801-878-9946How to choose the best home loan program for you
There isn't a single or simple answer to this question. The right type of mortgage for you depends on many different factors:
- Your current financial picture
- Your current employment and income situation
- How you expect your finances to change
- How long you intend to keep your house
- How comfortable you are with your mortgage payment changing
- What does your current credit history look like
- What are you overall goals that a mortgage financing can influence
To guide you further there are two items you will need to know about in deciding what type of financing you will need:
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Go to: Loan Program Types
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Go to: Documentation Types
Income / Asset / Employment Documentation
You will need to put on your application how you plan on documenting your income, assets, and employment. Sometimes it is not convenient or possible to document to the underwriter one, two, or all three of these items. You might be self employed and tax returns do not reflect your true income. You might have a second job that can not be proven exists by documentation. You also may just be an individual that values privacy and would prefer to not disclose certain items. The reasons and possibilities are endless.
Fannie Mae and Freddie Mac generally ask that all three items are documented traditionally for their most optimum pricing and program availability. As a general rule of thumb, if you have to reduce the amount of documentation that goes into underwriting your loan the lender will consider the loan a higher risk and make adjustments or limitations to the loan parameters.
Example 1:
You are self employed and can not prove your income traditionally. Where an 30yr Fixed Rate Mortgage might have offered you a 6.00% interest rate, the lender will offer you now a .25% higher rate making it 6.25% for being a slightly higher risk
Example 2:
You have excellent credit, but your spouse does not. Also, although you are employed, it is only a fraction of what your spouse's income is. Additionally you just had a career change and have only been with your employer for a few months. You could get a No income / No employment loan documented loan without your spouse on it that allows you to still qualify. This is not a conforming Fannie Mae or Freddie Mac loan, therefore your interest rate where it may have been 6.00% normally on a 30yr Fixed Rate Mortgage actually could be as high as 6.875% comparatively.
There are other items that are affected too other than just the interest rate. Sometimes the lender may want to reduce the total Loan to Value (LTV) they are willing to lend to, or additionally may require a pre pay penalty to offset some of the risk. These are just some of the examples.
Other items that need to be documented in the loan process may include mortgage and/or rental history, refinance history, credit history, bankruptcy and/or foreclosure history, and citizenship status. Ask your mortgage advisor what other items may be affected by reducing your loan documentation.
Loan Documentation Types
Full Doc
Alternative Doc
6, 12, or 24 months Bank Statements Doc
Stated Income Doc
No Ratio Doc
Stated Income / Stated Assets Doc
No Income / No Assets Doc
No Income / No Employment Doc
No Income / No Assets / No Employment Doc (True No Doc)
Full Doc Loans
Traditional income, asset, and employment documentation.
For wage earners the following generally is required: Income- 2 years W2, 2 years of personal tax returns, and one full-month pay stubsAssets- recent banks statement or money asset statement, and/or verification of deposits Employment- verbal and/or written verification of income and employment history and position from current and possibly recent employers.
For self-employed individuals the following generally is required: Income- 2-3 years of personal and/or business tax returns, and/or 1044's Assets- recent banks statement or money asset statement, and/or verification of deposits Employment- minimum 2 years business licenses, CPA letter.
Alternative Doc (or "Lite-Doc") Loans .
Generally the same as full documentation but only less paperwork to document.
For wage earners the following is generally required: Income- last years W2, one recent pay-stub Assets- 1 recent bank statement or money asset statement, and/or verification of deposits Employment- verbal and/or written verification of income and employment history and position from current and possibly recent employers.
For self-employed individuals the following generally is required: Income- 1 year of personal and/or business tax returns, and/or 1044 Assets- recent bank statement or money asset statement, and/or verification of deposit Employment- minimum 2 years business licenses, CPA letter.
6, 12, or 24 months Bank Statements Doc
This documentation method is generally used to replace the income approach in either the full or alternative documentation underwriting. All other items, assets and employment, remain the same. Essentially, the bank statements, whether 6 months, 12 months, or 24 months, showing income (normal deposits) over that time period respectively is averaged together to verify income.
