty. Speak to your lender and make sure you understand the terms of the loan before you move forward (Quicken Loans® does not have any prepayment penalties).
What Is A Jumbo Loan?
A jumbo loan or jumbo mortgage, is a mortgage loan that exceeds the limit set by the Federal Housing Finance Agency (FHFA). Jumbo loans cannot be secured by the government-sponsored Fannie Mae or Freddie Mac, which makes these loans riskier for lenders.
What Are The Conforming Jumbo Loan
Fannie and Freddie set limits on how high your mortgage can be – they’re called conforming loan limits. Mortgages that fall under the limit have insurance that protects the lender. Jumbo loans are sometimes called “non-conforming loans” because they go above this limit.
Conforming loan limits vary by state and market. In 2020, you can only borrow up to $510,400 for a single-family unit in most parts of the U.S. However, conforming loan limits go as high as $765,600 in Alaska and Hawaii.
They apply to single-family units only – multi-family unit limits are higher and also vary by state. If the amount of money you borrow goes above your limit, your loan automatically becomes a jumbo loan.
Jumbo Mortgage Rates
It makes sense that lenders might charge higher interest rates on jumbo loans because, as mentioned before, there’s so much risk involved. However, market data suggests that interest rates on jumbo loans are very competitive with market rates.
At today’s rates, the difference between conforming and non-conforming loans ranges from just 0.25% to 1%. In fact, some jumbo loans have rates that are lower than other mortgage loans.
Before you take out a jumbo loan, consider these factors.
Lenders May Require Cash Reserves
Lenders need to know that you can make consistent, regular payments on a jumbo loan. Your lender will ask you for bank statements to prove that you have money in the bank to keep up with payments. It’s not uncommon for lenders to ask jumbo borrowers to have up to 18 months’ worth of expenses in reserve before they can get a loan.
Having cash in your bank account isn’t the only way to meet reserve requirements. Lenders may consider up to 70% of your retirement account as well, so you don’t need to cash out all of your funds to meet the reserve rule. In some cases, business and gift funds may also go toward your reserve requirements.
Closing Costs Are Higher
Closing costs usually range between 3% – 6% of your total home value, but jumbo loans have much higher closing costs than conventional mortgages. On a $500,000 mortgage, you can expect to pay between $10,000 – $25,000 in cash at the closing table.
Lenders only offer jumbo loans to buyers who have a predictable and regular income. Lenders often ask to see up to 2 years’ worth of W-2s, tax documents and 1099s when you get a conventional loan. With a jumbo loan, your lender may ask for more documentation and proof that your income is unlikely to change after you get a loan.
Jumbo loans are manually underwritten. A finance expert will go through your credit report, assets and bank statements with a fine-toothed comb and bring to light any past missteps. If you have a bankruptcy or foreclosure on your report, you’ll have a harder time getting a jumbo loan.
VA Funding Fee
According to VA rules, you can’t finance funding fees for loans greater than $510,400. Like the 25% down payment rule, you must pay a prorated VA funding fee in cash during closing on the amount over $510,400. You can also ask the seller to cover this portion of your closing costs in cash.
Jumbo loans are large home loans that are higher than the conforming limits set by Fannie Mae and Freddie Mac. These mortgages are riskier than conventional or government-backed mortgages because they don’t have insurance.
This means that if you default on a jumbo loan, the bank has to foot the bill. You can use a standard jumbo loan to buy many types of properties, though requirements may vary by lender.
Down payment requirements for jumbo loans are usually higher than conventional mortgages. With a VA jumbo loan, you must make a 25% down payment on the amount over your local conforming limit. Lenders also have higher standards when it comes to DTI ratios, credit scores and cash reserves with jumbo loan applications.
USDA loans are mortgages backed the U.S. Department of Agriculture as part of its USDA Rural Development Guaranteed Housing Loan program. USDA loans are available to home buyers with low-to-average income for their area, offer 100% financing with reduced mortgage insurance premiums, and feature below-market mortgage rates.
