The three C's of your mortgage loan approval, part three
February 26, 2014In my last two columns, The Three C's of Your Mortgage Loan Approval, Roadrunner Jan. 15, 2014, and Feb. 6, 2014, I talked about Credit and Capacity. This week let's look at the last of the three Cs: Collateral.
Collateral is the borrower's total down payment or equity.
There was a time a few years ago when you could buy a house with a negative down payment. There were loan products that went to 125 percent of the purchase price of a home. That's right, you could buy a home for, say, $200,000 and get a check, minus closing costs, for $50,000. Take a guess as to how many of these loans eventually defaulted. The closer your guess is to "all of them" the better chance you have of being right.
We do have a loan product now that will go to 105 percent of the purchase price, the USDA loan. I have talked about USDA loans before. These are rural development loans and are under the Department of Agriculture to service low population communities. Most of Valley Center is under the USDA eligible area. If the appraisal comes in higher than the purchase price, which is unusual but not unheard of, the borrower can finance the closing costs up to 5 percent of the purchase price. The USDA loan has a lot of quirks, so call me for more details of this program.
The best, and my favorite loan program, calls for no money down with a purchase price up to $527,500 in San Diego County. This is the Veteran's Administration, or VA, loan program.
For retired or active duty military personnel, 100 percent of the purchase price can be financed. VA loans have a funding fee that ranges from 2.15 percent of the loan amount to 3.3 percent of the loan amount, depending on whether the loan is a first use or subsequent use of the VA entitlement. Service members who have a 10 percent or greater service related disability are exempt from this fee. If the fee is imposed it is generally rolled into the loan, which can then exceed 100 percent of the purchase price.
For VA loans that are over the County loan limit of $527,500 in San Diego County, the borrower needs to put down 25 percent of the difference between the purchase price and the loan limit. For a $1,000,000 home purchase using a VA loan in San Diego, the down payment would be $118,150. One of the best features of the VA loan is that there is no monthly mortgage insurance payment.
FHA loans require a minimum 3.5 percent down and now go to $546,250 in San Diego County. FHA loan have an upfront mortgage insurance premium of 1.75 percent of the base loan amount, and a monthly mortgage insurance premium of 1.35 percent. As the government has tried to minimize their mortgage risk exposure they have made FHA loans more expensive. They are still the loan of choice for a low down payment loan for a borrower who may have had some credit issues in the past, or is getting a gift for some or all of the down payment and closing costs.
Lastly, conventional loans have a wide range of down payment options. For loans with less than 20 percent down there is the option of putting as little as 3 percent down and having private mortgage insurance, or PMI. With 10 percent down a number of borrowers do an 80-10-10 loan. That is a 10 percent down payment, a 10 percent second loan or equity line, and an 80 percent loan to value first trust deed. This avoids mortgage insurance, although there may be an interest rate adjustment on the first loan.
The collateral type can be divided into different categories: 1 unit, or single family residence (SFR), 2 to 4 units, condominium unit or manufactured home. Each of these property types will have different requirements for down payment.
Another way to categorize collateral is by property use: primary residence, second home or investment property.
A single family detached home with a 20 percent or more down payment that is owner occupied with a loan amount less than $417,000 will have the best interest rate options. These are the Fannie Mae and Freddie Mac conforming loans that are published in the press.
The opposite end of the spectrum would be an investment property that is a condominium or manufactured home. These loans would carry a higher rate than the example above and would require a down payment of at least 20 percent, if not more.
John Yeager is the Valley Center Branch Manager for Summit Mortgage, NMLS #219612.
He can be reached at 760-749-8931 or by visiting www.john-yeager.com, or via email at email@example.com