quick mortgage guide

QUICK MORTGAGE GUIDE
TABLE OF CONTENTS
FNMA CONVENTIONAL LOANS - Page 3
FHA LOANS - Page 7
VA LOANS - Page 11
ADJUSTABLE RATE MORTGAGES - Page 15
CONTACT INFORMATION - Page 16
FNMA CONVENTIONAL LOANS
The maximum original principal balance on FNMA loans is:
Number of
Maximum Original
Units
Principal Balance
1
$417,000
The maximum term on conventional loan can be up to 40 years.
Minimum Credit Score of 620 is required.
High ratio (95%) loans are available to homebuyers who meet both the FNMA and private mortgage
insurance guidelines. As with all real estate transactions, the loan amount is based on the lesser of the
sales price or the appraised value.
97% loans may be available to Homebuyers through the Fannie Mae Flex programs.
SOURCE OF DOWNPAYMENT GUIDELINES
• FNMA requires that lenders adequately document the source of all funds to be used for the closing of
a home purchase. The following are some specific guidelines:
• Gifts are acceptable to FNMA with certain limitations.
1. On high ratio loans (85% to 95%) FNMA requires that the borrower have 5% of the purchase
price of his own resources in the home purchase.
2. In the case of a 97% loan the Borrower may obtain a gift for all closing costs, pre-paids and
down payment.
3. On any loan with an LTV of 80% or less the entire down payment and closing costs can come
as a gift. On any gift, a gift letter must be obtained with proof that the funds cited in the letter
have been transferred to the borrower or paid (i.e. at closing) in his behalf.
• Checking, Savings, or Money Market Accounts are the most typical places that assets are verified.
• Any new accounts or large increases in balances must be adequately explained and documented.
1. Borrowed Funds that are secured by an asset
represent a return of equity and are acceptable to
FNMA. Assets that may be used to secure funds
include certificates of deposit, stocks, bonds, autos,
real estate, and life insurance policies. The lender
must verify the loan terms including the monthly
payment which must be included in the
qualifying ratios.
2. Borrowed Funds cannot come from signature loans
or credit card advances.
• Sweat Equity is not allowed on any FNMA
conventional loans.
• Trade Equity is allowed by FNMA providing that the
borrower has a minimum or 5% additional cash investment
of his own money in the purchase transaction. The equity
is determined by subtracting the outstanding loan balance
of the property that is being traded, plus any transfer costs,
from the lesser of that property’s appraisal value or its
trade-in value.
• Cash On Hand is not acceptable under FNMA guidelines.
3
INCOME QUALIFYING GUIDELINES
Ratios using income and housing expense/obligations are used to determine whether the borrower will be
able to meet the expenses involved in homeownership. Ratio guidelines may be exceeded as long as there
are documented factors to justify their use.
1. The ratio used on fixed rate mortgages for the housing ratio Principal, interest, taxes, hazard
insurance, mortgage insurance, and subordinate financing is 28% for all loans. This ratio is
calculated using the gross monthly income for all borrowers divided into the monthly
housing expense.
2. The second ratio includes the projected house payment plus any obligations extending 10 months
or longer divided by the gross monthly effective income and is 36%.
3. These Ratios may be exceeded if an approval is obtained from FNMA’s Desktop Underwriter or
Freddie Mac’s L. P. (Automated Underwriting Systems).
Any approval must be supported with adequate documentation.
MAXIMUM SELLING CONTRIBUTIONS
• The maximum allowable contribution from interested parties are:
1. 3% of the lesser of the sales price or appraised value, if the loan-to-value ratio is greater than 90%
and the property will be occupied as a principal residence.
2. 6% of the lesser of the sales price or appraised value, if the loan-to-value ratio is 90% or less and the
property will be occupied as a principal residence.
3. 6% of the lesser of the sales price or appraised value, if the loan-to-value is 80% or less (or the
combined loan-to-value is 90% or less) and the property will be occupied as a second home.
