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This section will cover three distinctly different types of loans; conforming, non-conforming and sub-prime. Let’s look at them one at a time.
Conforming loans are for loans that are less than the current size limitation of $417,000 for borrowers with decent credit. For purposes of this type loan we will concentrate on those who have less than a 20% down payment. For 20% or greater down payment, you can do one loan without having to pay PMI insurance. For those with less than 20% you have 5 options, Zero down (100% financing), 3%, 5%, 10% or last but not least 15%.
In recent years the 3% option has become the least popular because it will always require some type of PMI. If possible, lenders such as Family Mortgage will work to show you alternatives to loans that require PMI. These are called “piggyback mortgages” because they require you to do two loans to avoid paying PMI. The first loan would be 80% of the sales price of the home and the second mortgage would be for the balance that you need to close.
For example, let’s assume you are purchasing a $200,000 house and you have $20,000 to use for a down payment. In this case we would structure the first mortgage for 80% or $160,000 and the second for 10% or $20,000 leaving you to come up with the difference of $10,000. We call this an 80/10/10 in mortgage lingo. The other options are an 80/15/5 if you have 5% to use for a down payment or an 80/20 if you have no available funds for the down payment. The rate on the first mortgage will be the same for an 80/10/10 as it would be if you were putting the whole 20% down. If you are doing an 80/15/5 expect to pay a 1/8% higher rate on your first mortgage and for an 80/20 (zero down) expect to pay at least a ¼% higher in rate for the privilege of not having to come up with any down payment.
Non-Conforming loans are for those loan sizes exceeding $417,000 up to $2,000,000. These loans are perceived to be riskier by lenders and therefore carry a premium in the rate of generally ¼% over that of a conforming loan. They also have stricter guidelines in terms of down payments depending on the size of the loan. In general, the more that you are borrowing, the more as a percentage of the sale price of the house the lender will require you to have for a down payment. Having said that, many lenders are shifting to risk based pricing, i.e. you can borrow more as a percentage of the sales price but you may pay a slightly higher rate for the increased risk. Also, some lenders may require a larger down payment on the first mortgage once you exceed $1,000,000 for your loan size. In general, the guidelines for those who have less than 20% to use for a down payment are the same as mentioned above for the conforming loans.
Sub prime loans are defined as those with less than average credit. They are available as zero down provided that your credit scores meet their guidelines. In general, the guidelines for those who have less than 20% to use for a down payment are the same as mentioned above for the conforming and non-conforming loans. The big difference being that because the credit scores portend greater risk, you will pay a fairly steep premium in the rate for these loans. We call them credit repair loans; the idea being to get you into the house, get your credit restored and then refinance you into a lower arte after a year or two. These loans are generally for individuals with credit scores less than 640.
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