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Mortgages: Everything You Need to Know

By Brad King, City National Bank

What are the qualifications needed for getting a loan today?

When a lender evaluates a potential borrower they will review credit, income, and liquid assets.

  • Credit score requirements vary with the type of loan product with FHA being more liberal than Conventional and Jumbo loans.
  • Someone who has had a bankruptcy or a foreclosure may eventually be qualified for a mortgage once they have passed some seasoning requirements and have re-established good credit.
  • Income requirements will be used to evaluate one’s “ability to repay” by calculating one’s debt obligations as a percentage of one’s income. The income analysis will review and verify the income to see if it’s through employment, self-employment, pensions, or other sources. This income will be evaluated as to its stability and likelihood of continuing, which is important since the lender wants the borrower to be able to continue to pay the obligation.
  • Lastly, liquid assets will be reviewed. It is important to lenders that the monies used for a purchase are, in fact, the funds belonging to the borrower and not from a friend or borrowed from some source that would not be acceptable for a borrower to use for mortgage approval.

Getting with a knowledgeable mortgage professional to help navigate the process is an important first step towards home ownership.

How is today’s loan process different than in 2008? When we hear talk of a real estate bubble, what would you say that makes this loan market different?

In the immediate aftermath of the real estate downturn in 2008, credit markets froze and the availability of credit was greatly reduced. Harsher analysis of borrowers and the collateral were used. In Florida, the property, for loan purposes, was discounted an additional 5% from the appraisal as an additional cushion for lenders since the state was a “declining” market, the same as states like Nevada and California.

In the years since this collapse, the real estate market has healed and there are no more “declining markets.” Credit score requirements have also moderated. Where many banks would require at least a 660 score for conventional loans, they are now allowing back down to 620 which is what Fannie Mae and Freddie Mac allow. We’ve returned to allowing 95% conventional financing fairly routinely and 80-10-10 loans have returned now that banks are doing HELOCS (Home Equity Line of Credit) to 90% combined loan-to-value again.

We don’t see the same level of risk that was prevalent back then where one could get a loan with stated income/stated assets or negative amortization loans; though if one searches hard enough there are now a couple small players offering that up if the borrower is willing to pay the price. All in all, the credit quality created over the past 10 years has greatly strengthened the housing and lending markets from a well-deserved lesson in responsible lending.

The bottom line is if one has a properly maintained recent credit history, sustainable, verifiable income, and funds they can verify, they can probably get a house.

What are the benefits of working with a local mortgage banker in Florida?

To some people, a mortgage has become a commodity instead of a service. It’s unfortunate since there are many things an experienced local mortgage professional can do to both simplify the mortgage process as well as offer guidance to save money and time.

The benefit of dealing with a local mortgage professional is that they have local knowledge for appraisals and values; closing agents; insurance – both homeowners and/or flood requirements; home inspections – just to name a few.

With the lengthy mortgage lending guidelines confronting borrowers the knowledge of a local lender that one can meet face to face with to navigate the process can be both comforting and hopefully avoid pitfalls.

What is the threshold for a conforming loan vs a jumbo loan?

The term “conforming” refers to the agency loan limits of a particular suite of mortgage products such as Fannie Mae, Freddie Mac, FHA, VA, and USDA. The loan limits vary by market and product type.

Most of Florida has a maximum loan amount of $453,100 for Fannie and Freddie. For FHA it actually varies by county so there are quite a few variations across the state. The FHA limit in Duval County ($343,850) is more than the limit in Flagler County ($294,515) and Sarasota ($299,000) but less than Palm Beach ($345,000).

For VA financing the maximum at 100% LTV is $453,100 but VA buyers routinely financing at higher prices but need 25% down payment on the amount OVER $453,100.

Jumbo loans are loans provided, for the most part, by large commercial banks. Fannie and Freddie don’t buy jumbo loans so they are provided by banks for their portfolio.

Historically jumbo rates have been higher than conforming loans. For the past several years, however, that has not been the case. As banks have pursued the more affluent clients who borrow jumbo loan amounts the rates have been the same and in some cases less than rates provided by Fannie, Freddie, or FHA. Both offer options for fixed and ARM’s; interest-only and principal and interest options.

Are their products out there for lot purchases?

Lot financing is a bit more difficult to obtain than financing a home. You can’t finance a lot with Fannie Mae, Freddie Mac, VA, or FHA financing. Lot financing is provided by a few banks that typically are interested in construction financing and therefore will finance a lot to assist a buyer in eventually wanting to finance a home to be built.

Lot loans options are very basic and limited, and they are typically a shorter term. Some banks will only provide a 3 or 5-year balloon. Others will financing longer but only with an interest rate which is only locked a few years. Expect a lot loan to have a rate that’s a bit higher than a comparable loan on a home. Keep in mind that the lot loan is really temporary financing, not a long-term solution.

Can you explain what a bridge loan is?

Bridge loans aren’t really a type of loan. When the term “bridge loan” is used it’s really to imply a purpose which is to “bridge” equity on an exit property into a new subject property before it’s been sold.

Many people cannot afford to buy a new house without selling the old house and extracting the equity to apply towards the purchase of a new home. Then there are people who may be able to afford to buy the new house without selling the departure residence but may need some or all of the equity of the departure home.

If you fall under the second scenario the challenge may be how to handle the down payment without the sale? Bridge financing can be one of several methods to achieve the goal of closing on the new home before the prior home closes.

Options may be but not limited to: taking a HELOC out on the departure residence; borrowing against a 401k; borrowing against a brokerage account; borrowing against other assets such as other real estate, automobiles, or jewelery. The key is that one can borrow against an asset for bridge financing but cannot borrow unsecured funds such as credit cards or unsecured lines of credit. Any of these things can be “bridge financing”.

Can you explain what a construction to perm loan is? How is it different than a jumbo renovation loan?

Most people, when they purchase a home, are purchasing a completed home. However, when one hires a builder to construct a home for them, the buyer will typically need to obtain financing to pay for the construction of the home. This is called a construction-to-permanent loan.

Builders and buyers will agree upon a contract which includes the “sticks, bricks, labor, material, and profit.” The financing and transaction costs are separate and provided by the buyer. This is a transaction which is a one-time closing that provides a “construction phase” and a “permanent phase.” The construction phase is where a lender will hold loan proceeds for the benefit of the borrower to pay their builder “draws” as the house is built. At completion, the loan then becomes a permanent mortgage with a payment of principal, interest, taxes, and insurance, like any other mortgage payment.

A similar transaction is renovation financing. As our housing stock ages, one may locate a home in an area that requires updating or expansion. The renovation financing works in a similar but smaller fashion. Since the home is already completed, we would be structuring financing for the purchase of the property and setting up a renovation loan that provides the funds to be used to renovate or update the kitchen, bathrooms, bedrooms, roofs, or whatever is necessary to make the home current to the buyer’s tastes.

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