Understanding the loan process is as important for the seller as it is for the buyer. As a seller, you want to make certain that anyone who makes an offer on your property can qualify for the necessary loan amount. And, once a contract is agreed, it is good to know the different steps in the loan process as outlined below.
TYPES OF LOANS
Loans and terms constantly change with economic conditions, but the following is a summary of many of the types of loan offerings in existence.
Adjustable Rate Mortgage - (ARM) Adjustable rate mortgages have an interest rate that is adjusted at certain intervals based on a specific index during the life of the loan.
Balloon Payment Loan - A fixed rate loan that is amortized over a specified number of years, but becomes due and payable at the end of an earlier specified time. May be extended or may roll over into a different type of loan at that point.
Buy-Down Loan - Fixed rate loans may have an interest rate and payment that are reduced for a specific period of time by paying the interest up front to subsidize the lower payment.
Community Homebuyer's Program - A fixed rate loan for first time buyers with a low down payment, usually 3% - 5%. No cash reserve requirement and easier qualifying ratios. Subject to borrower meeting income limits and attendance of a four-hour training course on home ownership.
Conventional Loan - Conventional loans are sometimes more lenient with the appraisal and condition of the property. Conventional loans are not government insured and usually have higher down payment requirements.
FHA Loan - FHA loans are insured by the Federal Housing Administration. They offer a low down payment and are easier to qualify for than conventional loans. Appraisal and property condition rules will be applied and loan amounts are limited.
Fixed Rate Loan - A fixed rate loan has one set interest rate that remains constant throughout the life of the loan.
Graduated Payment Mortgage - A fixed rate loan that has payments starting lower than a standard fixed rate loan, which are increased by a predetermined amount each year for a set number of years.
Non-Qualifying Loan - Also known as Assumable Loans, Pre-existing loans that can be assumed by the buyer without a qualifying process. The buyer pays the seller for their equity and then continues making payments on the existing loan.
VA Loan - VA loans are guaranteed by the Veterans Administration. Typically, a veteran must have served 180 days of active service to qualify.
CONVENTIONAL FINANCING INFORMATION
Loan Limits - The current maximum allowable loan limit for a conforming loan cannot exceed $333,700 for a single-family unit.
Reserves - 2 months PITI (principal, interest, taxes & insurance) is required after closing.
MI (mortgage insurance) - FNMA requires mortgage insurance for first mortgages if the LTV (loan to value) is > 80%.
Contributions - May be paid by the seller, lender or any other interested party to the transaction. These include non-recurring closing costs.
Gift Funds - A borrower can use gift funds from a relative, church, municipality or non-profit organization. The borrower must use their own funds to cover the minimum cash down payment. When the LTV for the mortgage is 80% or less, the full down payment may come from a gift.
Credit Requirements - Conventional programs are credit score driven. FICO scores below 620 might not be approved on a 5% down loan. However, there are many other products available at a higher interest rate. Bankruptcies must have been discharged for at least four years, Chapter 13 only two years, and credit must be reestablished. NOTE: With a score of 520, no loan will be given without a huge down payment. With scores of 700 or more, it is easier to get a loan.
Qualifying Ratios - 28/36 - The monthly housing expense-to-income ratio is 28%, and the obligations-to-income ratio is 36%. Ratios can be expanded based on compensating factors. i.e.: excellent credit, low LTV and strong (liquid) assets. Qualifying ratios are rarely used.
FHA FINANCING INFORMATION
Loan Limits - The new maximum FHA base loan amount is $160,176 for a single family unit (primary residence only) in Maricopa and Pinal counties (maximum sales price based on 3% down is $165,130).
LTV (loan to value) - Loan to value varies by sales price. It is always safe to use 3% down (97% LTV) due to the fact that FHA requests a 3% minimum investment by the borrower. All ohter costs (closing costs, prepaids) can be paid by the seller or lender.
Gift Funds - Up to 100% of the down payment and closing costs can be gifted. Acceptable donors are relatives of the borrower, the borrower's employer or labor union, a charitable organization, or a non-profit agency. Gift Funds cannot be derived from anyone else who is a party to the transaction.
Credit Requirements - FHA is NOT credit score driven. Isolated incidents of unsatisfactory or slow payments due to a period of financial difficulty in the past does not mean the credit is unacceptable, if a good payment record has been maintained for the past two years. Bankruptcies and Chapters 7's must have been discharged for at least two years. Chapter 13 and consumer c redit counseling require one year of satisfactory payment history and a letter from the court. Foreclosures must be three years old. FHA also allows borrowers with no established traditional credit (i.e. auto, credit card) by using alternative credit such as rent, phone bills, auto insurance and cable. Three sources of alternate credit must be established. (Note: The credit score is a good indication, even though it is not score driven.)
Qualifying Ratios - 29/41 - The total mortgage payment cannot exceed 29% of gross effective income. The total mortgage payment and all recurring debts cannot exceed 41% of gross effective income. Ratios exceeding either may be acceptable if significant compensating factors are present. (Note: These ratios apply with a bankruptcy, but otherwise they usually don't apply.)
Contributions - the seller can contribute up to 6% of the sales price for closing costs and prepaids. Buyers are not allowed to pay for lender fees - this is the responsibility of the seller.
Reserves - No cash reserves for PITI (principal, interest, taxes and insurance) are required after closing.
Special Notes - A borrower cannot have more than one FHA loan at one time. Exceptions: transfer or significant change in family status (i.e. divorce or change in total number of people in household.)
VA FINANCING INFORMATION
Loan Limits - The maximum loan amount is $333,700 for purchase and construction loans (funding fee is calculated in the maximum). Maximum loan amount for Zero Down is $240,000. This includes the funding fee.
VA Funding Fee - VA loans require an upfront funding fee. This fee may be financed in the loan or may be paid separately at time of settlement. No monthly MIP or VA loans.
NOTE: Veterans receiving VA compensation for service-connected disabilities, Veterans who would be entitled to receive compensation if they were not receiving retirement pay, and loans made to surviving spouses of Veterans who died in service or from service-connected disabilities are exempt from the VA funding fee.
Contributions - The seller, lender or any other party to the transaction may pay fees and charges (including discount points) on behalf of the borrower. However, it cannot exceed 4% of the established reasonable value of the property.
Gift Funds - Up to 100% of the down payment and closing costs can be gifted. Acceptable donors are a relative of the borrower, the borrower's employer or labor union, a charitable organization or a non-profit agency. Gift funds cannot be derived from anyone else who is a party to the transaction.
Credit Requirements - Financial difficulty in the past does not mean the credit is unacceptable if a good payment record has been established for the past full year. For bankruptcy, two years time must elapse, and foreclosure three years time must elapse and credit must be re-established.
Qualifying Ratios - The debt ratio of 41% should not be xceeded. VA Residual Income (balance available for family support) requirement is more important in the consideration of an approval for a VA loan.
Reserves - No cash reserves are required.
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