CHAPTER 7

Finding Your Home Loan

Finding a home loan, at first glance, is a simple process. A loan is nothing more than money you borrowed and promised to pay back, right? There are two primary mortgage types in today’s marketplace, conventional and government-backed. In addition, these two programs can be offered with multiple terms.

7.1 WHAT KINDS OF LOANS ARE THERE?

Here’s a brief list of the most common types of mortgage loans offered by every lender or mortgage broker:

30-year fixed

10-year fixed

3/1 ARM

3/6 ARM

VA fixed

State bonds

Portfolio

25-year fixed

5/25 two-step

5/1 ARM

5/6 ARM

VA ARM

Seconds

20-year fixed

7/23 two-step

7/1 ARM

7/6 ARM

FHA fixed

HELOC

15-year fixed

1-year ARM

10/1 ARM buydown

10/6 ARM

FHA ARM HomeReady

Const.-perm

These loans are good for conforming loan amounts. Another set of loan programs is available for jumbo loans. With a few exceptions, most lenders offer the same programs, with the only variable being the cost of the loan itself. If one lender introduces a new program and it’s successful, you can bet the other lenders will soon follow with a replica product.

But that can lead to confusion for both the borrower and the loan officer. Some mortgage brokers advertise that they have access to 40 or 50 mortgage lenders. Or more. Are lenders all that different? Do we really need that many loan programs? Of course not. But loans fall into either one of two categories: fixed-rate loans, where your monthly payment never changes throughout the life of the loan, and loans that can adjust over the life of the loan, called adjustable-rate mortgages. The only difference really is in the rate and terms of the mortgage from one place to another.

7.2 WHEN WOULD I WANT A FIXED RATE?

1. When rates are at relative lows compared to the previous two or three years. Here a fixed rate is good because it locks in that money for the remaining term. Over the past 25 years, fixed rates have been as high as 18 percent or 19 percent and as low as 2 percent. If you’re buying in a high interest rate cycle, it might not be the best time to get a fixed rate. If rates are relatively low, it might be a good time to lock in the low rates.

2. When you’re holding onto the property for a long time, say, more than five years. This could be the home you plan to retire in, or a home where you can say, “Enough! I’m tired of moving.”

3. When you’re not one of the gambling types. Fixed rates never change. Yeah, adjustable rates can start low, but they can also go much higher. Some people like to be able to plan in the long run what their house payment will be five, ten, or twenty years from now. Others can’t sleep at night because they’re wondering if their house payments will go up next year.

7.3 WHEN WOULD I WANT AN ADJUSTABLE RATE?

1. When rates are at relative highs compared to the previous years. If rates are currently at a high cycle, chances are rates will go down in the near future. On the other hand, if rates are at historical lows you may want to avoid an adjustable-rate mortgage.

2. When your job has you moving a lot. Adjustable-rate mortgages typically have lower starting rates than fixed ones, and if you transfer or move often, you’ll have retired your mortgage before an adjustable has time to move upward.

3. When you have a gut feeling that rates will stay the same or move lower for the long term. If your rate is in the middle of the pack compared to historic rates, an adjustable rate gives you the benefit of a lower start rate with the possibility of moving into an even lower rate later on.

7.4 HOW DO ADJUSTABLE-RATE MORTGAGES WORK?

There are four basics for an adjustable-rate mortgage (ARM): the index, the margin, the adjustment period, and rate caps.

1. The Index. This is what your interest rate is tied to. Your index can actually be anything you agree upon, but most ARMs are indexed to a one-year treasury, or something called a LIBOR. LIBOR stands for the London Interbank Offered Rate, and this index is quite similar to the Federal Funds rate found here in the United States. The LIBOR index is released each business day and is the index by which banks lend money to one another over the short term—for example, overnight.

The one-year treasury is a security or treasury bill issued by the Fed to, among other things, raise money. Other indexes that ARMs might be tied to are various LIBOR and treasury maturities, like one-month or six-month LIBOR ARMs; the prime rate; or even certificates of deposit (CDs). Your index could theoretically be anything you agree to. It could be the price of a gallon of ice cream if that’s the deal you come up with. Just don’t bet the lender will use ice cream as your index; lenders will use one of the indexes mentioned above.

