Purchase Loans
Fixed Rate
a fixed-rate mortgage is a type of home loan where the interest rate remains constant throughout the entire term of the loan, typically 15 or 30 years. This means your monthly principal and interest payments stay the same, regardless of market fluctuations. Fixed-rate mortgages provide predictability and make budgeting easier, as borrowers know exactly how much they'll pay each month. However, if interest rates fall significantly, you won't benefit unless you refinance. These mortgages are often preferred by homebuyers who plan to stay in their homes long-term and value financial stability.
Adjustable Rate
an adjustable-rate mortgage is a home loan with an interest rate that can change periodically over the life of the loan. ARMs typically start with a lower interest rate than fixed-rate mortgages, making them attractive to some borrowers initially. After an initial fixed-rate period (often 5, 7, or 10 years), the interest rate adjusts at predetermined intervals based on a specific financial index plus a margin. This means monthly payments can increase or decrease over time. ARMs often have caps that limit how much the rate can change in each adjustment period and over the life of the loan. These mortgages can be beneficial for borrowers who plan to sell or refinance before the initial fixed-rate period ends, or for those who expect their income to increase over time. However, they carry more risk than fixed-rate mortgages due to the potential for higher payments in the future.
FHA Loans
an FHA loan is a mortgage insured by the Federal Housing Administration, designed to help more people achieve homeownership. These loans are particularly attractive to first-time homebuyers and those with lower credit scores or limited savings. Key features of FHA loans include:
- Lower down payment requirements (as low as 3.5% of the purchase price)
- More lenient credit score requirements compared to conventional loans
- Higher debt-to-income ratios allowed
- Potential for sellers to contribute to closing costs
- Mortgage insurance requirements (both upfront and annual premiums)
FHA loans can be used for various property types, including single-family homes, multi-unit properties (up to four units), and certain condominiums. While they offer easier qualification, borrowers should be aware of the ongoing mortgage insurance costs and potential property condition requirements. These loans are originated by FHA-approved lenders and insured by the government, reducing the risk for lenders and allowing them to offer more favorable terms to borrowers.
VA Loans
a VA loan is a mortgage program backed by the U.S. Department of Veterans Affairs, designed to help active-duty service members, veterans, and eligible surviving spouses become homeowners. Key features of VA loans include:
- No down payment required in most cases
- No private mortgage insurance (PMI) requirement
- Competitive interest rates, often lower than conventional loans
- More lenient credit requirements compared to conventional loans
- Limits on closing costs that veterans can pay
- No prepayment penalties
- Option for the seller to pay all closing costs
- VA funding fee (which can be financed into the loan) instead of mortgage insurance
To qualify, borrowers must meet service requirements and obtain a Certificate of Eligibility. VA loans can be used for purchasing, building, or refinancing a primary residence. While they offer significant benefits, borrowers should be aware of the funding fee and potential property condition requirements. These loans are provided by private lenders but guaranteed by the VA, allowing lenders to offer more favorable terms to eligible borrowers.
Jumbo Loans
a jumbo loan is a type of mortgage used to finance properties that are too expensive for a conventional conforming loan. These loans exceed the Federal Housing Finance Agency's (FHFA) conforming loan limits, which vary by location but are generally $726,200 in most areas for 2023. Key features of jumbo loans include:
- Higher loan amounts to accommodate expensive properties
- Often require larger down payments (typically 10-20%)
- Stricter credit score requirements (usually 700 or higher)
- Lower debt-to-income ratio requirements
- More stringent income and asset verification
- Potentially higher interest rates than conforming loans
- May require additional appraisals or documentation
- Not backed by government agencies or sold to Fannie Mae or Freddie Mac
Jumbo loans are typically used for high-end or luxury homes, properties in competitive real estate markets, or multi-unit properties. While they allow borrowers to finance more expensive homes, they often come with more rigorous qualification standards and may have less flexibility in terms. These loans are held by lenders or sold on the secondary market to private investors.
