PureWest Christie’s International Real Estate in Bozeman recently held a Mortgage Basics discussion, hosted by Mortgage Broker Sherrie Kitto of Rocky Mountain Bank. The class reviewed the basics of what programs available on the mortgage market. As interest rates increase, the variety of loan programs available to buyers becomes more attractive. Some offer very low or NO money down situations…but there are always catches. I’ve put together six take away points from the discussion – there is so very much more to each of these programs and I’d encourage anyone shopping for a loan to get more specific information from their lender as to the best program for your specific situation. Loan programs discussed here include Conventional, Jumbo, FHA, VA, & RD.
1. Build Your Table – Imagine the 4 Cs of lending- Credit, Collateral, Capacity to Repay, Capital – as legs of a table. One might be a little short or wobbly but the other three if strong can compensate. In other words, all four of these items are very important when applying for a loan but if one is a little shakey, many times a loan can still be issued. If two are shakey the table comes crashing down. The basic premise on all of these loans is that the buyer must have at lease 620-640 credit scores to even begin discussing what programs they’d like to use. Wondering about where your credit sits? Visit annualcreditreport.com for your free annual credit report – they will charge you for the FICO score but you can see what lenders see (debts, debt to income ratio, etc).
2. Location, Location, Location: Certain areas qualify for different financing options. A good example of this is the Rural Development Loan. This loan program can be used for properties that sit outside of Bozeman City limits – including Big Sky, Three Forks, Belgrade, and Manhattan areas and unincorporated Gallatin Valley. 100% financing is allowed – the property must be owner occupied. The catch? There is a 2% RD Funding Fee that can be wrapped into the loan and financed. Additionally there are income limits (currently $81K family 1-4, $108K family 5-9). Single unit homes and some condos qualify. And there is mortgage interest for the LIFE of the loan calculated at .4% of the Loan Amount annually. Property must be owner occupied for at least 1 year. Funds for this program tend to run low in the early fall months – the coffers are renewed in October yearly.
3. Thank you for your service: If you’ve served in the military you may qualify for a Veterans Administration Loan. This is a pretty sweet loan program – up to 100% financing with NO mortgage insurance. Multi unit homes may be purchased if one of the units is owner occupied. The catch? Funding fee is 2.15% for the first time this program is used. This goes to 3.3% for each subsequent use. Veterans with 10% or more disability may have this funding fee waived.
4. How much house? There are limits or conditions on all loan programs (and for good reason). Conventional loans (meat and potatoes, regular secondary market term loans) cap out at $417K. VA loans don’t have a set loan limit but for purchasers looking to go over $417K they must put down 25% of the difference between $417K and whatever their loan amount is. RD financing is tied to income levels so individual debt to income ratios will determine the highest price that this loan program can accommodate. FHA loans cap out at $346,150 in the Gallatin Valley. Thinking big? Jumbo Loans offer fairly competitive rates for minimum loan amounts of $417,001 and maximum loan rates of $1.5 million. Buyers must have at least at 720 credit score to qualify and strict loan underwriting requirements apply.
5. Nest Egg – How much money do you have to put down on a property? RD financing allows buyers 100% financing but the buyer and the property must qualify. VA financing allows buyers 100% financing but the buyer and the property must qualify. FHA offers loans that only require 3.5% down, no income limits, those with lower credit scores or higher debt to income ratios may qualify, down payment may be gifted and parents/immediate family may qualify to cosign.. The catch? Big up front fee 1.75% that can be wrapped into the loan, the property must qualify and requires an FHA inspection during appraisal and then there’s the hugely expensive mortgage insurance for the life of the loan calculated at 1.3% of the loan value annually. If you have 5-20% to put down on a loan, Conventional Loans may still be your best bet after Mortgage Insurance is figured into the equation.
6. Square Peg, Round Hole: Missing an entire leg of the 4C table? If you’re a buyer with good credit, reserves and good income but are self employed without two years of reportable income or if the property won’t qualify (i.e. over 40 acres) to be sold on the secondary market, a portfolio product may be the best bet for you. Lending institutions offer ‘in house’ financing where the note is held by the bank for the entire life of the loan.