2. The Margin. The margin is the difference between your mortgage rate and your index. The index is what your rate is based upon, and the lender adds a margin to it (think profit margin or cushion) to arrive at your fully indexed rate(also called your note rate), which is the number reached when you add your index and your margin. Common margins are anywhere from 2 percent to 2.75 percent, although some loans let you pay extra fees, such as a 1/2 discount point, to get a lower margin.

3. The Adjustment Period. This is the period after which your rate can change. At the end of each adjustment period, your margin is added to the current index to get your new rate. Sometimes the rate won’t change, but most often it will, as the index will have changed. Common adjustment periods are every six months or once a year (your anniversary date). Let’s say your new loan is an ARM with the cost of a gallon of ice cream as the index. You also agree that the lender will add 2 percent (the margin) to whatever that cost (index) will be. One year from now the cost of a gallon of ice cream is $5.00. Since your margin is 2 percent, your new rate for the following year will be 5 + 2, or 7 percent. But what if there’s a milk shortage and the cost of ice cream zooms to $50.00 a gallon? Will your rate then be 52 percent?

4. Rate Caps. This is how high your rate is permitted to change each adjustment period. There are three possible caps on an adjustable-rate mortgage: the adjustment cap, the lifetime rate cap, and the initial rate cap.

Maybe the ice cream went from $5.00 a gallon to $50.00 a gallon, but don’t sweat it. An adjustment cap protects consumers from wild swings in their loan index by limiting the increase from period to period. When the adjustment rate cap is set for 1 percent every six months, or 2 percent every twelve months, it means that at the end of each six-month adjustment period the rate is allowed to increase only another 1 percent over the previous rate. Returning to our example, even though your fully indexed rate might be 52 percent, the rate is only allowed to jump to 6 percent because of the rate cap.

A second type of cap is called a lifetime rate cap, which means that, no matter what, the interest rate can never be higher than the cap. Some caps are at 5 percent above the starting rate, but most caps are at 6 percent above the starting rate. If your loan has a 5 percent lifetime cap and you started out at 5 percent, then, no matter what, your fully indexed rate will never be higher than 5 + 5, or 10 percent.

Other types of adjustables have an initial cap, meaning that at the very first, or initial, adjustment period the cap is 5 percent or 6 percent, or whatever the agreed-upon loan parameters actually are.

You might see some adjustable-rate mortgage cap numbers reading 2/6 or 1/5. That means the adjustment cap is 2 percent or 1 percent, respectively, and the lifetime cap of the loan is 6 percent or 5 percent. For loans with initial rate caps, it might read 5/2/5, meaning a possible 5 percent cap at the very first adjustment, 2 percent annually or at each adjustment period, and 5 percent over the life of the loan.

7.5 ARE ARMS ONLY HELPFUL IN THE VERY NEAR TERM?

Probably. For borrowers who locked in at the right time, ARMs may also help them to not only get a lower starting rate than competing fixed-rate mortgages, but to have their index actually drop over the next few years. For them, it means simply watching their mortgage payment drop every six months or so, while people who chose a fixed-rate mortgage have to refinance their loan to get a lower rate. There is actually a combination of a fixed-rate mortgage and an adjustable-rate mortgage. It’s called a hybrid.

7.6 WHAT EXACTLY IS A HYBRID LOAN?

A hybrid loan is simply a combination of a fixed rate and an ARM where the rate is fixed for a predetermined number of years before turning into an ARM for the remaining life of the loan. Hybrids have a lower starting rate than a fixed-rate mortgage, but a slightly higher rate than an adjustable-rate mortgage. The trade-off is the rate guarantee for the near term. Most hybrids are fixed initially for three or five years. Some hybrids have fixed terms that go as high as 10 years, but if their rates are higher than comparable fixed rates, they may not make much sense. Hybrids, then, even though they’re a “combination” of a fixed and an adjustable mortgage, are essentially ARMs that are fixed for the first few years.

