Chapter 3

CONVENTIONAL MORTGAGE LOANS

Conventional loans are not insured by FHA or VA.  The source of these loans are many banks, savings and loans, insurance companies, etc.

A conventional mortgage is known as a conforming loan and it does not exceed a specific loan amount of $417,000 for a 1 unit property.  These loans are regulated by FLMC (Federal Home Loan Mortgage Corp.) and FNMA (Federal national Mortgage Association).  The maximum allowed for a conforming loan amount is presently:

                         1 unit   $494,500

                        2 unit   $533,850

                        3 unit   $645,300

                        4 units $801,950

 Non-Conforming refers to loans in excess of the conforming maximum loan amounts above. These loans are referred to as Jumbo loans.  Most lenders qualify buyers using FNMA/FHLMC guidelines/ratios for underwriting.

 Private Mortgage Insurance (PMI)  

PMI is insurance that protects the lenders should the borrower default on the loan

It is paid for by the borrower and is required on loans with less then a 20% downpayment.  There are several ways of paying PMI – monthly, financed into the loan, upfront at closing or in a higher interest rate.

 Fixed Rate Loans

 The fixed rate mortgage is amortized fully over a specific term (10, 20, 30 or 40 years) at a constant fixed rate with the principle and interest payment not changing.

 Adjustable Rate Mortgage (ARM)

 The ARM is amortized fully over a 30 year term and interest rate adjustments will occur at set intervals.  There are several different types of ARM programs.  The most common are the 1, 3, 5, 7, or 10 year loans. Each program is tied to a specific index like the 1 year or 10 year treasury yield.  At each adjustment period the difference between the applicable index (set at time of loan closing) will be added or subtracted from the mortgage rate. 

 Two Step Loans

 This fully amortized mortgage combines the unique elements of a 30 year fixed rate mortgage and an adjustable rate loan, with the initial rate set for a specific period of time, generally 5 or 7 years.  At the end of the initial term the payment is adjusted based on an index plus a margin for the remaining term of the loan, 25 or 30 years.  These loans are also referred to as 5/25 or 7/23 programs.

 Balloon Loans

 Payments under this program are based on a thirty year loan with a fixed interest rate.  At the end of specific period, the entire outstanding principle balance is due.  The borrower will then have to refinance the loan at current market rates or pay the current balance in full.

 Buydown/Subsidy Programs

 This program is identical to a fixed rate conventional loan except that the payments are temporarily subsidized for a limited term by the buyer, seller or third party.  Buydown funds are held in an escrow account to temporarily subsidize the payment.  The bought down rate is typically for a 2 or 3 year period of time. 

 General Mortgage Guidelines  

  1. Downpayment requirements.  The borrower must typically have a 5% downpayment from their own funds. There may be 0% down programs that are available.  Some programs may require additional money as reserves after closing.

             Example            $200,000       Sales price

                                    x        95%  

                                                $190,000         Maximum loan amount

                                                                        $10,000 downpayment required  

  1. Loan-to-value Ratio.  The LTV is the mortgage amount as a percentage of the sales price or appraised value, which ever is less

            Example          $190,000 divided by $200,000 = 95% loan to value

  1. Seller Contributions.  3% on a 90.01%-95.00% and 6% on all LTV’s below 90.00%  Seller contributions are defined as the total amount paid by the seller or any other interested party to the transaction – such as the builder, developer, real estate agent, or their affiliates.
  1. Prepayment Penalty. There may or may not be a prepayment charged when the borrower pays off the loan before the expiration of the term.  This is based on program and state regulations.
  1. Assumptions.  Most conventional loans are not assumable and vary by program.
  1. Escrow/Impounds. Policies vary from lender to lender. However, the majority of conventional loans require that escrows for real estate taxes and insurance (including hazard, flood and mortgage insurance) be held by the servicing lender.
  1. Secondary Financing.  Second loans may sometimes be allowed within mortgage program guidelines to assist the borrower in obtaining a complete financing package, providing the borrower qualifies for the combined first and secondary loans.  These are sometimes referred to as 80/20, 80/15/5, or 80/10/10 loans.

                        Example:    $200,000 sales price      80/15/5

                          less           $160,000 1st mortgage  (80%)

                          less           $  30,000 2ndmortgage  (15%)

                          leaves       $  10,000  or 5% down payment  

  1. Qualifying the Borrower.  Conventional qualifying uses “gross” income to calculate the ratios.

First Ratio:  total housing payment or PITI (principle, interest, taxes, insurance, PMI (if applicable), monthly condo/HOA fee divided by the borrower(s) combined gross monthly income.  This generally should not exceed 28-34%.

            Example:  Gross monthly income                   $5,000

                             Monthly mortgage payment           $1,350  

                             $1,350 divided by $5,000 = 27% front ratio  

Second Ratio:  total PITI payment from above plus all monthly debt divided by combined gross monthly income.  Generally should not exceed 36-41%.  

            Example:  Gross monthly income                   $5,000

                             Monthly mortgage payment           $1,350

                             Other monthly debt                       $   650           

                             $2,000 divided by $5,000 = 40% back ratio  

The maximum allowed ratios vary from program to program.  

SPECIAL CONVENTIONAL PROGRAM

Home Possible  (check with lender for availability)

            95% financing available

            No reserves required on 1 unit properties

Options for Teachers, Firefighters, Law Enforcement

Fixed, 5/1 and 7/1 ARMS available      

National Dream (check with lender for availability)

           Flexible income sources such as income from cash, boarders, or commissions

            More flexible credit sources like alternative credit for rent history, or utility

            Payments $500 cash investment from borrower towards 5% downpayment

 My Community (check with lender for availability)

            95% and low downpayment options

            Flexible sources for downpayment

            Flexible credit standards – lower credit scores

            Expanded debt to income ratios

            Fixed and Adjustable rates available

   

“Do Better Business…. The Carroll Way!”  

The information provided in this manual reflects current mortgage information which may be subject to change 
without  notice/or which may have already been eliminated. Your transaction may involve updates periodically.  
Consult with your mortgage loan officer for updated information.

Updated March 16, 2009