This is not a conforming Fannie Mae or Freddie Mac documentation method. The investors and lenders that allow this type of documentation generally treat the borrower as "full doc" or "lite-doc" as far as their program guidelines go.
Stated Income Doc (verified assets/employment)
This documentation type only differs from full documentation with regard to the income; assets and employment requirements remain the same.
For wage earners the following generally is required: Income- only state the income figure on the application, but it is is not verified Assets- recent banks statement or money asset statement, and/or verification of deposits Employment- verbal and/or written verification of income and employment history and position from current and possibly recent employers.
For self-employed individuals the following generally is required: Income- only state the income figure on the application, but it is is not verified Assets- recent banks statement or money asset statement, and/or verification of deposits Employment- minimum 2 years business licenses, CPA letter.
No Ratio Doc (verified assets/employment)
This documentation type only differs from full documentation with regard to the income; assets and employment requirements remain the same. Because no income is put on the application at all, it is not calculated, and thus no debt-to-income ratio is calculated; hence, no ratio doc.
For wage earners the following generally is required: Income- no income figure is stated on the application nor is it verified Assets- recent banks statement or money asset statement, and/or verification of deposits Employment- verbal and/or written verification of income and employment history and position from current and possibly recent employers.
For self-employed individuals the following generally is required: Income- no income figure is stated on the application nor is it verified Assets- recent banks statement or money asset statement, and/or verification of deposits Employment- minimum 2 years business licenses, CPA letter.
Stated Income / Stated Asset Doc (verified employment)
This documentation type only differs from stated income documentation with regard to the assets- assets are stated on the application, but not verified; employment requirements remain the same.
For wage earners the following generally is required: Income- only state the income figure on the application, but it is is not verified Assets- only state the asset figure and the source on the application, but it is is not verified Employment- verbal and/or written verification of income and employment history and position from current and possibly recent employers.
For self-employed individuals the following generally is required: Income- no income figure is stated on the application nor is it verified Assets- only state the asset figure and the source on the application, but it is is not verified Employment- minimum 2 years business licenses, CPA letter.
No Income / No Asset Doc (verified employment)
This documentation type only differs from no ratio documentation with regard to the assets- additionally no assets are included on the application; employment requirements remain the same.
For wage earners the following generally is required: Income- no income figure is stated on the application nor is it verified Assets- no asset figures are put on the application, nor is it verified Employment- verbal and/or written verification of income and employment history and position from current and possibly recent employers.
For self-employed individuals the following generally is required: Income- no income figure is stated on the application nor is it verified Assets- no asset figures are put on the application, nor is it verified Employment- minimum 2 years business licenses, CPA letter.
No Income / No Employment (verified assets)
This documentation type only differs from no ratio documentation with regard to the employment- additionally no employer is included on the application; asset requirements remain the same.
For wage earners the following generally is required: Income- no income figure is stated on the application nor is it verified Assets- recent banks statement or money asset statement, and/or verification of deposits Employment- no employer or employment information is included on the application or verified.
For self-employed individuals the following generally is required: Income- no income figure is stated on the application nor is it verified Assets- recent banks statement or money asset statement, and/or verification of deposits Employment- no employer or employment information is included on the application or verified.
No Income / No Assets / No Employment Doc (true no doc)
This documentation type only differs from no income / no asset documentation with regard to the employment- additionally no employer is included on the application.
For wage earners the following generally is required: Income- no income figure is stated on the application nor is it verified Assets- no asset figures are put on the application, nor is it verified Employment- no employer or employment information is included on the application or verified.
For self-employed individuals the following generally is required: Income- no income figure is stated on the application nor is it verified Assets- no asset figures are put on the application, nor is it verified Employment- no employer or employment information is included on the application or verified.
Loan programs we provide
Below is a list of general loan types that we currently offer. For more specific loan programs that correspond with these general loan types go to either the home refinance page or the home purchase page.
Conventional and Jumbo Loans
Conventional loans are secured by government sponsored entities or GSE's such as Fannie Mae and Freddie Mac.