A hybrid fixed for three years before turning into an annual adjustable-rate mortgage is called a 3/1 loan. Similarly, a 5/1 hybrid is fixed for five years before becoming an ARM, and so on. Over the past few years hybrids have become more and more popular as consumers determined that they’re not very likely to own a home for 15 or 20 years but, in practice, only plan to live in the house for three, four, or five years. In these cases, hybrids are hard to beat.

Are hybrids the best choice? Not necessarily. Again, there is a risk that they can change into a semi-unpredictable ARM later on. For instance, you figure that you’ll be up for a big promotion in three years, so you choose a 3/1 hybrid. But during those three years you don’t get that promotion, and now you’re stuck with a possible rate increase at the first adjustment period. Life’s what happens when you’re busy making other plans, right? Plans can change, but your note stays the same.

Some people are almost positive they’ll be out of their mortgage in four years but don’t choose a 5/1 ARM because they’re just not comfortable with the possibility of higher payments down the road. Just understand that there is an alternative between an adjustable-rate mortgage and a fixed one. But in the long run, there really are only two basic loans: fixed loans and adjustable loans.

7.7 WHAT IS A BUYDOWN?

A buydown either temporarily or permanently reduces the note rate on a mortgage. A temporary buydown is sometimes called a two-step or a 2–1 buydown, where there is a lower start rate for year 1, with a higher rate for years 2 through 30. Buydowns can help borrowers who might have trouble qualifying at 8 percent, but can qualify at the lower buydown rate of 7 percent.

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Temporary buydowns are nothing more than prepaid interest to the lender expressed as a note rate. They can be applied to most any fixed-rate mortgage in the market. Temporary buydowns can also be for three years, called a 3–2–1 buydown. A 3–2–1 could have a start rate of 6 percent for year 1, 7 percent for year 2, and 8 percent for years 3 to 30. Temporary buydowns can be a good choice if you expect to have increased income in the next year or two; for example, if you are starting a new job or practice.

To calculate a temporary buydown, you take your principal balance and calculate a monthly payment using a current market rate with no points. If the current rate is 7 percent and your loan amount is $300,000, then your monthly payment would be $1,995, using a 30-year fixed rate. For a 2–1 buydown, drop the rate from 7 percent to 6 percent, then again calculate the monthly payment, which would be $1,798; subtracting that from $1,995 gives you $197. If you multiply that $197 by the 12 months you’ll have the 6 percent rate, you get the amount you must pay the lender for the temporary buy-down, or $2,364.

You now have a choice of paying that tax-deductible interest in the form of cash at closing, or you can adjust your interest rate to accommodate the interest. By dividing the buydown interest of $2,364 by your loan amount of $300,000, you get about 80 basis points, or almost 0.8 of a discount point. If you increase your rate by about 1/4 percent, your lender will accept the higher rate in lieu of a cash payment from you.

Temporary buydowns are effective if you’re either having trouble qualifying at higher market rates or you simply want lower rates to start out with.

The other type of buydown is a permanent buydown, which is nothing more than paying discount points to get a lower rate. It can be applied to either a fixed rate or an adjustable one. There is a difference here. Temporary and permanent buydowns are different.

7.8 APART FROM CHOOSING FIXED OR ADJUSTABLE RATES, WHAT TYPES OF LOAN PROGRAMS SHOULD I CONSIDER?

Besides deciding between a fixed rate and an adjustable rate, you also need to examine the types of loans available to you. Most loans will fall into one of two types: conventional and government. Conventional loans are secured and backed by lenders, while government loans carry a governmental guarantee. Conventional loans are mortgages that are underwritten to Fannie Mae or Freddie Mac guidelines, as well as jumbo loans. Government mortgages are loans guaranteed by the Department of Veterans Affairs (VA), the United States Department of Agriculture (USDA), or the Federal Housing Administration (FHA).

7.9 HOW ARE LIMITS ON CONVENTIONAL LOANS SET?

Fannie Mae and Freddie Mac set conforming loan limits based upon legislation passed in 2008 using a formula presented in the Housing and Economic Recovery Act of 2008, or HERA, replacing the previous method of using the national median home value as a guide. HERA was the most sweeping piece of legislation affecting the housing and mortgage industry perhaps ever. HERA guidelines state that there will be no adjustment in the conforming loan limit; if during the previous 12-month period the housing price index decreases, the limit will stay the same. When the index increases, the adjustment will be based upon the increase over the 12-month period.

