Understanding Home Loans Programs
Common Loan Programs:
- 30-Year Fixed Loans
- 15-Year Fixed Loans
- Adjustable-Rate Mortgages (ARMs)
- Interest Only Loans
- Investment Loans
- Stated Income Loans/Low Doc or No Doc Loans
Specialty Loan Programs:
- FHA Loans
- VA Loans
A lot of first-time buyers want to know what kind of loan to get. I recommend 30-year fixed loans most of the time because the interest rate never changes- which means your mortgage payment never changes, and you reduce the principal balance and pay off the loan over time. Sometimes buyers can’t wait 30 years to pay off their house and want to pay it off quicker and choose a 15 year fixed loan. 15 year fixed loans offer slightly better interest rates but also have higher monthly payments.
I rarely recommend adjustable rate mortgages, or interest-only mortgages because these do have some downside risks. With adjustable-rate mortgages, your interest rate could go up and that means your monthly payment could go up as well. With interest-only loans, you don’t reduce principal so the loan balance doesn’t decrease over time lowering your leverage, increasing your equity, and ending mortgage payments after the loan is paid off.
Point or No Point Loans
With loan programs, you can usually have the option to choose between a “1 point loan” or “no point loan”.
What is a Loan Point?
A Loan point is a buyer closing cost paid in escrow. 1 point equals 1 percent of the loan amount.
For Example: Lets say you are buying a $600,000 house with 20% down. That means, in regards to home loans, you will have a loan amount of $480,000. 1 point or 1% of this amount would be $4,800. This $4,800 will be cash paid out of pocket by you the buyer before closing and will raise your closing cost.
Is Paying a point worth it?
Because paying a point will lower the interest rate for the life of the loan. Let’s say that the interest rate for no points is 4.25% and that by paying a point you can lower the interest rate by 1/8 of a percent or 0.125 so that the new rate would be 4.125% and that it’s the $480,000 loan we talked about above.
|No Point Loan||1 Point Loan|
|Monthly Mortgage Payment||$2,361||$2,326|
You can now calculate how long it will take for this point to pay for itself, by taking the cost of 1 point and dividing by the monthly savings. $4,800/$35 = 137 months or 11.5 years. In this example if the buyer were planning to stay in the property for 11 years this might make sense to do, otherwise, I would stick with no point home loans. Over 10 years 4.25% loan will pay $186,000 in interest while 4.125% will pay $180,000 in interest.
The problem nowadays with paying points is lenders aren’t giving very big discounts, if the discount for a point was ¼ or ½ a percent, that would be a lot more attractive for buyers. Another downside of buying a point is that it increases your closing costs rather significantly. You will have to decide for yourself.
How much do I qualify for?
The next thing that buyers want to find out is how much they can buy. There is a difference between what you qualify for versus what you are willing to spend.
For stated income loans that come in and out of the market, you can claim whatever income you want- although a lot of these buyers tend to get over their heads. A great example would be a salesperson in their first year who made 4K, 4K, 6K, and 14K in their first four months. They probably will assume from now on, they will always make 14K a month or more. If you get a loan payment that you can’t afford you will risk losing your down payment so be conservative if you are stating your finances.
For most of us, we will need documented income to qualify for a loan. This means the income that shows up on your taxes. The bank will look at your NET income, and not your gross. So lets suppose you own a small business, and you made $150,000 gross income, but then wrote off in your schedule C $140,000 in business expenses- that means your net income is $10,000 and that’s the income the lender is going to use to qualify you.
The bank takes an average of two years income. If your income increased they average it. So if you made $60,000 net income last year and $75,000 net income this year, they will give you $67,500 income. If your income decreased from this year to last year, the bank takes the lower income. Lets suppose you made $75,000 net income last year and $60,000 net income this year, they will give you $60,000 income.
How much can I borrow when it comes to home loans?
Use this great online tool, it’s the easiest way:
The mortgage amount you can qualify for is directly related to your net income. First, the bank will subtract any debt payments (for example a credit card payment or car payment) from your net income, then with what remains they will not loan more than a 35-40% debt to income ratio. If you are currently paying rent, and plan to live in the property as your primary residence then rent won’t be counted against you because they assume you will be living in your new home. If you are buying the property as an investment, your monthly living expense will also be subtracted from your net income.
Do you need help with home loans? Please call me directly at (310) 388-7332 or click the button below and I will be in touch.