An FHA loan, or Federal Housing Administration loan, is a government-backed mortgage designed to make homeownership more accessible, especially for first-time buyers. Established in the 1930s, the FHA aims to promote homeownership by insuring loans made by approved lenders, reducing the risk they face.

Key Features of FHA Loans:

1. Lower Down Payments: One of the most attractive aspects of FHA loans is the lower down payment requirement. Borrowers can put down as little as 3.5% of the home’s purchase price, making it easier for those with limited savings to buy a home.

2. Flexible Credit Requirements: FHA loans are accessible to borrowers with varying credit scores. While traditional loans often require higher credit scores, FHA loans can be obtained with scores as low as 580 for the minimum down payment, and even lower for higher down payments.

3. Mortgage Insurance Premiums: To protect lenders, FHA loans require borrowers to pay mortgage insurance premiums (MIP). This includes both an upfront premium paid at closing and a monthly premium added to the mortgage payment.

4. Loan Limits: FHA loans have maximum loan limits that vary by region. These limits are designed to reflect local housing market conditions, allowing for flexibility in different areas.

5. Assumability: FHA loans can be assumable, meaning that a future buyer can take over the existing loan, which can be a selling point if interest rates rise.

Who Should Consider an FHA Loan?

FHA loans are ideal for first-time homebuyers, those with lower credit scores, or individuals with limited savings for a down payment. They can also benefit those looking to refinance their existing mortgages into a more affordable option.

In conclusion, FHA loans provide an accessible pathway to homeownership, offering lower down payments and flexible credit requirements. If you’re considering buying a home, an FHA loan might be a suitable option to explore.

The most common type of mortgage program where your monthly payments for interest and principal never change. Property taxes and homeowners insurance may increase, but generally your monthly payments will be very stable.

Fixed rate mortgages are available for 30 years, 20 years, 15 years and even 10 years. There are also “biweekly” mortgages, which shorten the loan by calling for half the monthly payment every two weeks. (Since there are 52 weeks in a year, you make 26 payments, or 13 “months” worth, every year.)

Fixed rate fully amortizing loans have two distinct features. First, the interest rate remains fixed for the life of the loan. Secondly, the payments remain level for the life of the loan and are structured to repay the loan at the end of the loan term. The most common fixed rate loans are 15 year and 30 year mortgages.

During the early amortization period, a large percentage of the monthly payment is used for paying the interest. As the loan is paid down, more of the monthly payment is applied to principal. A typical 30 year fixed rate mortgage takes 22.5 years of level payments to pay half of the original loan amount.

Conventional loans are secured by government sponsored entities such as Fannie Mae and Freddie Mac. Conventional loans can be made to purchase or refinance homes, single family to four family homes.

The Conforming Loan Limits are published annually by the Federal Housing Finance Agency (FHFA). Alaska, Hawaii, Guam and the U.S. Virgin Islands have loan limits that are 50% higher than the other contiguous states. Early in 2008, there were legislative changes that resulted in temporarily increases of the loan limits in certain high-cost areas in the contiguous United States. Here are a few websites to find additional information:

Federal Housing Finance Agency (FHFA)
US Department of Housing and Urban Development (HUD)
Fannie Mae

Jumbo loans are higher than the limits set by FHFA. They usually have a higher interest rate and some additional underwriting requirements. A strategy to lower your overall interest payment when your new balance is over the conforming limits is to use a combination of both a first and second mortgage. These are sometimes referred to as 80/10/10, 80/15/5, etc. Every situation is different, but is one more option to consider.

In addition to common loan structures such as fixed rate and adjustable rate, Fannie Mae and Freddie Mac have other loan programs for low to no down payments, community lending and affordable housing initiatives, construction to permanent, home improvement and reverse mortgages. Consult your mortgage professional and consider all your options.

These loans generally begin with an interest rate that is 2-3 percent below a comparable fixed rate mortgage, and could allow you to buy a more expensive home.

However, the interest rate changes at specified intervals (for example, every year) depending on changing market conditions; if interest rates go up, your monthly mortgage payment will go up, too. However, if rates go down, your mortgage payment will drop also.

There are also mortgages that combine aspects of fixed and adjustable rate mortgages – starting at a low fixed rate for seven to ten years, for example, then adjusting to market conditions. Ask your mortgage professional about these and other special kinds of mortgages that fit your specific financial situation.

The GPM is another alternative to the conventional adjustable rate mortgage, and is making a comeback as borrowers and mortgage companies seek alternatives to assist in qualify for home financing.

Unlike an ARM, GPMs have a fixed note rate and payment schedule. With a GPM the payments are usually fixed for one year at a time. Each year for five years the payments graduate at 7.5% – 12.5% of the previous years payment.

GPMs are available in 30 year and 15 year amortization, and for both conforming and jumbo loans. With the graduated payments and a fixed note rate, GPMs have scheduled negative amortization of approximately 10% – 12% of the loan amount depending on the note rate. The higher the note rate the larger degree of negative amortization. This compares to the possible negative amortization of a monthly adjusting ARM of 10% of the loan amount. Both loans give the consumer the ability to pay the additional principal and avoid the negative amortization. In contrast, the GPM has a fixed payment schedule so the additional principal payments reduce the term of the loan. The ARMs additional payments avoid the negative amortization and the payments decrease while the term of the loan remains constant.

The scheduled negative amortization on a GPM differs depending on the amortization schedule, the note rate and the payment increases of the loan. GPM loans with 7.5% annual payment increases offer the lowest qualifying rate but the largest amount of negative amortization.

Contact your mortgage professional for additional information and program availability.

