Mortgage Approaches

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Loan product developments in recent years have greatly expanded the choices for all home buyers. Today's market offers borrowers strategies to maximize buying power, save cash for repairs or improvements, get a loan with little or no income verification, or even buy a home with no down payment. This article will discuss some of the new ways that buyers can take advantage of the expanding loan market to secure the best financing for their purchase and covers the following topics.

 

  • Purchase Preapprovals
  • No-income documentation loans
  • 80/10/10 combinations
  • 100% loans


Purchase PreApprovals

 

A purchase preapproval is a lender's analysis of you as a borrower without specific property information. In other words, your loan information is submitted to a lender for full underwriting and includes all borrower details, such as employment information, asset information, and credit history. The lender then approves you as a borrower, subject to a maximum loan amount, down payment, and interest rate.

 

Getting preapproved for a loan is critical in today's real estate environment. Many Realtors do not want to accept offers from buyers unless their home loan has already been approved by a lender. While this seems like a ``catch 22'', that is, how can I get my loan approved if I haven't even found a home?, the tool is very useful. By going through the loan process prior to being in contract on a home, you can eliminate all of the obstacles to borrowing without jeopardizing an actual purchase transaction. Once your loan is approved, your real loan closing will be quick and subject only to a satisfactory appraisal and title report on the home.

 

To begin the preapproval process you need to make some assumptions for your purchase price, loan amount, and loan program. Any of these assumptions can change once you've found your home, but it helps to do the following:

  • Complete your application for the maximum loan amount and purchase price that you're interested in. You can always reduce these later.
  • Get your loan approved at an interest rate that is higher than what you expect to take. Again, the loan program that you decide upon can differ from what you are initially approved at.

 

The preapproval of your loan will ensure that your real purchase will go smoothly once you have located the perfect home.

 

No Income Documentation Loans

 

Often grouped together despite their subtle differences, ``light documentation,'' ``no-income verification'' and ``quick qualifier,'' or ``QQ'' loans are a solution for many buyers who have income from sources that are hard to verify. Usually these loans are used by self-employed borrowers who have difficulty verifying all of their income, or by borrowers with very complex income structures. For example, a borrower who has income primarily from rental properties and investments may be hesitant to verify all sources of income due to the volumes of paperwork this would require. With a no income documentation loan, the borrower can simply state his income on the application, and the lender will use this stated income to qualify the loan. Why do lenders do this? Because they recognize that by charging a slightly higher rate of interest they can rely on this stated income of the borrower and cover the additional risk. Lenders do in fact rely on verifying that the borrower has assets that logically match the stated income, along with excellent credit.

 

With a higher cash down payment, typically 25% or higher, along with good credit, these loans allow borrowers to buy into purchase prices a lender wouldn't ordinarily qualify them for. Because no-income documentation loans carry a higher interest rate, they should only be used when necessary, not simply to avoid the paperwork requirements of a full documentation loan.

 

Avoid Mortgage Insurance with 80/10/10 Financing

 

If you purchase your home with less than 20% down, chances are you will obtain a loan that is insured by ``Mortgage Insurance'' (MI). Private mortgage insurance or MI is a type of insurance provided by a private mortgage insurance company to protect a lender in the event of default on a loan. This type of insurance is generally required when a borrower has less than 20% equity in a home; i.e. the loan amount divided by the property value is 80.01% or greater. As your home appreciates or your loan balance decreases (or a combination of the two), and your equity in the home exceeds 20%, you may petition the mortgage holder to drop the MI. This process may be cumbersome or difficult.

 

One way to avoid paying MI is to purchase a home with a combination first and second mortgage. The first mortgage would be limited to 80% of the home's appraised value. The second mortgage, which would close in conjunction with the first, would then provide for the difference between the home's purchase price, less the 80% first mortgage, less the down payment available . In other words, if you have a 10% down payment available, your first loan would provide for the 80% mortgage with a second mortgage of 10%. This is commonly referred to as an 80 -10 -10 transaction.

 

Another way to avoid incurring MI payments is to find a lender that offers self-insured programs. This type of loan would have a higher interest rate in place of the private mortgage insurance premium. While mortgage insurance premium payments are not tax deductible, the interest associated with a self-insured mortgage would be fully tax deductible.

 

The decision of whether to obtain a loan with mortgage insurance versus the above two options should take into account the combined total monthly payments of the various options, adjusted for the tax benefits of interest deductions.

 

100% Financing or 0% Down Loans

 

Considering a new purchase and hate the thought of taking cash out of your skyrocketing investments? Ask your mortgage source for a quote on 100% financing. Put no money down! You can keep all of the down payment in your investments and pledge the assets instead. While the interest costs are higher in this type of loan, the opportunity costs of the down payment money may well make this a worthwhile situation.

 

As a rule of thumb, fully leveraging your real estate purchase would make the most sense if your investment returns were better than 3% over the prevailing 30 year fixed rate.

 

To summarize, there are many ways to approach financing a new home and starting with a preapproval is a must in today's competitive real estate market. Several new techniques are available for your home buying flexibility and it pays to educate yourself on the buying process first. Remember that today's mortgage market offers new opportunities to the homebuyer that never existed before. And don't forget to enjoy your new home!