4. 2% of the lesser of the sales price or appraised value, if the mortgage is a fixed rate loan (regardless
of the loan-to-value ratio) and the property is an investment property.
• Any closing costs normally paid by the property purchaser are considered contributions if they are not paid
by the purchaser.
• Funds received from the purchaser’s employer or family are not considered a concession, but are subject to
“gift” guidelines. Contributions include:
1. Funds that are contributed to an interest rate buy down plan for temporary or permanent lowering
of the mortgage payment.
2. All other forms of payments or gifts that are related to acquiring the property or to payments of the
financing terms – loan placement fees, origination fees, discount points, commitment fees, appraisal
costs, interest shortfall, transfer taxes, stamps, attorneys’ fees, surveys, title insurance, fees for the use
of real estate tax service, or credits to the purchaser from any interested party are contributions that
are subject to our limitations.
3. However, transfer related charges such as costs of title insurance, surveys, or recording fees, if
tradition in the market area results in property sellers paying all or a portion of these charges in
virtually all sales transactions involving individual sales of both existing and new homes are not
considered a contribution.
4. Any contribution above the maximum or contributions that are in the form of personal property
(furniture, cars, or “giveaways”) must be deducted from the property’s sales price before the loan
amount is calculated.
4
SELF-EMPLOYED INFORMATION
Any borrower with 25% or more ownership in a business
is considered to be self-employed. A borrower must be
self-employed for a minimum of two years or more or have a
two year history of previous successful employment in the same
occupation (or related field) in order to be eligible for financing.
The borrower must disclose in what type of company (i.e.,
corporation, partnership, etc.) he/she has ownership and
provide the required corporate and personal tax returns, profit
and loss statements, and other requested documentation for
underwriting. A business credit report is not required.
Borrowers who have been employed less than two years will
be required to furnish a financial pro forma and market
feasibility studies. Borrowers who have been self employed less
than two years are generally not eligible for maximum financing.
BANKRUPTCY
• A bankruptcy must be discharged fully and the borrower must have re-established good credit and
demonstrated an ability to manage financial affairs.
1. Chapter 7:
A minimum elapsed time of at least 4 years between the time the bankruptcy was
discharged and the mortgage application is sufficient time to re-establish credit.
2. Chapter 13:
A minimum elapsed time of 2 years from date of discharge or 4 years from the date
of dismissal.
3. In all cases, the lender must have sufficient documentation to document its decision that the
borrower is creditworthy
FORECLOSURE
• Generally, FNMA will not purchase a mortgage if the borrower(s) has been a defendant in a foreclosure
proceeding during the last 5 years or has returned a property to the lender with a deed in lieu of foreclosure
with in the last 4 years. In either case the Borrower is limited to a 90% LTV until the 7th year from the date
of foreclosure.
• A pre-foreclosure sale (short sale) requires 2 years elapsed time period and reestablished credit.
• If the foreclosure was the result of extenuating circumstances beyond the control of the borrower(s) – such as
serious illness, death of a principal wage-earner, or loss of employment due to factory shutdown, etc. – FNMA
will consider purchase of the loan after 2 years, if the borrower(s) has re-established good credit and has
demonstrated an ability to manage financial affairs. This exception does not apply if the property involved
in the foreclosure was a second home or an investment property.
5
ASSUMPTION INFORMATION
Generally, on FNMA loans the following are the assumption guidelines:
Fixed rate loans (30 and 15 year) – These loans are generally not assumable.
Adjustable rate loans (30 and 15 year) – These loans are generally assumable with a formal
qualifying assumption. The fee for the assumption on this loan can vary from $250.00 to 1% of
the outstanding balance.
