The traditional fixed-rate mortgage is the most common type of loan program, where monthly principal and interest payments never change during the life of the loan. Fixed-rate mortgages are available in terms ranging from 10 to 30 years and, in most cases, can be paid off at any time without penalty. This type of mortgage is structured, or "amortized," so that it will be completely paid off by the end of the loan term. 

Even though you have a fixed-rate mortgage, your monthly payment may vary if you have an "impound account.". In addition to the monthly "principal + interest" and any mortgage insurance premium (amount charged to homebuyers who put less than 20% cash down when purchasing their home), some lenders collect additional money each month for the prorated monthly cost of property taxes and homeowners insurance. The extra money is put in an impound account by the lender, who uses it to pay the borrowers' property taxes and homeowners insurance premiums when they are due. If either the property tax or the insurance happen to change, the borrower's monthly payment will be adjusted accordingly. However, the overall payments on a fixed-rate mortgage are very stable and predictable.

Adjustable Rate Mortgages (ARM) are loans whose interest rate can vary during the loan's term. These loans usually have a fixed interest rate for an initial period of time, which can be adjusted based on current market conditions. The initial rate on an ARM is lower than on a fixed-rate mortgage, which allows you to afford and hence purchase a more expensive home. Adjustable-rate mortgages are usually amortized over a period of 30 years, with the initial rate being fixed for anywhere from 1 month to 10 years. All ARM loans have a "margin" plus an "index." Margins on loans typically range from 1.75% to 3.5%, depending on the index and the amount financed in relation to the property value. The index is the financial instrument that the ARM loan is tied to, such as: 1-Year Treasury Security, LIBOR (London Interbank Offered Rate), Prime, 6-Month Certificate of Deposit (CD), and the 11th District Cost of Funds (COFI).

When the time comes for the ARM to adjust, the margin will be added to the index and typically rounded to the nearest 1/8 of one percent to arrive at the new interest rate. That rate will then be fixed for the next adjustment period. This adjustment can occur every year, but there are factors limiting how much the rates can adjust. These factors are called "caps.". Suppose you had a "3/1 ARM" with an initial cap of 2%, a lifetime cap of 6%, and an initial interest rate of 6.25%. The highest rate you could have in the fourth year would be 8.25%, and the highest rate you could have during the life of the loan would be 12.25%.

A mortgage is called “interest only” when its monthly payment does not include the repayment of the principal for a certain period of time. Interest-only loans are offered on fixed- or adjustable-rate mortgages as well as on option ARMs. At the end of the interest-only period, the loan becomes fully amortized, resulting in greatly increased monthly payments. The new payment will be larger than it would have been if it had been fully amortized from the beginning. The longer the interest-only period, the larger the new payment will be when the interest-only period ends.

You won't build equity during the interest-only term, but it could help you close on the home you want instead of settling for the home you can afford.

Since you'll be qualified based on the interest-only payment and will likely refinance before the interest-only term expires anyway, it could be a way to effectively lease your dream home now and invest the principal portion of your payment elsewhere while realizing the tax advantages and appreciation that accompany homeownership.

As an example, if you borrow $250,000 at 6 percent using a 30-year fixed-rate mortgage, your monthly payment would be $1,499. On the other hand, if you borrowed $250,000 at 6 percent using a 30-year mortgage with a 5-year interest-only payment plan, your initial monthly payment would be $1,250. This saves you $249 per month, or $2,987 a year. However, when you reach year six, your monthly payments will jump to $1,611, or $361 more per month. Hopefully, your income will have jumped accordingly to support the higher payments, or you will have refinanced your loan by that time.

Mortgages with interest-only payment options may save you money in the short run, but they actually cost more over the 30-year term of the loan. However, most borrowers repay their mortgages well before the end of the full 30-year loan term.

Borrowers with sporadic incomes can benefit from interest-only mortgages. This is particularly the case if the mortgage is one that permits the borrower to pay more than interest-only. In this case, the borrower can pay interest only during lean times and use bonuses or income spurts to pay down the principal.

A graduated payment mortgage is a loan where the payment increases each year for a predetermined amount of time (such as 5 or 10 years), then becomes fixed for the remaining duration of the loan.

When interest rates are high, borrowers can use a graduated payment mortgage to increase their chances of qualifying for the loan because the initial payment is lower. The downside of opting for a smaller initial payment is that the interest owed increases and the payment shortfall from the initial years of the loan is then added on to the loan, potentially leading to a situation called "negative amortization." Negative amortization occurs when the loan payment for any period is less than the interest charged over that period, resulting in an increase in the outstanding balance of the loan.

