Financing Houses

by Jeanette Joy Fisher

What Real Estate Lenders Look For

Lenders control many programs -- some make use of over 200! Generally, lenders look for the following typical standards, with many exceptions:

1. Absolutely no late mortgage payments

2. Credit score above 580

3. If bankruptcy, no charge-offs or collection accounts afterwards

4. If bankruptcy, only 1 late payment afterwards

5. Two active revolving accounts in good standing

6. Good employment history or stated income

7. Three to six months reserves (covering mortgage payment, taxes & insurance) in savings

8. 55% income to debt ratio

9. Appropriate loan-to-value ratio on purchase property

Borrowers obtain a loan by bringing something of value to the table. One of the following assets ought to get you financing:

1. Good credit score

2. Good income

3. Good cash down payment and reserves

Seven Loan Types and Finance Terms

Understanding the variety of loan types and terms enables you to choose an effective lender. Here are seven important loan types and related terms:

1. "A" Loans

Borrowers with great credit, a good cash reserve, good employment, and a debt-to-income ratio of less than 33%, qualify for "A" loans. These loans typically cost less upfront for points and costs, charge no prepayment penalty, and offer lower interest rates.

2. Sub-Prime Loans

Credit reporting agency websites portray Americans as having great credit. These informational articles and graphs mislead and cause struggling home buyers to feel inadequate. In fact, my Countrywide lending contact told me that 60% of all applicants are considered "sub-prime" borrowers. Sub-prime borrowers usually are those with credit scores under 620 or those with other conditions such as undocumented stated income, poor employment history, or credit issues such as collections, charge offs, and late payments.

3. Stated Income Loans

Most applicants for a mortgage have a full-time job with income tax returns verifying income for the past two years. Other borrowers, like me, with multiple streams of income must get loans with stated income. Some lenders require two years of bank statements showing deposits equaling the required total income, proving the ability to make the mortgage payment.

4. Full-documented Loans

These loans require tax returns, employment verification, bank statements, and other individual lender demands. Other processing types, more flexible and easier for the borrower to gather information on, do not necessarily cost more. High credit scores, big down payments, and large cash reserves ease documentation requirements.

5. Conforming Loans & Jumbo Loans

According to Fannie Mae and Freddie Mac guidelines, "conforming loans" are mortgages for less than the following allowable amounts at the time of this writing:

(Unit= dwelling or housing unit)

1 unit    $333,700

2 units  $413,100

3 units  $499,300

4 units  $625,000

Note: the amounts are higher in Hawaii and Alaska. Other states like California, New York, and Florida join the higher limits this year. The dollar amount of these loans changes periodically.

Conventional lenders also use the term conforming loans for loans which are not Fannie Mae and Freddie Mac loans. Conforming loans simply refers to the dollar amount; it doesn’t mean you get a Freddie Mac or Fannie Mae loan.

6. "Jumbo loans" are for higher dollar amounts.

You need jumbo loans to finance properties requiring larger mortgages than the limited conventional loan amount. Jumbo loans usually charge higher interest rates than conforming loans.

7. Home Equity Line of Credit (HELOC)

If you already own your own home, consider a Home Equity Line of Credit, with few fees and lower costs, for purchasing investment property. Use this line of credit for a large down payment on your investment properties over and over. With twenty percent or more down on an investment property, you get better financing plus save on loan costs.