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HERA was enacted to address primarily the subprime mortgage marketplace. Subprime loans are those designed to finance properties for those with damaged credit, yet it also reined in Fannie Mae and Freddie Mac as well as government-backed programs of VA, FHA, and USDA. Aside from the VA and USDA programs, there was a move toward lessening lending guidelines in order to increase market share. The housing debacle, which technically began in 2007, wiped away billions of dollars in homeowner equity, and as home values fell, because of the HERA formula, the conforming loan limit stayed where it was at $417,000 for nearly a decade before the HERA calculation finally raised the conforming loan limit for 2017. Anything above the maximum is called a jumbo mortgage.

Because loans are underwritten to the same standards, competition is encouraged, which helps to drive rates lower for the consumer. Conventional mortgages are one of the most common types of mortgages. They are available from most any mortgage lender or mortgage broker. Mortgages are like any other product or service in the United States: If there are more people selling the same thing, the price will ultimately come down.

7.10 WHO OR WHAT ARE FANNIE AND FREDDIE?

We mentioned Fannie Mae and Freddie Mac earlier, but let’s take a moment to see what their real purposes are. Fannie and Freddie are the familiar names of the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC) and are under the oversight of the Federal Housing Finance Agency. They provide mostly the same function. They were both formed by the federal government to provide liquidity in the mortgage marketplace.

Lenders loan money and charge you for it. That’s why they’re in business. But what if a lender runs out of money to lend? Fannie Mae was formed back in 1938 to purchase loans that were backed by the U.S. government’s newly created Federal Housing Administration. Before there was Fannie Mae, when lenders ran out of mortgage money to lend, they had only a few choices. They could:

Turn to their bank vaults and lend out money they had set aside for various other purposes.

Offer higher savings account rates to attract new money.

Take a certain set of HUD loans and sell them.

Typically, once a mortgage was placed, it stayed there until it was paid off. But Fannie Mae’s job was to provide a little cash flow in the mortgage market by buying loans from mortgage lenders that would then free up cash for them to lend again. In 1968, Fannie Mae reorganized and began purchasing nongovernment-guaranteed loans as well as FHA ones. The government spin-off, which is called Ginnie Mae (Government National Mortgage Association), buys VA and FHA loans. Fannie Mae then concentrated on nongovernment or conventional mortgages.

Freddie Mac, formed in 1970, provides essentially the same function, to provide liquidity in the mortgage market. When lenders want to sell their loans to free up some capital, they can sell their loans to Fannie or Freddie, or even buy and sell from one another. This is accomplished by making mortgage loans that comply with certain rules and guidelines established by Fannie Mae and Freddie Mac. These rules say that “if you make a mortgage that fits these parameters, we agree to buy them from you if you want.” And because such loans fit these parameters, they become somewhat of a commodity, allowing banks and mortgage companies to sell to one another and not just to Fannie Mae or Freddie Mac. This buying and selling of mortgages is called the secondary market. When Fannie or Freddie run out of money, they package those purchased mortgages into securities and sell them on Wall Street, replenishing the nest egg.

Remember, Fannie and Freddie don’t make loans, but they do provide guidelines for lenders to make them. If a loan “conforms” to all of the guidelines, it’s sometimes called a conforming loan. That’s one of the main reasons mortgage programs from different lenders are most always identical, except maybe for a little variation in price. If it’s a loan conforming to Fannie Mae or Freddie Mac guidelines, you can assume it’s an identical loan.

7.11 WHAT ARE SPECIAL COMMITMENTS?

There are occasions when a lender makes a special agreement with Fannie Mae and Freddie Mac and markets these loans under slightly different terms. Such arrangements are sometimes called “special commitments,” whereby a lender might guarantee to provide Freddie Mac with a certain amount of loan volume in exchange for an underwriting change or a discount in price. But again, for the most part, these loans are underwritten under the very same standards. That’s why lenders can buy and sell them with confidence, knowing exactly what they bought and what they’re selling.

