Loan Types

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Loan Programs

Conventional Loan
- Conventional loans are provided by private lenders, such as banks or credit unions.
- They typically have a fixed interest rate that remains constant throughout the loan's life.
- Interest rates depend on the loan terms, borrower's financial profile, and current economic conditions.
- Potential borrowers must complete a mortgage application and provide necessary documents, including pay stubs, W-2s, tax returns, bank statements, and proof of additional income.
- Lenders review assets and liabilities to ensure the borrower can afford monthly payments, down payment, fees, and closing costs.
- Ideal candidates have a good credit score, acceptable debt-to-income ratio, and a down payment.
- Conventional loans are not government-backed, so borrowers must pay private mortgage insurance (PMI) if they put down less than 20%.
- PMI is removed automatically after paying off 22% of the loan's principal balance or can be requested for cancellation at 20% repayment.
- Qualifying for a conventional loan can be challenging but offers flexibility, various property types, and different loan structures.
- Common options include 30-year fixed-rate mortgages, 15 or 20-year loans, and adjustable-rate mortgages.
FHA Loan
- FHA home loans are insured by the Federal Housing Administration (FHA) against default.
- These loans are accessible to individuals who may not qualify for conventional mortgages.
- They require a minimum 3.5% down payment and have lower credit score requirements.
- FHA loans are a more affordable option for first-time homebuyers, those with low credit scores, or borrowers with limited cash.
- Individuals with a history of bankruptcy or foreclosure may still qualify for an FHA loan.
- FHA loans can only be used to purchase a primary residence, not secondary or investment properties.
- Eligible property types include single-family homes, multifamily homes with up to four units, condos, and certain manufactured homes.
- FHA loans may have higher interest rates due to the small down payment compared to conventional loans.
- Borrowers must pay monthly mortgage insurance for the life of the loan if they put down less than 10%.
- Unlike conventional loans, FHA loans do not allow for cancellation of mortgage insurance once sufficient equity is accrued.
VA Loan
- VA loans are mortgage loans available to veterans, service members, and their surviving spouses in all 50 states.
- They typically have a fixed interest rate that remainsEstablished by the U.S. Department of Veterans Affairs (VA), which sets qualifying standards, dictates mortgage terms, and backs the loan. constant throughout the loan's life.
- Financing is provided by private lenders, such as banks and mortgage companies.
- VA guarantees the loan, enabling lenders to offer lower interest rates and better terms compared to conventional home loans.
- Eligible individuals can use a VA loan to purchase or build a home, improve or repair their home, or refinance.
- No down payment is required unless mandated by the lender or if the purchase price exceeds the home's property value.
- No mortgage insurance requirements or prepayment penalties if the loan is paid off early.
- VA loans offer competitive interest rates and limited closing costs.
- The VA provides assistance to borrowers at risk of default.
- VA loans can only be used to purchase a primary residence, not an investment property or secondary home.
- A VA-approved appraiser will evaluate the home to estimate its value and ensure it meets the VA's minimum property requirements.

Fixed Rate Mortgage
- The traditional fixed-rate mortgage is the most common loan program.
- Monthly principal and interest payments remain the same for the life of the loan.
- Available in terms ranging from 10 to 30 years, with the 30-year term being the most popular, followed by the 15-year term.
- This mortgage is amortized to be fully paid off by the end of the loan term.
- Fixed-rate mortgages can usually be paid off at any time without penalty.
- Monthly payments may vary if there is an escrow account.
- In addition to principal and interest, some lenders collect extra money for property taxes and homeowners insurance.
- This extra money is placed in an escrow account and used to pay taxes and insurance when due.
- If property taxes or insurance change, the borrower's monthly payment will be adjusted.
- Overall, fixed-rate mortgage payments are stable and predictable.
Adjustable Rate Mortgage
- Adjustable Rate Mortgages (ARMs) have interest rates that can fluctuate during the loan term.
- They typically have a fixed interest rate tARMs typically start with a fixed interest rate for an initial period, then adjust based on market conditions.hat remains constant throughout the loan's life.
- The initial rate on an ARM is lower than that on a fixed-rate mortgage.
- ARMs are usually amortized over 30 years, with the initial fixed rate lasting from 1 month to 10 years.
- ARMs have caps to limit how much the interest rate or payments can increase annually or over the loan's lifetime.
- There are two periods: the fixed-rate period and the adjustment period.
  - The fixed-rate period (first 5, 7, or 10 years) has an unchanged interest rate.
  - The adjustment period allows the interest rate and payments to change based on the benchmark index and margin.
- The index reflects general market conditions, and the margin is set by the lender at loan application.
- The new interest rate during the adjustment period is the sum of the index and margin.
- ARMs can be advantageous for buyers planning to sell before the interest rate adjusts, such as those buying starter homes.
- Lower initial monthly payments allow borrowers to pay more towards the principal or save for other financial goals.
Hybrid Adjustable Rate Mortgage
- Hybrid ARM mortgages, also known as fixed-period ARMs, combine features of fixed-rate and adjustable-rate mortgages.
- These loans start with a fixed interest rate for a set period, then convert to an adjustable rate for the remaining term.
- Common hybrid ARMs include 3/1, 5/1, 7/1, and 10/1, where the first number indicates the fixed-rate period in years, and the second number indicates potential rate adjustments once every year thereafter.
- The initial fixed interest rate period of a hybrid ARM is lower than a 30-year fixed-rate mortgage.
- Hybrid ARMs offer a longer introductory fixed interest rate period compared to other ARMs.
- Rate caps are in place to prevent significant increases, but borrowers should still prepare for potential rate adjustments.
- Hybrid ARMs are suitable for those planning to sell their home before the fixed-rate period ends, avoiding rate increases.
- Homeowners planning to refinance as the fixed period expires can benefit from lower initial rates and monthly payments.
- Lower monthly payments allow borrowers to make extra payments and potentially pay off the loan early, saving money over the loan's life.