FNMA
Adjustments to points on FNMA Loans
Based on Credit Scores
FNMA Adjustments
CREDIT SCORE DISCOUNT ADJUSTMENTS
Credit Score
<=60%
>60-70%
>70- 75%
>75-80%
>80-85%
>85-95%
>95%
>=740
(.25)
0
0
.25
.25
.25
.25
720 – 739
(.25)
0
.25
.50
.50
.50
.50
700 – 719
(.25)
.5
.75
1.00
1.00
1.00
1.00
680 - 699
0
.5
1.25
1.75
1.5
1.25
1.00
660 – 679
0
1
2
2.5
2.75
2.25
1.75
640 - 659
.5
1.25
2.5
3
3.25
2.75
2.25
620 – 639
.5
1.5
3
3
3.25
3.25
3.00
<620 or no score
.5
1.5
3
3
3.25
3.25
3.25
6
FHA
MAXIMUM MORTGAGE AMOUNTS
The FHA Maximum Mortgage amounts for single family properties located in Oklahoma is:
$271,050.00
The onetime MIP may be added to the above maximum mortgage amount or paid in cash at closing.
The Upfront/one time MIP is 1% of the Loan Amount with a renewal premium of 1.15%. The
renewal premium
Is required for a minimum of 5 years (no matter what the beginning LTV is)
The maximum term for FHA loans is 30 years.
PROGRAMS
The Federal Housing Administration (FHA)
insures loans made by lenders in an effort
to make available housing to low-to-middle
income homebuyers. There are a number
of different programs available that have
different document provisions.
FHA 203b
This program allows the homebuyer to obtain
a loan up to 96.5% of the sales price or
appraised value (which ever is less). This
program requires the payments of the one
time mortgage insurance premium and a
monthly mortgage insurance premium.
FHA 203b CO-MORTGAGOR
1. When there are two or more borrowers, but one will not occupy the property as a principal residence,
the maximum mortgage is limited to 75% LTV.
2. However, maximum financing is available for borrowers related by blood (parent-child, siblings) or
for unrelated individuals that can document evidence of a family type, long-standing and substantial
relationship not arising out of the loan transaction. HUD will not object to legitimate transactions
where the non-borrower assists in the financing of the property, such as a parent assisting a child with
the purchase of their first home or a college student to purchase a house near campus. This
arrangement may not be used by non-occupant borrowers to develop a portfolio of rental properties.
7
FHA 203k
The FHA 203k loan program is a program that enables a borrower to purchase (or refinance) a property and
include in the permanent loan the purchase price (or existing balance) plus any rehabilitation work required to
bring the property up to the minimum standards. There is a minimum amount of acceptable rehabilitation or
$5,000 required. The repair/rehabilitation work is escrowed for at the time of closing with the completion of
the work required within 180 days after closing. This program requires only monthly mortgage insurance. The
FHA allows the mortgage lender to collect a supplemental origination fee on this program and there are some
additional loan processing costs.
SOURCE OF DOWN PAYMENT GUIDELINES
The guidelines for verification of assets for closing between FNMA and FHA have become almost identical
with the following exceptions:
1. Gifts are allowable for all of the down payment and closing costs on FHA loans. The documentation
on the receipt of the gift funds is the same as on an FNMA conventional loan.
2. Checking, Savings, or Money Market Accounts – Same as FNMA.
3. Trade Equity is permitted by FHA. The amount of equity is determined by subtracting all liens
against the property being traded, along with any real estate commission, from the lesser of that
property’s appraised value or sales/trade price.
4. Cash on Hand is acceptable to FHA with certain restrictions.
5. Sweat Equity is acceptable to FHA. Several restrictions must be met, including: 1) Only repairs
listed on the appraisal can be used for sweat equity, 2) no cash back can be given to the borrower, 3)
if borrowers provide materials, then the source of the funds for material must be documented.
6. Sale of personal property is acceptable with the following guidelines: Proof that the item has been
sold and a satisfactory estimate of its worth. The estimated worth may be in the form of published
value estimates, such as those issued by an automobile dealer, philatelic or numismatic associations,
or a separate written appraisal by a qualified appraiser. Only the lesser of this estimate of value or the
actual sales price is considered as assets to close.