USDA home loans are putting people in homes who never thought they could do anything but rent.
USDA eligibility is based on the buyer and the property. First, the home must be in a qualified “ru” area, which USDA typically defines as a population of less than 20,000. Second, the buyer must meet USDA income caps. To be eligible, you can’t make more than 15% above the local median salary. You also have to use the home as your primary residence (no vacation homes or investment properties allowed).
Borrowers also have to meet USDA’s “ability to repay” standards, including:
- Steady job and income, proven by tax returns
- FICO credit score of at least 640 (though this can vary by lender)
- Debt-to-income ratio of 41% or less in most cases
USDA Mortgage Rates: How Do They
Compare to FHA & Conventional?
Compared to other loan programs, USDA mortgage rates are usually the lowest available.
USDA rates are typically only matched by the VA loan, which is exclusively for veterans. These two programs — USDA and VA — can offer below-market interest rates because their government guarantee protects lenders against loss.
That said, mortgage rates are personal. Just because you’re getting a USDA loan, doesn’t necessarily mean your rate will be “below-market” or match USDA loan rates advertised.
To get the lowest possible rate, you need an excellent credit score and low debts. Making a bigger down payment helps, too.
How USDA Loans Work
Using a USDA loan, buyers can finance 100% of a home’s purchase price while getting access to better-than-average mortgage rates. This is because USDA mortgage rates are discounted as compared to rates with other low-downpayment loans.
Beyond that, USDA loans aren’t all that “strange.”
The repayment schedule doesn’t feature a “balloon” or anything non-standard; the closing costs are ordinary; and, prepayment penalties never apply.
The two areas where USDA loans are different is with respect to loan type and downpayment amount.
With a USDA loan, you don’t have to make a downpayment; and you’re required to take a fixed rate loan. ARMs are not available via the USDA rural loan program.
Rural loans can be used by first-time buyers and repeat home buyers alike. Homeowner counseling is notrequired to use the USDA program.
USDA Loans Require Mortgage Insurance
USDA “guarantees” its loan program — meaning it offers protection to mortgage lenders in case USDA borrowers default. But the program is partially self-funded. So to keep it running, the USDA uses homeowner-paid mortgage insurance premiums.
As of October 1, 2016, USDA has lowered its mortgage insurance costs for both the upfront and monthly fees.
The Current USDA Mortgage Insurance Rates Are:
- For purchases, 1.00% upfront fee paid at closing, based on the loan size
- For refinances, 1.00% upfront fee paid at closing, based on the loan size
- For all loans, 0.35% annual fee, based on the remaining principal balance
As a real-life example: A homebuyer with a $100,000 loan size in Blacksburg, Virginia, would be required to make a $1,000 upfront mortgage insurance premium payment at closing, plus a monthly $29.17 payment for mortgage insurance.
USDA upfront mortgage insurance is not paid as cash. It’s added to your loan balance for you.
USDA mortgage insurance rates are lower than those for comparable FHA loans or conventional ones.
- FHA mortgage insurance premiums include a 1.75% upfront mortgage insurance premium, and 0.85% in MIP annually
- Conventional loan private mortgage insurance (PMI) premiums — even via the 3%-down HomeReady™ program — can range above one percent annually
With USDA loans, then, mortgage insurance premiums are just a fraction of what you’d typically pay. Even better, USDA mortgage rates are low.
USDA mortgage rates are often the lowest among FHA mortgage rates, VA mortgage rates, and conventional loan mortgage rates — especially when buyers are making a small or minimum downpayment.
For a buyer with average credit scores, USDA mortgage rates can be 100 basis points (1.00%) or more below the rates of a comparable conventional loan.
Lower rates mean lower payments, which is why USDA loans can be extremely affordable.
Home Equity Line of Credit (HELOC)
What is a home equity line of credit?
A home equity line of credit, or HELOC, is a second mortgage that gives you access to cash based on the value of your home. You can draw from a home equity line of credit and repay all or some of it monthly, somewhat like a credit card.