USDA Loan
- The USDA home loans program helps low-income households purchase safe and affordable homes in rural areas.
- USDA mortgages typically offer some of the lowest interest rates compared to other home loan programs.
- There are two main types of USDA loans: direct loans and guaranteed loans.
  - Direct Loan:
    Intended for very low- to low-income borrowers.
    Funded directly by the USDA.
    Interest rates could be as low as 1%.
    No mortgage insurance required.
    Loan terms typically 33 years, but can be up to 38 years.
  - Guaranteed Loan:
    Meant for low- to moderate-income borrowers.
    Funded by private lenders and backed by the USDA.
    Low interest rates, but requires mortgage insurance.
    Two forms of mortgage insurance: an upfront guarantee fee and an annual mortgage insurance premium, which can be included in the monthly mortgage payment.
    Offered at a 30-year fixed-rate term.
- To qualify for a USDA loan, the home must be in an eligible rural area and be the borrower's primary residence.
- Borrowers must meet specific credit score and income requirements.
Construction Loan
- Construction loans are short-term loans used to finance the building of a home.
- Homebuyers use construction loans to cover project costs before obtaining long-term financing.
- These loans are considered riskier than traditional loans, leading to higher interest rates.
- Funds are paid out in installments as construction milestones are achieved, rather than as a lump sum.
- Upon project completion, the construction loan can be converted into a traditional mortgage.
- To qualify, lenders consider the borrower’s credit score, down payment, home blueprints and specs, and the contractor involved.
- The lender evaluates the project budget, projected cash flow, and the construction contract between the borrower and contractor.
- Construction loans cover costs such as land, architectural plans, design fees, building permits, construction materials, contractor labor, contingency reserves, interest reserves, and closing costs.
Investor Cash Flow Loan
- Ideal for expanding or building a real estate portfolio and owning multiple properties.
- Qualification based on property cash flow once rented; rental income must cover mortgage, taxes, and insurance.
- Debt Service Coverage Ratio (DSCR):
  - Determines borrower eligibility by dividing gross rental income by principal, interest, taxes, insurance, and association fees (PITIA).
  - Ratio must be ≥ 1 to qualify.
- Key Features:
  - Qualification based on property cash flow, not personal income or employment.
  - No debt-to-income ratio requirement.
  - Allows short-term and vacation properties.
  - Property can be in an LLC's name.
  - No limit on the number of properties.
  - First-time home buyers are ineligible.
  - Loan amounts up to $1.5 million.
  - Must own a primary owner-occupant residence with a mortgage history.
  - For purchase transactions, rent used is the lesser of market rental price (per appraisal) or current rental price if an existing lease is in place.
  - For refinance transactions, rent used is the lesser of market rental price (per appraisal) or current rental price, with leases from the previous 12 months required.
Reverse Mortgage
- Reverse Mortgage Overview:
  - Enables homeowners to convert home equity into cash.
  - The lender pays the homeowner instead of the homeowner paying the lender.
  - Funds can be received as a lump sum, fixed monthly payments, a line of credit, or a combination.
  - No loan payments are required from the borrower.
  - The loan balance is due if the borrower moves away permanently, sells the home, or dies.
  - Homeowner is responsible for taxes, homeowners insurance, and home maintenance.
- Loan Repayment:
  - If the homeowner dies, heirs must pay off the loan by refinancing or selling the home.
  - Eligible non-borrowing spouses can remain in the home.
- Qualifications:
  - Borrower must be at least 62 years old.
  - Home must be the primary residence.
  - Home must be owned free and clear or have a substantial amount of the mortgage paid off.
  - Homeowner must attend an informational session with a HUD-approved counselor.
- Uses of Funds:
  - Can be used for living expenses, medical bills, debt repayment, home repairs and maintenance, taxes, insurance, etc.
  - Ideal for those with significant home equity but limited cash savings or investments for retirement.
  - Can potentially be used to pay off an existing mortgage to halt foreclosure.

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