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Section 4 - Chapter 17 (continuation)
Interest-Only Loan
One of the more popular loan types, these loans allow you to make monthly payments of just the interest on the balance due. Of course, if you pay only interest, years from now you will still owe the same amount as when you borrowed the money. This is a means of gambling, when you can't afford a regular mortgage, and you bet you'll build equity in any case with fast-rising home values.
Purchase Money Mortgage
This is basic seller financing - you agree to make payments to the seller, and give him a mortgage on the home, so he can take back his property if you don't pay according to the agreed-upon terms. You may get a good interest rate this way, and pay less in closing costs. However, smart sellers are selling this way because they can get a higher price, since the buyer may not be able to get conventional financing to buy anything else. If you can get financing on your own, you may be better off.
Land Contract
Similar to a purchase money mortgage, this is a type of seller financing in which the buyer makes payments to the seller. In this case, however, the deed is delivered after the final payment is made. Also called "contract for deed" in some areas. Keep this in mind if you are having trouble getting financing. Sellers often feel more comfortable with this than with a mortgage, because they retain the title until you pay (in reality, the process for getting the property back is about the same in most states).
No-Doc Loans
This is a loan that doesn't require the borrower to provide evidence of a job or income (no documentation). These loans are based on property value, credit score of the borrower, or both. For example, a lender may make a no-doc loan on a house, but only loan 70% of the value, so the loan is safe. With a high credit score, they may loan 95% of the value.
Interest rates are always higher on no-doc loans. A no-doc mortgage loan may commonly be 2.5% to 5% higher than a traditional loan. This may be one of your limited options, though, if you have a new business or can't get conventional financing for other reasons.
Low-Doc Loans
Similar to a no-doc loan, except you need some documentation of a job or income. You may have to have a job, for example, but not need to verify your income.
Stated Income Loans
Similar to a no-doc loan, except you must provide evidence of a business or other source of income. The amount of income is not verified, and the lender considers the borrowers credit score. These loans are common for small business owners and others with variable or hard-to-document income.
Manufacturer Loans
These are mortgage loans from manufactured-home companies (or arranged and guaranteed by them). They often allow buyers to buy with 5% or less down. They may be your only option if you are buying a mobile home, but the interest rates are usually high compared with conventional mortgage loans.
Option ARM
This is an adjustable rate loan some lenders are offering that allows you make various payment options each month, from paying only the interest to paying the full interest-and-principal payment. It could be useful if you have irregular income or an uncertain future. On the other hand, if you can get an interest-only loan at a better rate, you can always pay something towards the principal when you have it.
Rehabilitation Mortgage
This is a mortgage loan that covers the costs of rehabilitating (repairing or improving) a property. Some rehabilitation mortgages - like the FHA's 203(k) - allow a borrower to roll the costs of rehabilitation and home purchase into one mortgage loan. Check into these if you are short on cash and looking at a fixer-upper.
Reverse Mortgage
This is a home loan for your final years, paid out either in one lump sum, as a regular monthly check, or at times and in amounts you choose. The balance and interest are repaid once you sell, permanently move, or die. It is a way to live in your equity and eat it too.
Step-Rate Mortgage
This mortgage loan has a gradual increase in interest rate during the first few years of the term. The increases are scheduled, and not dependent on an index, as in ARMs. You have to consider your future plans (are you moving in a few years?) to see if this is a better loan for you. Also ask about any prepayment penalties.
VA Loans
If you are a veteran, you may qualify for a Veterans Administration loan. These can be for as much as 100% of the home value, and may have low closing costs too.
FHA Loans
The Farmers Home Administration doesn't actually loan money, but guarantees the loans that banks make. This allows banks to safely loan up to 97% of the value of the home (even more in some FHA programs). You will have to pay mortgage insurance, making these loans more expensive than some others, but check into these if you are cash-poor.
The FHA also insures loans for the purchase or rehabilitation of manufactured housing, condominiums, and cooperatives. It also has special programs for urban areas, disaster victims, and members of the armed forces. Insurance for ARMS is also available from the FHA.
Contact an FHA-approved lender such as a participating mortgage company, bank, savings and loan association, or thrift. For more information on the FHA and how you can obtain an FHA loan, visit the HUD web site at http://www.hud.gov or call a HUD-approved counseling agency at 1-800-569-4287 or TDD: 1-800-877-8339.
203(b) Loan
This is the most commonly used FHA program. It offers a low down payment, flexible qualifying guidelines, limited lender's fees, and a maximum loan amount.
203(k) Loan
This FHA loan lets you finance the purchase and rehabilitation of a home through a single mortgage. A portion of the loan is used to pay off the seller's existing mortgage and the remainder is placed in an escrow account and released as rehabilitation is completed. Basic guidelines for 203(k) loans are as follows: The home must be at least one year old; The cost of rehabilitation must be at least $5,000, but the total property value - including the cost of repairs - must fall within the FHA maximum mortgage limit; The 203(k) loan must follow many of the 203(b) eligibility requirements. Talk to your lender about specific improvement, energy efficiency, and structural guidelines.
Second Mortgage Loans From Sellers
Some banks will allow you to have as little as 5% into a home purchase, but will only loan you 80%. The seller can take payments on a second mortgage from you for the other 15%. Keep this in mind as a way to lower your down payment requirement, and eliminate the mortgage insurance on the primary mortgage loan.
State Government Loans
Most states have some sort of financing help in the form of a loan-guarantee program or outright loans for low-income buyers. Some programs even base the payment amounts on your income.
Builders Gifting Programs
In some parts of the country, builders fund foundations that give you a portion of the down payment, so you can get into a home with as little as 3% down payment from your own pocket. FHA and other lenders have so far approved of or allowed this.
Friend And Family Loans
It may not be from charity that a brother or a friend lends you the money to buy a home. That 7% return might look awfully good if their money is sitting in the bank at 3%. Just be sure to have the papers
So are there more ways to approach real estate financing? There are hundreds of ways! These are just some simple ways to buy your home, and some of the more basic loan types. In fact, if you start investing, you can use other techniques for really creative real estate financing.
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