fha refinance

What Goes Where and Why?

In this lesson we will talk about what goes where and why. You see everyone does not qualify for a loan. Loans are based on three important factors;
1.LTV(loan to value ratio) which is simply the new proposed loan amount divided by the estimated value of the home.
2. DTI(debt to income ratio) which is simply the amount of their monthly proposed debt divided by the amount of their monthly gross income. If you are doing a debt consolidation loan where you are paying off consumer credit debts, then the new DTI is based on the proposed DTI after everything is paid off. The idea of proposed is simply what we are proposing to the client. There is no loan program for a client whom has a DTI of 55% or more. Also, if a client is self employed, their DTI is based off of their net income, not their gross income. Most self employed borrowers deduct most of their expenses and usually claim little profit.
3. Credit Score-The minimum Credit score required to do a loan is 600. If a client does not have at least a 600 credit score, they will not qualify for a refinance or a new home purchase. For each of the programs below, we can offer terms of loans from 10-40 year repayment schedules, however, the 40 year is usually not a popular option because the rates are higher.
Since the banking crisis, there are only a few different programs available these days. That makes it pretty simple for you to learn these programs and the ins and out of which program works best for each client. I have broken down the available programs for you here:
1. Conventional loan. A conventional loan is for a client with good credit. Most conventional loans have an LTV of 80% or less. You can go up to a 55% front end and a 55% backend end DTI with this program. The maximum LTV for this program is 85% on a cash out and 90% on a rate and term refi. If you go over 80% ltv you will have to pay monthly private mortgage insurance. You can calculate this by taking the loan amount and multiplying it by .0048 and dividing that by 12 to get the monthly amount. You would need a minimum 720 credit score to qualify for an LTV above 80%. You do not have to have perfect credit for this program, however, conventional loans have risk based pricing adjustments so people with average credit usually would be offered higher conventional rates and there could be a better program with a better rate for that borrower. This program will not allow more than one 30 day late payment in the last 12 months.
2. FHA loan (Federal Housing Administration)
An FHA loan is a great loan for a client whom wants to either purchase a home with little money down or refinance a home with little equity. The FHA loan will allow a client with moderate credit to refinance their home with out pricing or rate adjustments. A borrower with just a 620 credit score will qualify for the best FHA rates available. The maximum front end DTI is 45% and the maximum back end DTI is 55% You can go to 96.5% LTV on a purchase or rate/term refinance and 85% LTV on a cash out refinance. The drawback to this program is that every FHA loan requires the borrower to be charged an upfront MIP of 1.75% and an annual PMI of .0055 multiplied by the loan amount divided 12 to determine the monthly PMI amount. Again it is your job to do the math to determine which program will give the best terms to the client for their given situation. This program will not allow more than one 30 day late payment in the last 12 months.

3. Reverse Mortgage- This is a special program for Senior Homeowners over the age of 62. This special program allows the senior homeowner to tap into the equity of their home with no monthly repayment. This program is unique because it does not require a minimum credit score and it does not have any DTI requirements. It is all based on the senior homeowners age, and what their house is worth. The reverse mortgage works just like a regular mortgage in the sense that there is an interest rate, the difference is that with the reverse mortgage, the bank allows the senior citizen to defer the interest to the rear of the loan. As long as they are alive and living in the home they will not have to make a mortgage payment. When the senior homeowner passes away(dies) they will have a balance owed on the mortgage. At that point they can leave the home to their heirs(children) and the heirs can sell the home and payoff the mortgage or they can take out a new mortgage to pay off the balance. Some senior homeowners will take out a life insurance policy and use that to pay the balance. They also have the option to simply let the bank take their home if they wish, with no recourse to their estate. I would not recommend this option because most senior homeowners would still have equity in their home at that point.