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NON CONFORMING LOANS
There are many reasons, other than credit score, to get a non-conforming loan. The following information will help you to understand some of those reasons along with the type of loans and related costs:
NON CONFORMING LOANS: These loans are designed for borrowers who need a loan outside of traditional Fannie Mae, Freddie Mac guidelines. They are for people who need high loan-to-value (LTV) but have only a marginal credit rating, for people who have good credit but are just outside conventional guidelines, or for poor credit people who desperately need a loan until their credit can be fixed. The following will describe the most common loans offered and even some special loans for excellent credit borrowers who want 100% financing or more.
2/28 NON CONFORMING ARM: 2-year arm amortized over 30 years to keep the payment low. This is probably the most common non conforming loan type. It is an arm that is fixed for 2 years but can go up each additional year up to a disclosed set max. The rate a borrower receives is based on many different factors including but not limited to: Credit Score, Credit History, Debt Ratio, Income Information, Property Type, Occupancy, and other factors. We recommend this loan for the person who does not plan on selling their home or refinancing within the next two years. The reason is that this type of loan is generally designed for the borrower(s) who know they will move after two years or their credit situation or employment situation will be substantially improved. Many times this loan is good for young first time home buyers who have little down payment money and know their credit score and income will improve in the next few years. It can also work well for the desperate borrower who has been late on some payments and wants to do a debt consolidation. As with most non conforming loans the drawback to this loan is that there is usually a prepayment penalty if you pay the loan off early (Inside the two years). The good news is that it is usually only 1% of the loan amount. Therefore should you win the lotto or decide to sell your home, the penalty inside the two years is reasonable. NOTE: BE CAREFUL...There are lenders and/or brokers who's penalty periods last excessively long or the percentage is really high. We have run across people who have had to pay as much as $8,000 just because they refinanced.
3/27 NON CONFORMING ARM: Non conforming 3-year arm amortized over 30 years. The same as the two year arm above. The only difference is the rate is locked for three years instead of two and is usually just a tiny bit higher. In addition the pre-payment penalty period is now 3 years instead of 2 years. Reminder, if your going to use someone else, please watch out for outrageous closing costs and/or pre-payment penalties.
15/30 SECOND LOANS: This is a 15 year balloon loan amortized over 30 years to keep the payment low. Although it is due in 15 years, this loan is designed to be in combination with the 2/28, or the 3/27 Arms. It is used on top of these other arms to get a borrower a high loan to value (over 80%) and keep them from having to pay private mortgage insurance (PMI). PMI insurance, which is not tax deductible, so we always try our best to keep our customers from paying it. In fact, we never put our customers in a PMI situation unless they request it. There may be a pre-payment penalty on this loan of 1% but usually second loans are much smaller therefore it only comes out to a few hundred dollars if you get rid of the loan in 2 years.
20/YEAR FIXED SECOND: 20 year fixed second amortized over 20-years. This loan is also designed to be used in conjunction with the the 2/28 or the 3/27 for the same reason as the 15/30 loan. The only difference is that it is never due as it will be paid off in 20 years. However, the borrower's payment will be a little higher. Keep in mind that there may be a small pre-payment penalty associated with this loan for the first 2 years, but should a few hundred dollars or less.
100% FINANCING: 30 year fixed amortized over 30 years for 100%, with NO PMI. This type of non conforming loan is available for the borrower with a very good credit score with housing, auto, revolving, and installment debts within reason. This loan is best for individuals who have good or excellent credit, make good money, but just don't have much saved up. The rates are very close to normal conforming rates. The only downside is that there will usually be about .75% closing costs of the loan amount associated with this loan and possibly a 2-3 year pre-payment penalty of 1%. The good news is that you can get in a home for little or no money down.
OTHER FINANCING: There are other types of of non conforming loans and ways to mix and match them to best suit your sitution. The mortgage industry changes very quickly and at any time there may be hundreds or even thousands of other programs to choose from. However, it has been our experience that it is usually financially beneficial to stick with the programs listed above. Therfore if your situation dictates a particular need, we will always work to find the best program for you.
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