7.12 WHAT EXACTLY IS A JUMBO MORTGAGE?

It is a loan that is above the conforming loan limit. Just like conforming loans, jumbo mortgages may also be bought and sold in the secondary market, except not by Fannie and Freddie. Private corporations buy and sell them, and they work similarly to how conforming loans work. That’s also why most jumbo loans can be exactly alike at two different lenders, because they’re underwritten using the same guidelines. Many jumbo loans carry guidelines that are similar to what Fannie or Freddie might have, and they can even be underwritten using Fannie and Freddie. Besides the higher loan amounts, one of the main differences between jumbo and conforming loans is usually in the interest rate. Jumbo loans usually carry an interest rate about 1/4 percent or more higher than a conforming one.

7.13 CAN I PREPAY MY MORTGAGE OR PAY IT OFF EARLY?

Of course you can. Sometimes first-time home buyers might think that they don’t want a 30-year fixed rate because they don’t want to be paying on a home for that long. You don’t have to keep a mortgage loan to full term; it’s simply that the term helps to determine the monthly payment and to amortize the loan. You can pay extra on your mortgage anytime you want, and many people do; it’s a great way to build equity faster. For example, on a 30-year $100,000 loan at 4 percent, the monthly payment would be about $416. By making just one extra payment a year, you would automatically knock off nearly eight years of your loan term. You can make a lump-sum payment of $416 every year or even divide it by 12 and make smaller additional monthly payments for the same effect.

7.14 WHAT ARE PREPAYMENT PENALTIES?

A prepayment penalty is an agreed-upon amount the lender gets in addition to normal principal and interest payments if the borrower pays extra on the loan or pays it off ahead of time. A prepayment can mean simply making extra payments, or paying off the entire note with cash, or refinancing into another mortgage. This penalty is actually in the form of additional interest, which may be a tax deduction for most people who itemize on their tax returns. Prepayment penalties used to be much more common, but most loans now have no prepayment restrictions whatsoever. Today, prepayment penalties are typically applied to loans for people with not-so-great credit and are extremely rare. Let’s first look at the two different types of prepayment penalties: hard and soft.

A hard penalty is one that says you can’t pay anything extra at any time; you can’t refinance the loan, you can’t sell the house, and if you don’t take it to full term, you owe the lender money. That’s rough, hence the nickname. Common prepayment penalties might be six or twelve months’ worth of interest, although they can be practically anything the borrower and lender agree upon, as long as the penalty is within local guidelines and lending regulations.

A soft penalty typically allows a borrower to make extra payments (usually no more than 20 percent of the outstanding balance each year). It doesn’t apply if you sell the home, and it lasts anywhere from one to three years instead of the entire life of the loan, as with a hard penalty. For example, say that two loans for $200,000 each have a penalty, one soft and one hard. The soft penalty lets the borrower pay extra on the mortgage anytime, as long as the extra payment doesn’t exceed a certain amount, usually expressed as a percentage of a remaining principal balance during any 12-month period. For a $200,000 loan with a soft penalty, the consumer may pay up to $40,000 extra without penalty. Under a hard penalty, any extra payment whatsoever can result in a penalty, typically six months’ worth of interest.

7.15 WHY DO LENDERS HAVE PREPAYMENT PENALTIES ON SOME OF THEIR LOANS?

Sometimes it’s to offset an additional layer of risk, while at the same time keeping the borrower’s payments lower. For example, a lender agrees to make a mortgage loan to someone who has just come out of a bankruptcy. Let’s also say that the lender, through interest payments, expects to make $10,000 on that loan for the first three years. The lender, while accepting a higher-risk loan, requires that they make $10,000 on the loan, which they can get if the borrower makes normal monthly payments over the course of three years. If the house is refinanced or sold in the first year, then the lender still needs to get their $10,000, but it will have to be in the form of a “penalty.” Prepayment penalties, in general, are just not that easy to find anymore.

7.15A WHAT IS A QUALIFIED MORTGAGE?

As part of the recovery effort after the housing crisis, the Consumer Financial Protection Bureau, or CFPB, was created by authorization by the Dodd-Frank Wall Street Reform and Consumer Protection Act passed in 2010. This is a government agency that sets rules for extending credit to consumers. The Qualified Mortgage defined by the CFPB lists the characteristics of a mortgage a lender could issue that would conform to the new standards, thus protecting the lender from any future litigation regarding the issuance of a particular mortgage. Today, most all mortgage loans may fall into the Qualified Mortgage, or QM category. If a lender does approve a loan without QM status, the loan would be most likely held by the lender as the loan would be difficult to sell in the secondary market.