Rehab Purchase Loans
rehab purchase loans, also known as renovation loans or purchase-and-renovate loans, are mortgage products that allow buyers to finance both the purchase of a property and its renovation or rehabilitation costs in one loan. Key features of rehab purchase loans include:
- Financing based on the home's projected value after renovations
- Funds for both purchase and renovation disbursed in a single loan
- Often lower down payment requirements compared to traditional loans plus separate renovation financing
- Can be used for a wide range of improvements, from minor updates to major renovations
- Various program options, including FHA 203(k), Fannie Mae HomeStyle, and VA renovation loans
- Typically require detailed renovation plans and licensed contractor involvement
- Funds are usually held in escrow and disbursed as work is completed
- May have higher interest rates than traditional mortgages
- Often involve more complex underwriting and approval processes
These loans are particularly useful for buyers interested in properties that need work but who don't have additional cash for renovations after the purchase. They can be an effective way to turn a fixer-upper into a dream home or to increase the value of a property quickly. However, they also require more planning and oversight during the renovation process.
Down Payment Assistance Loans
Down Payment Assistance (DPA) loans are programs designed to help homebuyers overcome one of the biggest hurdles to homeownership: the down payment. These programs are typically offered by state and local governments, non-profit organizations, and sometimes lenders. Key features of Down Payment Assistance loans include:
- Provide funds for down payment and sometimes closing costs
- Often structured as a second mortgage or a grant
- May be forgivable over time if certain conditions are met
- Usually have low or zero interest rates
- Typically have deferred payments or no payments required
- Often targeted at first-time homebuyers, though not exclusively
- Generally have income limits and purchase price restrictions
- May require homebuyer education courses
- Can be combined with various types of first mortgages (conventional, FHA, VA, etc.)
- Amounts vary widely, from a few thousand dollars to a percentage of the purchase price
These programs aim to make homeownership more accessible, particularly for low to moderate-income buyers or those in high-cost areas. While they can significantly reduce upfront costs, borrowers should be aware of any repayment terms, restrictions on resale, or occupancy requirements. The availability and terms of these programs can vary greatly by location and funding availability.
DSCR Loans
DSCR (Debt Service Coverage Ratio) loans are a type of mortgage specifically designed for real estate investors. These loans are underwritten based on the property's income potential rather than the borrower's personal income. Key features of DSCR loans include:
- Qualification based on the property's income vs. expenses, not the borrower's personal income
- Typically used for investment properties, including single-family rentals, multi-family units, and commercial properties
- Often require a DSCR of 1.25 or higher (meaning the property's income is at least 1.25 times the mortgage payment)
- May have higher interest rates compared to conventional mortgages
- Usually require larger down payments (often 20-25% or more)
- Can be easier to qualify for investors with complex tax returns or multiple properties
- Often have less stringent documentation requirements for personal income
- May offer options for interest-only payments or longer amortization periods
- Typically available for both purchase and refinance transactions
- Can be a good option for self-employed borrowers or those with non-traditional income sources
DSCR loans are particularly attractive to real estate investors looking to expand their portfolios without being limited by their personal income or existing debts. However, they often come with stricter property requirements and may have prepayment penalties. These loans are not typically available for owner-occupied properties.
USDA Loans
USDA loans are mortgage programs offered by the United States Department of Agriculture to promote homeownership in rural and some suburban areas. These loans are designed to help low to moderate-income borrowers purchase homes in eligible rural areas. Key features of USDA loans include:
- 100% financing with no down payment required
- Competitive interest rates, often lower than conventional loans
- Lower mortgage insurance premiums compared to FHA loans
- Available for primary residences only
- Income limits based on location and household size
- Property must be located in a USDA-eligible rural area
- Can be used for new construction, existing homes, or even some home improvements
- Upfront guarantee fee and annual fee instead of traditional mortgage insurance
- More lenient credit requirements compared to conventional loans
- Possibility to finance closing costs into the loan
USDA loans come in two main types: Direct Loans (issued by the USDA) and Guaranteed Loans (issued by approved lenders and guaranteed by the USDA). These loans can be an excellent option for eligible buyers who want to purchase in rural areas but have limited savings for a down payment. However, the geographical restrictions and income limits can make them less accessible for some borrowers.