FHA home loans are mortgage loans that are insured against default by the Federal Housing Administration (FHA). FHA loans are available for single-family and multifamily homes. These home loans allow banks to continuously issue loans without much risk or capital requirements. The FHA doesn't issue loans or set interest rates; it just guarantees against default.

FHA loans allow individuals who may not qualify for a conventional mortgage obtain a loan, especially first-time home buyers. These loans offer low minimum down payments, reasonable credit expectations, and flexible income requirements.

What is an FHA Loan?

In 1934, the Federal Housing Administration (FHA) was established to improve housing standards and to provide an adequate home financing system with mortgage insurance. Now families that may have otherwise been excluded from the housing market could finally buy their dream home.

FHA does not make home loans, it insures a loan; should a homebuyer default, the lender is paid from the insurance fund.

Buy a house with as little as 3.5% down.

Ideal for the first-time homebuyers unable to make larger down payments.

The right mortgage solution for those who may not qualify for a conventional loan.

Down payment assistance programs can be added to a FHA Loan for additional down payment and/or closing cost savings.

Documents Needed for FHA Loans

Your loan approval depends 100% on the documentation that you provide at the time of application. You will need to give accurate information on:

Employment

Complete Income Tax Returns for past 2-years

W-2 & 1099 Statements for past 2-years

Pay-Check Stubs for past 2-months

Self-Employed Income Tax Returns and YTD Profit & Loss Statements for past 3-years for self-employed borrowers

Savings

Complete bank statements for all accounts for past 3-months

Recent account statements for retirement, 401k, Mutual Funds, Money Market, Stocks, etc.

Credit

Recent bills & statements indicating account numbers and minimum payments

Landlord's name, address, telephone number, or 12- months cancelled rent checks

Recent utility bills to supplement thin credit

Bankruptcy & Discharge Papers if applicable

12-months cancelled checks written by someone you co-signed for to get a mortgage, car, or credit card, this indicates that you are not the one making the payments.

Personal

Drivers License

Social Security Card

Any Divorce, Palimony or Alimony or Child Support papers

Green Card or Work Permit if applicable

Any homeownership papers

Refinancing or Own Rental Property

Note & Deed from any Current Loan

Property Tax Bill

Hazard Homeowners Insurance Policy

A Payment Coupon for Current Mortgage

Rental Agreements for a Multi-Unit Property

FHA Versus Conventional Loans

The main difference between a FHA Loan and a Conventional Home Loan is that a FHA loan requires a lower down payment, and the credit qualifying criteria for a borrower is not as strict. This allows those without a credit history, or with minor credit problems to buy a home. FHA requires a reasonable explanation of any derogatory items, but will use common sense credit underwriting. Some borrowers, with extenuating circumstances surrounding bankruptcy discharged 3-years ago, can work around past credit problems. However, conventional financing relies heavily upon credit scoring, a rating given by a credit bureau such as Experian, Trans-Union or Equifax. If your score is below the minimum standard, you may not qualify.

What Can I Afford?

Your monthly costs should not exceed 29% of your gross monthly income for a FHA Loan. Total housing costs often lumped together are referred to as PITI.

P = Principal

I = Interest

T = Taxes

I = Insurance

Examples:

Monthly Income x .29 = Maximum PITI

$3,000 x .29 = $870 Maximum PITI

Your total monthly costs, or debt to income (DTI) adding PITI and long-term debt like car loans or credit cards, should not exceed 41% of your gross monthly income.

Monthly Income x .41 = Maximum Total Monthly Costs

$3,000 x .41 = $1230

$1,230 total - $870 PITI = $360 Allowed for Monthly Long Term Debt

FHA Loan ratios are more lenient than a typical conventional loan.

Bankruptcy and FHA Loans

Yes, generally a bankruptcy won’t preclude a borrower from obtaining a FHA Loan. Ideally, a borrower should have re-established their credit with a minimum of two credit accounts such as a car loan, or credit card. Then wait two years since the discharge of a Chapter 7 bankruptcy, or have a minimum of one year of repayment for a Chapter 13 (the borrower must seek the permission of the courts). Also, the borrower should not have any credit issues like late payments, collections, or credit charge-offs since the bankruptcy. Special exceptions can be made if a borrower has suffered through extenuating circumstances like surviving a serious medical condition, and had to declare bankruptcy because the high medical bills couldn't be paid.

The VA Loan provides veterans with a federally guaranteed home loan which requires no down payment. This program was designed to provide housing and assistance for veterans and their families.

The Veterans Administration provides insurance to lenders in the case that you default on a loan. Because the mortgage is guaranteed, lenders will offer a lower interest rate and terms than a conventional home loan. VA home loans are available in all 50 states. A VA loan may also have reduced closing costs and no prepayment penalties.