7. Collateralized loans. Funds can be borrowed for the required investment as long as satisfactory
evidence is provided that they are fully secured by existing marketable assets. These assets may
include stocks, bonds, automobiles, real estate (other than the property being purchased), and the
cash value of life insurance policies. (Unless the borrower provides satisfactory evidence the
borrowed funds do not require repayment, e.g., some thrift and retirement plans, various loans
secured by deposited funds, etc., the monthly debt resulting from the loan must be included in the
borrower’s qualifying ratios.) The borrower’s funds must be provided by an independent third party.
The seller, real estate agent or broker, lender, etc., may not provide such funds. Unacceptable
borrowed funds include signature loans, cash advances on credit cards, and similar
unsecured financing.
8. Bridal Funds Gift Registry – A savings account may be established for funds to purchase a home by
family and friends of the applicants.
9. Second mortgage from family – The family of the applicants may loan borrowers money for purchase
of a home with a second mortgage taken and loan repaid by the borrowers. The borrower must
qualify for the payments.
8
INCOME QUALIFYING GUIDELINES
FHA is using the gross effective income method in qualifying home buyers. This method is like that process
described in the FNMA Conventional Qualifying section except that the ratios used on FHA loans are:
1. Mortgage payment expense to effective income should not exceed 31% without sufficient
compensating factors.
2. Total fixed payment (obligations with a remaining payment period of more than six months) to
effective income should not exceed 43% without significant compensating factors.
3. One other thing that should be considered is that FHA allows properties that qualify as energy
efficient (EEH) to have ratios that are 2% higher on both the monthly payment expense and total
fixed payment ratios.
MAXIMUM SELLING CONTRIBUTIONS
• HUD/FHA allows financing concessions of up to 6% of the contract sales price
before any dollar reduction is required.
• The 6% limitation can include discount points, interest rate buy downs, and
any closing costs normally paid by the buyer (including the 1% loan
origination fee).
• Any financing concessions above the 6% limit or any sales concessions, such as
decorating allowances, moving expenses, car, boats, furniture, or televisions will
require a dollar for dollar reduction in the sales price before the loan amount
is calculated.
• The sales or financing concessions noted include seller or interested third party
gifts or consideration.
SELF-EMPLOYED INFORMATION
FHA defines self-employed individuals as those owning 25% or more of a business. They generally require two
years history for self-employed borrowers. Exceptions to the two-year rule are:
Between one and two years – The borrower must have at least two
years previous successful employment, or a combination of one year
of employment and formal education or training in the current field
or a related field.
Less than one year – The income for the self-employed borrower
cannot be used as effective income.
As with FNMA borrowers, the lender must develop complete
documentation on the borrower and his/her business. This
development will require complete personal and corporate tax
returns as well as current profit and loss statements and balance
sheet, along with evidence of quarterly tax payments, a
business credit report on corporations and “S” corporations.
9
BANKRUPTCY
A bankruptcy will not disqualify the borrower if at least 2 years have passed since the bankruptcy was
discharged and the borrower has re-established good credit (or chosen to incur no new credit obligations) and
has demonstrated an ability to manage financial affairs.
1. An elapsed period of less than 2 years may be acceptable if the borrower can show that the
bankruptcy was caused by extenuating circumstances beyond his or her control (such as the death
of the principal wage earner, loss of employment due to factory closings, or serious long-term illness)
and has since exhibited an ability to manage financial affairs and the borrower’s current situation is
such that the events leading to the bankruptcy are not likely to recur.
2. A borrower paying off debts under Chapter 13 may qualify for a loan if (1) one year of the pay-out
period has elapsed with satisfactory credit, and (2) court approval is obtained.