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QM loans have four basic characteristics and they are:

The loan cannot have a prepayment penalty of any sort; the loan cannot negatively amortize; there cannot be balloon payments; and the loan term cannot exceed 30 years.

The total points and fees for the loan cannot exceed 3 percent of the total loan amount for loans over $100,000.

The borrower’s income and assets must be verified and documented, and

The total debt-to-income ratio cannot exceed 43 percent of the borrower’s gross monthly income.

What the CFPB did was essentially eliminate the types of loans that were deemed responsible for the housing crisis. No more prepayment penalty loans, no “stated income” or “no documentation” loans, no “high ratio” loans; and, in addition, closing costs were limited.

Almost immediately after the implementation of the QM guidelines, lenders were at first wary of issuing a home loan and guidelines were very difficult to meet for many borrowers. At one point, it seemed that only those with perfect credit, 20 percent down, and single-digit debt ratios could get a loan. Over time, however, lenders reverted back to commonsense underwriting and approved loans using similar methods used prior to the introduction of so-called toxic mortgages.

7.16 WHAT ARE VA LOANS? HOW DO I GET THEM?

In 1944, as part of the GI Bill of Rights, the U.S. government established a special program that rewarded certain members and veterans of the armed forces for service to their country by providing them with loan programs with zero money down and reduced closing costs. These VA loans have certain underwriting characteristics that are different from conventional loans, primarily in the amount of money available to buy a house. There are several zero-money-down programs available that are not VA loans, but usually the interest rates on such products are higher than prevailing rates on VA loans, making the VA loan a hot product if you’re eligible. You get a VA loan by applying for and being approved by a lender that issues VA-backed loans.

7.17 WHO’S ELIGIBLE FOR A VA LOAN?

Veterans, active duty personnel, reserve troops, and surviving spouses of veterans may be eligible. There are some requirements for each category.

All honorably discharged wartime veterans of World War II, the Korean War, and the Vietnam War are eligible if they served at least 90 days on active duty. During various peacetime periods from July 1947 to September 1980, one needed to have served 181 days of continuous active duty, or less if discharged for a service-connected disability.

For service dates after September 1980, the eligibility requirements are to have completed 24 months of continuous active duty, or 181 days of active duty with a service-connected disability. If you served after August 1990, in the Gulf War or the Iraq War, then you may be VA eligible as well.

Certain National Guard troops and reservists may also be eligible if they have completed six years in an active National Guard unit that had weekend drills and active duty training. If you’re an unmarried surviving spouse of someone who died while in service or as a result of a service-related injury, you may qualify for benefits as well.

And just like Fannie or Freddie deals, it’s not the VA that makes the loan. Lenders make the loans to eligible veterans and Ginnie Mae may buy or sell those loans on the secondary market. Being eligible for a VA loan doesn’t mean you’ll get one. Lenders make the credit decision as to whether to make a VA loan, not the VA. You still need to have good credit and be able to afford the home and so on; simply being eligible is not the same as being approved. It’s a common misconception that the VA will guarantee a loan simply because a veteran is applying for one. Not so. While certain leniencies are granted—for example, allowable debt ratios are higher than for some conventional loans—good credit is still needed.

So what’s the big deal about VA loans? They’re a good deal, that’s what, especially if you’re going the “no money down” option. If you have down payment funds and money for closing costs, then you might want to explore conventional products, because all VA purchases with zero down have a funding fee equal to 2 percent of the sales price of the home. This funding fee, required by law, is used to offset some of the costs of the VA program but may also be included in your loan amount, as long as that loan doesn’t exceed VA limits.

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Let’s look at a $200,000 home with zero money down, comparing a conventional loan and a VA loan. The interest rates are going to be competitive with one another; given the same circumstances, you won’t find a conventional loan at 4 percent and a VA loan at 6 percent.