Subprime Loans
Programs for those that have less than perfect credit or asking for financing that do not conform to Fannie Mae and Freddie Mac guidelines.
Fixed Rate Mortgages
A loan program where your monthly principal and interest payments never change.
Adjustable Rate Mortgages (ARMs)
These loans generally begin with an interest rate that is 2-3 percent below a comparable fixed rate mortgage, and could allow you to buy a more expensive home.
Introductory Rate ARMs and Interest Deferring ARMs
Most adjustable rate loans (ARMs) have a low introductory rate or start rate, some times as much as 5% below the current market rate of a fixed loan.
ARMs with different indexes are available for both purchases and refinances. Choosing an ARM with an index that reacts quickly lets you take full advantage of falling or climbing interest rates. An index that lags behind the market lets you take advantage of lower rates after market rates have started to adjust upward.
Interest deferring ARMs allow the home owner to achieve the lowest possible payments in the industry. The most common of these types is called the Option ARM, offering up to 4 different payments monthly, including a minimal payment less than interest due each month.
**credit score, LTV, income documentation and other restrictions apply for all loan types**
Conventional and Jumbo Loans
Conventional loans are secured by government sponsored entities or GSE's such as Fannie Mae and Freddie Mac. Conventional loans can be made to purchase or refinance homes with first and second mortgages on single family to four family homes.
In general, Fannie Mae and Freddie Mac's single family, first mortgage loan limit is $400,000 in 2005. This limit is reviewed annually and, if needed, changed to reflect changes in the national average price for single family homes. The current loan limit applies to all conventional mortgages delivered after January 1, 2005.
2008 Conventional Loan Limits
First Mortgages
- One-unit: $417,000
- Two-unit: $533,850
- Three-unit: $645,300
- Four-unit: $801,950
Note: Maximum original loan amounts are 50 percent higher for first mortgages on properties in Alaska, Hawaii, Guam and the U.S. Virgin Islands.
Second Mortgages
- $208,500
Loans above the maximum loan amount established by Fannie Mae and Freddie Mac are known as 'jumbo' loans. Because jumbo loans are bought and sold on a much smaller scale, they often have a little higher interest rate than conforming, but the spread between the two varies with the economy.
Subprime Loans
When people usually hear the word Subprime, they think of a negative situation or a loan for bad credit borrowers. While people with tarnished credit history from bankruptcy, foreclosure, collections, divorce, medical difficulties may fall into the category for subprime financing, it is only one side of what these subprime has to offer.
Despite what marketing forces like MyFico.com would have us believe, the majority of American individuals do not have a 700 credit risk rating (see our Credit section for more info on credit scores). The reality is America is in debt both nationally and individually, and it is taking its toll. Lenders in the sub-great-credit arena have been around for literally 100 years. They are here because they know they are needed. They serve the purposes of those that deserve to have their own home despite what credit repositories say about them.
Subprime loans are not only for the credit-challenged. Subprime lending was created to fill the large need of borrowers that seek financing outside what banks and institutions lend according to merely Fannie Mae and Freddie Mac guided loans. These include financing for homeowners seeking 107% financing on their home purchase, those who need more cash out than the average lender can provide, need greater financing on their investment property, need financing on homes over $1 million, to name only a few. The list actually goes on and on; the circumstances are limitless.
Because subprime lending is so diverse and "out of the box," it is difficult to find a good bank or broker that really understands how to serve the needs of those who need this type of financing. Fannie Mae and Freddie Mac have made it so convenient and simple for an inexperienced loan representative to underwrite loans for them, that they almost do not have to think about it. Subprime lending guidelines are vast and differing from each other. It takes an experienced company to ask the right questions and listen to all the answers in order to fill a loan request appropriately. Make sure you choose the right company, like BalboaMortgage.com, to service loan requests that fall in this category.
Fixed Rate Mortgages (FRM)
The fixed rate mortgage is the most common type of mortgage financing. Fixed rate mortgages are available for 40 years, 30 years, 20 years, 15 years and even 10 years. There are also "biweekly" mortgages, which shorten the loan by calling for half the monthly payment every two weeks. (Since there are 52 weeks in a year, you make 26 payments, or 13 "months" worth, every year.)