With a HELOC, you borrow against your equity, which is the home’s value minus the amount you owe on the primary mortgage. You can also get a HELOC if you own your home outright, in which case the HELOC is the primary mortgage rather than a second one.
Whether a HELOC is a secondary or primary mortgage, you could lose the home to foreclosure if you don’t make the payments.
How does it work?
Much like a credit card that allows you to borrow against your spending limit as often as needed, a HELOC gives you the flexibility to borrow against your home equity, repay and repeat.
Most HELOCs have adjustable interest rates. This means that as baseline interest rates go up or down, the interest rate on your HELOC will adjust, too.
To set your rate, the lender will start with an index rate, then add a markup depending on your credit profile. Generally the higher your credit score, the lower the markup. That markup is called the margin, and you should ask to see the amount before you sign off on the HELOC.
Variable rates leave you vulnerable to rising interest rates, so be sure to take this into account. Look at the size of the periodic cap — how much the interest rate can change at any one time — and the lifetime cap — the highest interest rate you could be charged over the life of the loan — to get an idea of how high your payments could get.
On the plus side, as with a credit card, you only pay interest on the amount of money you use, not the total amount available to borrow.
How do you qualify for a home equity line
Lender requirements will vary, but here’s what you’ll generally need to get a HELOC:
A debt-to-income ratio that’s 40% or less.
A credit score of 620 or higher.
A home value that’s at least 15% more than you owe.
How to get a home equity line of credit
The process of getting a HELOC is similar to that of a purchase or refinance mortgage. You’ll provide some of the same documentation and demonstrate that you’re creditworthy. Here are the steps you’ll follow:
Determine whether you have sufficient equity, using a HELOC calculator.
Once you have an idea of what you can borrow, call Sharp Loan.
Gather the necessary documentation before you apply so the process will go smoothly.
Once you have pulled together your documentation and selected a lender, apply for the HELOC.
You’ll receive disclosure documents. Read them carefully and ask the lender questions. Make sure the HELOC will fit your needs. For example, does it require you to borrow thousands of dollars upfront (often called an initial draw)? Do you have to open a separate bank account to get the best rate on the HELOC?
The underwriting process can take hours to weeks, and may involve getting an appraisal to confirm the home’s value.
The final step is the loan closing, when you sign paperwork and the line of credit becomes available.
How much can you borrow with a HELOC?
The maximum amount of your home equity line of credit will vary based on the value of your home, what percentage of that value the lender will allow you to borrow against and how much you still owe on your mortgage. Two quick calculations can give you an idea of what you might be able to borrow with a HELOC.
Say you have a $500,000 home with a balance of $300,000 on your first mortgage and your lender will allow you to access up to 85% of your home’s value. Multiplying the home’s value ($500,000) by the percentage the lender will allow you to borrow (85%, or .85) gives you a maximum amount of $425,000 in equity that could be borrowed. Subtract the amount you still owe on your mortgage ($300,000) to get the total amount you can borrow with a HELOC — $125,000.
How do you pay back a home equity line of
A HELOC has two phases: the draw period and the repayment period.
During the draw period, you can borrow from the credit line by check, transfer or a credit card linked to the account. Monthly minimum payments often are interest-only during the draw period, but you can pay principal if you wish. The length of the draw period varies; it’s often 10 years.
During the repayment period, you can no longer borrow against the credit line. Instead, you pay it back in monthly installments that include principal and interest. With the addition of principal, the monthly payments can rise sharply compared with the draw period. The length of the repayment period varies; it’s often 20 years.
At the end of the loan, you could owe a large lump sum — or balloon payment — that covers any principal not paid during the life of the loan. Before you close on a HELOC, consider negotiating a term extension or refinance option so that you’re covered if you can’t afford the lump sum payment.
Down Payment Assistance Program
Homeownership Assistance: California
Need help buying a home? You may qualify for one of these programs.