Equity Loans
Streamline Refinance
refinancing without cash out, also known as a rate-and-term refinance, is a type of mortgage refinance where the borrower replaces their existing loan with a new one, typically to obtain better terms, without taking additional cash out of their home's equity. Key features of this type of refinancing include:
- Aims to lower interest rate, reduce monthly payments, or change loan terms
- Does not increase the loan balance (except for closing costs, which may be rolled into the new loan)
- Can be used to switch from an adjustable-rate to a fixed-rate mortgage (or vice versa)
- May shorten or lengthen the loan term (e.g., from 30 years to 15 years, or vice versa)
- Can potentially eliminate private mortgage insurance (PMI) if home value has increased
- Often has lower closing costs and interest rates compared to cash-out refinances
- Typically easier to qualify for than cash-out refinances
- May reset the loan term, potentially extending the overall time to pay off the mortgage
- Can be done with conventional, FHA, VA, or other loan types
- Usually requires a new appraisal, credit check, and income verification
This type of refinancing is ideal for homeowners who are satisfied with their current equity position but want to take advantage of lower interest rates or change their loan structure. It's particularly beneficial when market rates are significantly lower than the homeowner's current rate, or when the homeowner's financial situation or credit score has improved since the original mortgage was obtained.
Cash-out refinance
a cash-out refinance is a type of mortgage refinancing where a homeowner borrows more than they owe on their current loan, taking the difference in cash. This allows homeowners to access their home equity for various purposes. Key features of cash-out refinancing include:
- Replaces existing mortgage with a new, larger loan
- Provides a lump sum of cash to the homeowner at closing
- Can be used for various purposes like home improvements, debt consolidation, or major expenses
- Typically limited to 80-85% of the home's value (loan-to-value ratio)
- Often has slightly higher interest rates compared to rate-and-term refinances
- May have stricter credit score and debt-to-income requirements
- Can potentially reset the loan term, extending the overall time to pay off the mortgage
- Usually requires a new appraisal, credit check, and income verification
- May result in higher monthly payments due to the increased loan amount
- Can be done with conventional, FHA, or VA loans, each with their own requirements
- Closing costs are typically higher than a rate-and-term refinance
- Interest on the cash-out portion may be tax-deductible if used for home improvements
Cash-out refinancing can be a useful tool for homeowners who need access to a large sum of money and have sufficient equity in their homes. However, it's important to consider the long-term implications, including potentially paying more interest over time and using your home as collateral.
heloc
a Home Equity Line of Credit (HELOC) is a revolving credit line secured by your home's equity. Unlike a traditional loan, a HELOC allows you to borrow money as needed, up to a predetermined limit, during a set period. Key features of HELOCs include:
- Credit limit based on home equity (typically up to 85% of home value minus existing mortgage balance)
- Two phases: draw period (usually 5-10 years) and repayment period (10-20 years)
- Variable interest rates, often tied to the prime rate
- Interest-only payments may be allowed during the draw period
- Flexibility to borrow and repay repeatedly during the draw period
- Often lower closing costs compared to cash-out refinancing
- Interest may be tax-deductible if used for home improvements
- Can be used for various purposes: home improvements, debt consolidation, major expenses
- No lump sum disbursement; borrow as needed
- May require an annual fee to maintain the line of credit
- Potential for rate caps and rate floors to limit interest rate fluctuations
- Typically requires good credit and a favorable debt-to-income ratio
- Risk of foreclosure if unable to repay, as your home is used as collateral
HELOCs offer more flexibility than traditional loans, making them attractive for ongoing expenses or projects with uncertain costs. However, the variable interest rates and potential for overborrowing require careful financial management.