Fixed rate fully amortizing loans have two distinct features. First, the interest rate remains fixed for the life of the loan. Secondly, the payments remain level for the life of the loan and are structured to repay the loan at the end of the loan term. The most common fixed rate loans are 15 year and 30 year mortgages.
During the early amortization period, a large percentage of the monthly payment is used for paying the interest. As the loan is paid down, more of the monthly payment is applied to principal. A typical 30 year fixed rate mortgage takes 22.5 years of level payments to pay half of the original loan amount.
Adjustable Rate Mortgages (ARMs)
6-Month Certificate of Deposit (CD) ARM
This program has a maximum interest rate adjustment of 1% every six months. The 6-month Certificate of Deposit (CD) index is generally considered to react quickly to changes in the market.
1-Year Treasury Spot ARM
This program has a maximum interest rate adjustment of 2% every 12 months. The 1-Year Treasury Spot index generally reacts more slowly than the CD index, but more quickly than the Treasury Average index.
6-Month Treasury Average ARM
This program has a maximum interest rate adjustment of 1% every six months. The Treasury Average index generally reacts more slowly in fluctuating markets so adjustments in the ARM interest rate will lag behind some other market indicators.
12-Month Treasury Average ARM
This program has a maximum interest rate adjustment of 2% every 12 months. The Treasury Average Index generally reacts more slowly in fluctuating markets so adjustments in the ARM interest rate will lag behind some other market indicators.
Introductory Rate ARMs and Interest Deferring ARMs
Most adjustable rate loans (ARMs) have a low introductory rate or start rate, some times as much as 5.0% below the current market rate of a fixed loan. This start rate is usually good from 1 month to as long as 10 years. As a rule the lower the start rate is the shorter the time before the loan makes its first adjustment.
Additionally, these same ARMs often provide for a interest deferring feature or option the borrower may opt to use. These types of ARMs, often more popularly referred to as the Options ARM, give the borrower up to four options for payment. They can choose a 15 year amortized payment for maximum payment to principle and interest savings; a 30 year amortized payment for moderate payment to principle; an interest only payment allowing a payment just of the interest accrued; and lastly, a minimum payment requiring a payment based on 1-2.5% of the loan balance that is usually is 20-40% less than a 30 year amortized payment. This means that the minimum payment creates more Cash Flow, which is why we call it the Cash Flow ARM on this site. For more information on the usefulness of the Option ARM Go Here.
Index
The index of an ARM is the financial instrument that the loan is "tied" to, or adjusted to. The most common indices are the 1-Year Treasury Security, LIBOR (London Inter bank Offered Rate), Prime, 6-Month Certificate of Deposit (CD) and the 11th District Cost of Funds (COFI). Each of these indices move up or down based on conditions of the financial markets.
Margin
The margin is one of the most important aspects of ARMs because it is added to the index to determine the interest rate that you pay. The margin added to the index is known as the fully indexed rate. As an example if the current index value is 5.50% and your loan has a margin of 2.5%, your fully indexed rate is 8.00%. Margins on loans range from 1.75% to 3.5% depending on the index and the amount financed in relation to the property value.
Interim Caps
All adjustable rate loans carry interim caps. Many ARMs have interest rate caps of six months or a year. There are loans that have interest rate caps of three years. Interest rate caps are beneficial in rising interest rate markets, but can also keep your interest rate higher than the fully indexed rate if rates are falling rapidly.
Payment Caps
Some loans have payment caps instead of interest rate caps. These loans reduce payment shock in a rising interest rate market, but can also lead to deferred interest or "negative amortization." These loans generally cap your annual payment increases to 7.5% of the previous payment.
Lifetime Caps
Almost all ARMs have a maximum interest rate or lifetime interest rate cap. The lifetime cap varies from company to company and loan to loan. Loans with low lifetime caps usually have higher margins, and the reverse is also true. Those loans that carry low margins often have higher lifetime caps.