Additionally there are services that may be offered to veterans in danger of defaulting on their loans. VA home loans are available to military personal that have either served 181 days during peacetime, 90 days during war, or a spouse of serviceman either killed or missing in action.

What is a VA Loan?

The Veteran Administration's Loan originated in 1944 through the Servicemen's Readjustment Act; also know as the GI Bill. It was signed into law by President Franklin D. Roosevelt and was designed to provide Veterans with a federally-guaranteed home loan with no down payment. VA loans are made by private lenders like banks, savings & loans, and mortgage companies to eligible Veterans for homes to live in. The lender is protected against loss if the loan defaults. Depending on the program option, the loan may or may not default.

Who is Eligable for a VA Loan?

Wartime/Conflict Veterans

Veterans who were NOT Dishonorably Discharged, and served at least 90 days

World War II – September 16, 1940 to July 25, 1947

Korean Conflict – June 27, 1950 to January 31, 1955

Vietnam Era – August 5, 1964 to May 7, 1975

Persian Gulf War - Check with the Veterans Administration Office

Afghanistan & Iraq – Check with the Veterans Administration Office

Veterans Administration website www.va.gov

Peacetime Service

At least 181 days of continuous active duty with no dishonorable discharge. If you were discharged earlier due to a service-related disability you should contact your Regional VA Office for eligibility verification.

July 26, 1947 to June 26, 1950

February 1, 1955 to August 4, 1964, or May 8, 1975 to September 7, 1980 (Enlisted), or to October 16, 1981 (Officer)

Enlisted Veterans whose service began after September 7, 1980, or officers who service began after October 16, 1981, must have completed 24-months of continuous active duty and been honorably discharged

Reserves and National Guard

Certain U.S. Citizens who served in the Armed Forces of a government allied with the United States during World War II.

Surviving spouse of an eligible Veteran who died resulting from service, and has not remarried.

The spouse of an Armed Forces member who served Active Duty, and was listed as a POW or MIA for more than 90-days.

What Type of Home Can I Buy with a VA Loan?

A VA home loan must be used to finance your personal residence within the United States and its territories. You have choices for the type of home you purchase:

Existing Single-Family Home

Townhouse or Condominium in a VA-Approved Project

New Construction Residence

Manufactured Home or Lot

Home Refinances and Certain Types of Home Improvements

What are the Benefits of a VA Loan?

100% Financing & No Down Payment Loans

No Private Mortgage (PMI)

No Penalties for Prepaying the Loan

Competitive Interest Rates

Qualification is Easier than a Conventional Loan

Sellers Pay Some of the Closing Costs

Can be combined with additional down payment assistance to reduce closing costs

How do I Apply for a VA Guaranteed Loan?

You can apply for a VA Loan with any mortgage lender that participates in the program. In addition to the application requirements from your lender, you will need the following at application time:

Certificate of Eligibility from the Veterans Administration by submitting a completed VA Form 26-1880.

Proof of Military Service from a VA Eligibility Center

If I Have Already Obtained One VA Loan, Can I Obtain Another One?

Yes, your eligibility is reusable depending on the circumstance. If you have paid-off your prior VA Loan, and disposed the property, you can have your eligibility restored again. Also, on a 1-time basis, you may have your eligibility restored if your prior VA Loan has been paid-off, but you still own the property. Either way, the Veteran must send the Veterans Administration a completed VA Form 16-1880 to the VA Eligibility Center. To prevent delays in processing, it's advisable to include evidence that the prior loan has been fully paid, and if applicable, the property was disposed. A paid-in-full statement from the former lender or a copy of the HUD-1 settlement statement must be submitted.

What are the Disadvantages of a VA Loan?

VA Loans made prior to March 1, 1988 can be assumed with no qualifying of the new buyer. If the buyer defaults the property the Veteran homeowner may be liable for the funds.

Some sellers are hesitant to work with someone obtaining a VA Loan because it takes longer than a conventional loan to process.

Sellers are often asked to pay a portion of closing costs and therefore less likely to negotiate the sales price of the home.

USDA loans are low-interest mortgages with zero down payments designed for low-income Americans who don't have good enough credit to qualify for traditional mortgages. You must use a USDA loan to buy a home in a designated area that covers several rural and suburban locations.

A jumbo loan is a mortgage used to finance properties that are too expensive for a conventional conforming loan. The maximum amount for a conforming loan is $548,250 in most counties, as determined by the Federal Housing Finance Agency (FHFA). Homes that exceed the local conforming loan limit require a jumbo loan.

Also called non-conforming conventional mortgages, jumbo loans are considered riskier for lenders because these loans can’t be guaranteed by Fannie and Freddie, meaning the lender is not protected from losses if a borrower defaults. Jumbo loans are typically available with either a fixed interest rate or an adjustable rate, and they come with a variety of terms.