30 Year Home Loan
A standard 30 year fixed rate loan has a fixed
interest rate, a fixed monthly payment, and is fully amortizing over a
30 years. These loans are commonly referred to as a "Fannie Mae" or a
"Freddie Mac" loan (in reference to the company that will purchase the
loan on the secondary mortgage market from the lender). A portion of
each monthly payment covers the interest due on the loan. The remaining
portion is applied toward the reduction of the principal balance.
Regular payments systematically reduce the loan balance until the loan
is paid in full.
During the first 10 years, more than 84% of the
monthly payment is applied to interest and therefore is tax deductible.
Pay-down of principal occurs slowly. It is not until the 22nd year that
50% of the principal balance is paid off. Therefore, a 30-year is
appropriate for borrowers for whom an affordable monthly payment is more
important than the rapid reduction of principal.
The 30 year fixed rate loan is one of the most commonly used mortgages
for residential financing in America. The greatest advantage for a home
buyer is the predictability of the payments each month because it never
changes. This type of loan is often recommended for home buyers living
on a fixed income, a set budget, or those planning on living in their
home for more than five years. If interest rates increase, the loan
rate will remain the same. Unfortunately should rates decline below the
set interest rate on the loan, the only way to change it is to refinance
the mortgage and incur a loss of equity or additional closing costs to
take advantage of the lower interest rate.
The following are highlights of this loan program:
Down Payment Requirements: The minimum down payment required for
this type of loan is 3% to 5% of the sales price for owner-occupied
properties and home buyers purchasing a second home. Real estate
investors and non-owner occupied buyers are required to put a minimum of
10% of the sales price down. Down payment requirements will vary with
the number of units and the reason for the loan (i.e. purchase, rate and
term refinance or cash-out refinance).
Income and employment: There are no limitations placed upon
income requirements. As for employment, there are no limitations on a
specific length of time at a particular job. However, a 2 year history
is required, preferably in the same line of work (education can be
counted towards this 2 year history if it is for the same profession the
borrower is currently in).
Eligible properties and occupancy requirements: Single family
attached and detached homes, 2 to 4 unit properties, planned urban
developments (PUDs), Fannie Mae or Freddie Mac approved condominiums,
and mobile homes with a permanent foundation, taxed as real property,
and built after June 16, 1976 are eligible.
Closing Costs: Closing costs and prepaids may be paid by
interested parties (i.e. seller) as long as they are considered in the
contribution limitation. For primary and second homes, the seller may
contribute up to 3% of the sales price if the buyer is putting less than
10% down. If the buyer is putting less than 25% down, the seller may
contribute up to 6% of the closings costs. If the buyer is putting 25%
or more down on the home, the seller may contribute up to 9% of the
closing costs. For all investment properties, the seller may only
contribute up to 2% of the sales price.
Assumability: This type of loan is not assumable.
Pre-payment Penalty: Not applicable.
Cash Reserves: The borrower is required to have a minimum of
two months cash reserves in the bank by the close of escrow. Proceeds
from cash-out refinances are not considered reserves. Non-owner
occupants may be required to have a total of six months cash reserves.
Gift Funds: Gifts are allowed on owner occupied and primary
residence transactions only. If the down payment is 20% or greater,
100% of the down payment may be gifted otherwise the borrower must have
at least 3% to 5% of his/her own funds to contribute to the down
payment.
Credit Scoring: Generally Fannie Mae and Freddie Mac require a
minimum credit score of 620 for owner occupied and second homes.
Non-owner occupied borrowers must have a minimum credit score of 720
(740 for self-employed).
Co-Signors (Non-Occupant Co-Borrowers): Allowed on owner
occupied, primary residence, and 1 unit homes where the borrower is
purchasing the home or doing a rate/term refinance on the property.
Both incomes may be used for qualifying purposes as long as a minimum of
5% of the down payment comes from the occupying borrower's funds and the
non-occupant is an immediate family member.
Qualifying Ratios: Fannie Mae and Freddie Mac limit a borrower's
monthly payment not to exceed 28% of their gross monthly income. A
borrower's total debt (proposed monthly payment plus monthly payments
towards credit cards, student loans, car payments, and other installment
and revolving credit) cannot exceed 36% of their gross monthly income.
If compensating factors are present or if the borrower has an above
average credit score, the stated ratios may be exceeded.
Mortgage Insurance: Required for all purchases with a down
payment less than 20% of the purchase price. If the property is
non-owner occupied, mortgage insurance may be required when the down
payment is less than 30% of the purchase price.
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