For the zero-money-down VA loan, adding the funding fee of 2 percent (or $4,000) to the loan amount and using a 30-year fixed rate of 4 percent, the monthly payment is $1,176.

For the 5-percent-down conventional product, the interest rate might be 1/2 percent higher than the VA rate, or closer to 4.50 percent. On a loan amount of $190,000, the payment is $1,165; and after adding the monthly mortgage insurance payment on the conventional loan of say around $90, the payment is then $1,255, or $79 per month higher than the VA loan.

Another benefit of VA loans is apparent when comparing closing costs. Veterans only pay certain closing costs, called “allowables,” in connection with a mortgage, and they don’t have to pay others. This saves the veteran money at closing. A good way to remember which charges the veteran is allowed to pay is to remember the acronym ACTORS. Allowable closing costs for veterans include:

Appraisal or inspection charges

Credit report fees

Title and title-related charges

Origination fees and points

Recording charges

Survey fees, if needed

Any other fees being quoted to you must pass muster with the VA to be included. Common “nonallowables” are processing fees, administrative fees, and underwriting charges. Nonallowables are sometimes a concern—not to the buyer, but the seller. If the buyer can’t pay certain lender fees, such as a processing fee or underwriting fee (we’ll discuss closing costs in more detail in Chapter 14) when obtaining a VA loan, then it’s the seller who typically is hit with those charges. This is something sellers don’t normally like to do. For years, VA loans had this albatross, which was a deterrent in some instances. If a seller gets two offers for the same amount, which one will the seller accept? The one that hits the seller with VA nonallowables or the one that doesn’t? You guessed it. Sellers could be reluctant to accept a VA offer because of the additional fees that could come into play.

Now, however, VA lenders offer a choice, and instead of charging the borrower various lender fees that the borrower wasn’t allowed to pay for, the lender can replace all those charges with an origination fee in lieu of the nonallowable charges.

You may also hear of a loan called a VA No-No. That means you’re qualified for a VA loan with no money down and there are no closing costs. The closing costs will be paid by the seller of the property, with his agreement, of course. If you have zero money down and can qualify for VA, I can find no better alternative than a VA loan.

7.18 WHAT IS A VA “ENTITLEMENT”?

A VA entitlement is the amount the VA will guarantee in order for a VA loan to be made. Historically, VA entitlements were based upon an archaic formula and would change once every few years. If your entitlement was $20,000, then a VA lender would make a loan to you for up to four times your entitlement amount, or in this instance a maximum loan of $80,000. Even in earlier years, $80,000 would rarely buy much of a house.

Recent changes in VA lending, however, have made the maximum amount very simple: Whatever the maximum conforming loan amount is for that year, the VA will guaranty a quarter of that amount. This is a huge benefit for VA-eligible borrowers, because now their VA home loan benefit can be used to buy properties that can compete with conventional loan limits.

7.19 HOW OFTEN CAN I USE MY VA ELIGIBILITY?

As often as you like as long as the previous VA loan was paid off and entitlement restored. If you bought a home with a VA loan and want to buy another one to live in, you can use your VA home loan benefit as long as there is enough remaining entitlement available. This is rare, however, as any remaining entitlement is typically too low to be of much use. When you refinance, you can reuse your VA eligibility, replacing your old VA loan with a new one. Your lender will take care of getting your entitlement restored during the transaction.

7.20 WHAT IS A VA STREAMLINE REFINANCE?

It’s a refinance loan program that significantly cuts down on the paperwork and has relaxed credit guidelines. The VA calls it the interest rate reduction loan (IRRL).

Under a conventional refinance, the borrowers must qualify all over again by providing pay stubs and bank statements and maybe tax returns and everything that goes with a brand-new loan application. With an IRRL, as long as it can be demonstrated that the veteran’s interest rate is being reduced, the veteran can still qualify for the refinance, even if the credit has been damaged since the original purchase. There’s one major caveat: The VA mortgage cannot have any payments that are more than 30 days late over the past six months and no more than one payment more than 30 days past the due date over the previous 12. A VA IRRL is, however, perhaps the easiest refinance to qualify for.