The note rate of a GPM is traditionally .5% to .75% higher than the note rate of a straight fixed rate mortgage. The higher note rate and scheduled negative amortization of the GPM makes the cost of the mortgage more expensive to the borrower in the long run. In addition, the borrowers monthly payment can increase by as much as 50% by the final payment adjustment.

The lower qualifying rate of the GPM can help borrowers maximize their purchasing power, and can be useful in a market with rapid appreciation. In markets where appreciation is moderate, and a borrower needs to move during the scheduled negative amortization period they could create an unpleasant situation.

In certain markets, Adjustable Rate Loans (ARMs) may offer a low introductory rate or start rate. This start rate is for a limited time. As a rule, the lower the start rate is the shorter the time before the loan makes its first adjustment.

Index
The index of an ARM is the financial instrument that the loan is “tied” to, or adjusted to. The most common indices are the 1-Year Treasury Security, LIBOR (London Interbank Offered Rate), Prime, 6-Month Certificate of Deposit (CD) and the 11th District Cost of Funds (COFI). Each of these indices move up or down based on conditions of the financial markets.

Margin
The margin is one of the most important aspects of ARMs because it is added to the Index. This will determine the interest rate you will pay. When the margin is added to the index, it is called the “fully indexed rate”. Margins on loans may range from 1.75% to 3.50%, for example.

Interim Caps
All adjustable rate loans carry interim caps. Many ARMs have interest rate caps of six months or a year. There are loans that have interest rate caps of three years. Interest rate caps are beneficial in rising interest rate markets, but can also keep your interest rate higher than the fully indexed rate if rates are falling rapidly.

Payment Caps
Some loans have payment caps instead of interest rate caps. These loans reduce payment shock in a rising interest rate market, but can also lead to deferred interest or “negative amortization.” These loans generally cap your annual payment increases to 7.5% of the previous payment.

Lifetime Caps
Almost all ARMs have a maximum interest rate or lifetime interest rate cap. The lifetime cap varies from company to company and loan to loan. Loans with low lifetime caps usually have higher margins, and the reverse is also true. Those loans that carry low margins often have higher lifetime caps.

“Interest only” products are an easy way to save money and a very popular alternative to traditional fixed rates but they are not without risk. An “Interest Only” loan can offer consumers greater purchasing power, increased cash flow and a number of other benefits which are listed later in this article.

First let us start with a quick explanation of how the product works. With Interest only loans the borrower has the flexibility of paying only the interest due on the mortgage. Most of these products allow you to pay extra if you choose.

The positive aspects of these loans are as follows:

• They work well for borrowers that are restricted by a tight budget, and the savings can be as much as $300-400 per month!
• Interest Only loan can allow you to qualify for a bigger home. If the underwriter considers only the “Interest Only” payment, you may be able to upgrade to a nicer or larger home.
• This type of loan works well for people who only want to stay in a home for a just a few years. During the first couple of years with a conventional 30 yr mortgage, most of your mortgage payment is being applied directly to the interest of the loan. If you want to stay in the house for only 3-5 years, an “Interest Only” loan may be the right loan for you. You can receive a lower payment and have almost the same principal balance as the borrower who chose a 30 year, conventional mortgage if you choose to sell in 3-5 years.
• You want to buy a very expensive home. Most people who buy very expensive home have no desire to pay off their home completely, and the rate of appreciation on the house is usually very good. An “Interest Only” loan allows these borrowers to deduct their interest payments, and the money they save can be directed to other investments.
• You want to buy a rental property. The lower payment can help improve cash flow on a rental property.

As with every loan program, with positives there are always negatives.

• You are not paying down your principal on your mortgage. If your property doesn’t appreciate in value over those 3-5 years, you may even have to pay money if you choose to sell the home. While the likelihood of this happening is high, it is a risk that must be considered when thinking about using Interest Only loans.
• Most “Interest Only” products have a specified term. For example, on most 30 year fixed “Interest Only” loans, most lenders allow interest payments for 10 years, and then you must repay the loan during the last 20 years. This loan now must be amortized over a 20 year period, and this will carry a higher payment than a 30 year fixed mortgage. These loans may be a good option for you as a borrower, but each person’s situation is unique.
• Lastly, when in a period of incredibly low fixed rates “Interest Only” products will be very attractive. But, if you are planning on staying in your home for an extended period of time, you may want to consider a traditional fixed product.

At Martin Mortgage we understand how hard it is for self employed borrowers to be qualified for a mortgage loan based on adjusted gross income. That is why we offer traditional 30 year fixed rate loans based off of cash-flow in your business or personal bank accounts. Call us for details.

In certain markets, Interest Rate Buydowns may be available. In general Buydowns this is how they work. Payments are reduced and figured on a lower interest rate over a specific term. The difference between the “real” note rate and the lowered interest rate is paid in cash by the seller or the buyer. The more common buydowns are 3-2-1 and 2-1.

For example, the 2-1 Buydown with a loan amount of $350,000 which has a fixed interest rate 6.75% for 30 years. To “buy down” the interest rate, the cost would be a lump sum of $8,063.

1. First-year interest rate is 4.75%, monthly payment is $1,826.
2. Second-year interest rate is 5.75%, monthly payment is $2,043.
3. Years three through 30, interest rate is 6.75%, monthly payment is $2,270.
   • 1st-year savings (as compared to $2,270 per month) is $444 per month or $6,332.
   • 2nd-year savings (as compared to $2,270 per month) is $228 per month or $2,731.

Add up the annual savings: $6,332 + $2,731 = $8,063. Therefore, it costs $8,063 to buy down the interest rate and payments for two full years.

Contact your mortgage professional to discuss the availability of these options for you