FORECLOSURE
A borrower whose previous residence or other real property was foreclosed on or has given a deed-in-lieu of
foreclosure within the previous 3 years is generally not eligible for an FHA insured mortgage. However, if the
foreclosure was the result of extenuating circumstances (such as the death of the principal wage-earner, loss of
employment due to factory closings, or serious long-term illness) and the borrower has since established good
credit, an exception may be granted. Extenuating circumstances do not include the inability to sell a house
when transferring from one area to another.
ASSUMPTION INFORMATION
FHA mortgages originated before December 15, 1989 generally provide for a simple assumption with no
restrictions. Without a formal assumption, the borrower remains liable for the obligation and could be cited
in any foreclosure action. Historically, the FHA has not included borrowers that sold their properties on
simple assumptions in any legal action. On mortgages originated after December 15, 1989 may require a
creditworthiness review and certain restrictions. These include:
All mortgages originated after December 15, 1989 require a formal assumption where the assumption
borrowers meet current FHA credit guidelines.
The transfer/assumption fee for loans varies depending on when the original mortgage was closed, but
ranges between $125.00 to $500.00.
TO BE RELEASED OF LIABILITY ON AN ASSUMPTION, THE SELLER MUST REQUEST A RELEASE
OF LIABILITY.
10
VA
MAXIMUM MORTGAGE AMOUNTS
Mortgage lenders are required to have a minimum guaranty of 25% to put a loan in a GNMA security. Due
to significant losses incurred on “VA No-Bids”, lenders now establish company guidelines on how much
guaranty they require. VA loans are now available up to $417,000 with 25% guaranty. The amount of
eligibility available to a veteran increases to $36,000 on loans up to $144,000 up to $45,000 on loans above
$144,000 and $104,250 on loans up to $417,000. VA loans are available above $417,000.00, with the
borrower paying 25% of any amount over $417,000 as a down payment.
Any VA loan above $90,000 will have a guaranty less than the 40% maximum. The individual lenders should
be contacted to determine how much guaranty they will require on specific transactions.
PROGRAMS
The Veterans Administration provides eligible veteran borrowers with 100% loans for the purchase of a
homestead. There are minimum service requirements for a veteran to be eligible. To prove eligibility the
veteran must provide either a Certificate of Eligibility or
either a DD214 or Discharge Papers showing that the
veteran has served the minimum required time and has
been honorably discharged.
The VA charges the Veteran a “Funding Fee” to guarantee
the loan. The Funding Fee may be added to the mortgage
balance and financed or paid in cash. The Funding Fee
is waived for any veteran that has a service connected
disability. The VA Funding Fees were increased and are
shown below.
VA FUNDING FEES EFFECTIVE OCTOBER 1, 2004
The Funding Fees for VA home loans for regular military
are as follows:
Loans with down payment of less than 5.0% are 2.15
Loans with down payment of 5% to 10% are 1.5
Loans with down payment of 10%or more are 1.25
Loans made to reservists have the following Funding Fees:
Loans with a down payment of less than 5.0% are 2.4
Loans with down payment of 5% to 10% are 1.75
Loans with down payment of 10% or more are 1.5
11
SECOND USE FUNDING FEE
The Funding Fee for a second or subsequent VA loan made to a veteran or reservist with less than 5% down
will be 3.3%.
Loans for regular military (second or subsequent use):
With a 5% down payment 1.5
With a 10% down payment 1.25
Loans for reservists (second or subsequent use):
With a 5% down payment 1.75
With a 10% down payment 1.5
SOURCE OF DOWN PAYMENT GUIDELINES
The Veterans Administration requires that lenders document the source of funds for closing in a prudent
manner. It should be determined that the veteran has adequate assets to close the transaction from acceptable
sources. The following is a brief review of acceptable sources of funds for veterans:
Checking, Savings, or Money Market Accounts – same as FNMA.
Gifts are allowable on VA loans with same documentation guidelines.
Cash on Hand is not acceptable.
Sweat Equity is not acceptable.
Trade Equity is acceptable to VA using the same guidelines as FHA.
Borrowed funds would be acceptable on a VA loan if the debt is not secured by the subject property.
INCOME QUALIFYING GUIDELINES
The Veterans Administration uses a net income qualifying method. The long term reliable income is
developed from acceptable sources. From this gross income, taxes (Federal, State, and FICA) are deducted
along with the estimated housing expense (including principal, interest, taxes, insurance, maintenance, and
utilities) and long term obligations (6 months or longer or obligations with a large payment). This calculation
gives a “Balance of Support” for the veteran and his family after all fixed obligations are paid. The residual
income guideline is as follows:
FOR VA LOANS OF $79,999 AND BELOW
1 Person
$ 382
2 Persons
$ 641
3 Persons
$ 772
4 Persons
$ 868
5 Persons
$ 902
FOR VA LOANS $80,000 AND UP
1 Person
$ 441
2 Persons
$ 738
3 Persons
$ 889
4 Persons
$1003
5 Persons
$1039
12
For families with more than five members, add $75.00 for each
additional member up to a family of seven.
In addition to the “Balance of Support” (residual income) method,
the Veteran’s Administration uses an income ratio to underwrite
applicants. The income ratio takes all obligations including
housing expense (PITI) and total monthly obligations and divides
this figure by the gross monthly effective income. The VA
guideline is 41%. This ratio may be exceeded if the underwriter
feels there are sufficient compensating factors and justification
to do so.
SCHEDULE FOR MAINTENANCE AND UTILITIES
Square footage ____ X .13 = $ _________ for Maintenance and Utilities.
If there is an in-ground swimming pool, add $75.00 to the Maintenance and Utilities.
MAXIMUM SELLING CONTRIBUTIONS
The Veteran’s Administration has a 4% limit on seller concessions on VA loans.
1. The buyer’s normal closing costs are not included in the 4% limit.
2. Items that are a part of the 4% limitation include: extra discount points that are paid to provide
permanent interest rate buy downs, prepaid interest, prepaid taxes
and insurance, Mortgage Credit Certificate (MCC) costs, gifts
(televisions, payment of credit card balances, etc.) and any
other item or expense which is not considered typical for a real
estate purchase transaction.
SELF-EMPLOYED INFORMATION
Generally, income from self-employment is considered stable when
the applicant has been in business for at least two years. Less than
two years of income from self-employment cannot usually be
considered stable unless the applicant has had previous related
employment and/or extensive specialized training. When an
applicant has been self-employed less than 1 year, it will rarely
be possible to demonstrate that the income is stable for qualifying
purposes; such cases would require in-depth development.
13
BANKRUPTCY
When credit information developed shows that the veteran or veteran’s spouse has been adjudicated bankrupt
under the “straight” liquidation bankruptcy laws, this in itself does not disqualify the borrower from obtaining
a loan. It is necessary to develop information as to the facts and circumstances concerning the bankruptcy.
Generally, when the borrower or their spouse has been regularly employed (not self-employed) and the
bankruptcy has been completed 2-3 years (realistically 3 years) it would not be possible to determine if the
borrowers are satisfactory risks unless (1) Borrower or spouse has obtained credit since the bankruptcy and
made credit payments in a satisfactory manner, and (2) the bankruptcy was the result of circumstances beyond
the borrower’s control. A bankruptcy more than 5 years old may be disregarded. A bankruptcy completed
between 3 to 5 years may be given some consideration depending on the circumstances.
FORECLOSURE
When the credit information developed shows that the veteran or their spouse has had a foreclosure (or
deed-in-lieu) on a prior mortgage (including FHA or Conventional), this will not in itself disqualify the
borrower from obtaining a loan. It is necessary to develop complete information as to the facts or
circumstances concerning the foreclosure. Generally, when the borrower or their spouse has been
regularly employed (not self-employed) and the foreclosure has been completed 2-3 years (realistically
3 years), it would not be possible to determine if the borrowers are satisfactory credit risks unless 1)
borrower or spouse has obtained credit since foreclosure and made credit payments in a satisfactory manner,
and 2) the foreclosure was the result of circumstances beyond the borrower’s control. A foreclosure more than
5 years old may be disregarded. A foreclosure completed between 3 to 5 years may be given some consideration
depending on circumstances.
ASSUMPTION INFORMATION
Public Law 100-198 signed on December 27, 1987 imposed a requirement that VA loans on which
commitments were issued on or after March 1, 1988 would require a formal assumption. This formal
assumption processing is now being completed by the servicing mortgage lender who processes the loan
credit documents and underwrites the loan for approval. Upon approval, the lender issues the Release of
Liability on behalf of the Veteran’s Administration and transfers the loan to the assuming borrower(s).
14
ARM (ADJUSTABLE RATE MORTGAGE) LOANS
During the late 1970s and early 1980s, financial institutions expanded the use of mortgage instruments that
adjusted during the life of the loan. These mortgages had a variety of names including Adjustable Rate
Mortgages (ARMs) and Renegotiable Rate Mortgages (RRMs). The use of the Adjustable Rate Loans was
intended to better enable financial institutions to “match” funds with those deposited for savings and those
provided customers for long term mortgage loans. The use of ARMs allowed financial institutions to adjust
the rates at some interval (adjustment period) based on the current cost of funds (rates). The loan provided
a guaranteed positive spread (margin) over the cost of money(index) during the time of the adjustment. This
allowed the lender to make long term loans without having the rate risk of guaranteeing rates that might be
below market and reduce their profitability. Any adjustable rate mortgage should be underwritten at 7.0% if the
“start” rate is below 7.0%. On loans that have a term greater than 15 years, a loan-to-value ratio greater than
75% and an annual adjustment cap of 2%, the lender should use the maximum interest rate that could be in
effect as the result of the interest rate adjustment at the end of the first year (2% over note rate).
Terms currently being used with most Adjustable Rate Loans include:
Adjustment Period – The adjustment period is the frequency of the changes of the interest rates.
There is a variety of loan programs that include one-, three-, and five-year adjustable rate mortgages.
There are also loan programs that allow the borrower to have the rate fixed for an initial period and
then change to an adjustable rate program. These programs would include a 3/1, 5/1, and 7/1 ARM.
Index – Most lenders tie ARM interest rate changes to an “Index Rate”. The indexes usually go up and
down with the general movement of interest rates. If the index rate moves up, the mortgage rate will
likely move up as well. There are a variety of indexes including the one-, three-, and five-year Treasury
Security Indexes, COFI (Cost of Funds Index), as well as many other possibilities.
Margins – The margin is the amount of spread that the lender adds to the index to determine the new
interest rate at the time of the adjustment. The margin varies from lender to lender and may vary on
different programs.
Caps – Most adjustable rate loans provide both annual caps and life caps for loan programs. Annual
payment caps are a limitation on how much the rate may be changed during any adjustment period.
Life caps are a limit on how much a rate may change over the life of the loan.
Adjustable Rate Mortgages are calculated as follows when the rate
is being adjusted:
Index Rate + Margin = New ARM Interest Rate
Finally, ARMs can have other features that include:
Assumability – This permits the loan to be assumed by a purchaser
if the property is sold. This generally requires a formal assumption
requiring the borrower to make loan application and qualify with
the lender.
Conversion to a Fixed Rate – Some conventional loans offer the
opportunity to convert the ARM to a fixed rate loan. This option
generally has a limited period of time (13th to 60th month) and
converts to a fixed rate at a level above what current fixed rate
loans are being offered. There is generally a conversion fee that
varies depending on the loan product.
15
Contact Information
16