7.21 DO STATES HAVE VA LOAN PROGRAMS, TOO?

No, but many states do have special home-loan-related benefits. The Department of Veterans Affairs oversees the VA loan program and issues lending guidelines. Some states go one better and offer special loan programs that enhance a new VA loan. In Texas, for instance, there is the Tex-Vet program whereby the state of Texas subsidizes a VA or conventional loan purchase by offering below-market interest rates. Cal-Vet in California also has special programs for qualified veterans. You need to do the research in your own state to see if additional VA home loan benefits are offered.

7.22 WHAT ABOUT FHA LOANS?

The Federal Housing Administration (FHA) was formed in 1934 to help the country recover from its economic collapse after the Great Depression. The goal of the FHA was to get as many people owning homes as possible, and they did this by establishing lending guidelines that made it easier to get into a home than previously. Before mortgages became standardized, they were mostly handled through local banks or savings and loans. This created an array of mortgage qualification guidelines, but one of the more onerous requirements was a hefty down payment. Some mortgage loans required down payments of 50 percent or more. For many folks just coming out of the Depression, that kind of money was hard to come by. For that matter, 50 percent down is a lot of money in any economy. Owning your own home has always been the American Dream, but those early lending requirements put that dream out of reach for most Americans.

FHA loans required very little down payment. And although the FHA, as a government agency, didn’t actually make loans, the FHA, like Fannie and Freddie were to do later on, established lending guidelines for the loans and guaranteed to buy the loan back from the lender if it went sour. Not a bad deal. In fact, it changed the way mortgages were made, and soon the FHA became the standard for those with little money for a down payment. Lenders could make an FHA mortgage, and as long as the loan was written under FHA guidelines, then the lender could sell that loan to FHA if it ever went into default. That’s one of the reasons FHA loans have historically had less stringent guidelines than other mortgage programs.

FHA loans aren’t really all that different from conventional or VA loans. They still offer fixed- or adjustable-rate products, but they allow people who aren’t fortunate enough to have VA benefits to buy a house with less than 20 percent down. The minimum down payment required for an FHA loan is only 3.5 percent, and while you still need to pay a mortgage insurance premium, the monthly premium is less than a similar amount needed for a 3-percent-down conventional loan. In addition, the mortgage insurance premium—which is 1.5 percent of the loan amount—can be rolled into the loan and does not have to be borrowed, as long as the final loan amount doesn’t exceed FHA loan limits for your area.

7.23 WHO SETS FHA LOAN LIMITS AND HOW MUCH ARE THEY?

The Department of Housing and Urban Development (HUD) establishes FHA loan limits by county each year. These loans can vary from county to county. Your FHA lender will have the maximum FHA loan limit for your area, or you can visit www.hud.gov and check it out on your own. Typically, FHA loan limits are approximately half of what can be found in the conventional loan market, and still higher in so-called high cost areas, such as California or Hawaii. Often, however, these limits are too low for most homes in such areas, as housing prices are much higher than the FHA loan limit for the area.

7.24 IS FHA ONLY FOR FIRST-TIME HOME BUYERS?

No, but you wouldn’t know it by looking at some of the numbers. Most FHA mortgages are issued to first-timers. There are no borrower restrictions with regard to income limits, but you must occupy the property as your primary residence and you can never have more than one FHA loan at a time.

7.25 WHEN DO I CHOOSE AN FHA LOAN INSTEAD OF ANY OTHER?

When you have very little money to put down and you think your credit might not be the best. FHA loans have some advantages over other types of financing. You still get competitive rates with only 3.5 percent down, and you get a choice between fixed and adjustable. Yes, you’ll have a form of private mortgage insurance (PMI), strategically labeled mortgage insurance premium (MIP), but it’s at a lower rate than conventional loans with 3 percent or 5 percent down.

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Another benefit is that FHA loans relax their underwriting guidelines in certain areas, such as credit quality, allowing for people to coborrow without restrictions on their personal debt ratios, letting someone buy a house while in a Chapter 13 bankruptcy, allowing all of the down payment and closing costs to be a gift instead of having to be saved up, and restricting the amount of closing costs the buyer has to pay.

If you have little or no money down of your own, but can get 3 percent as a gift from a relative or by using a down payment assistance program, and if the loan you need is at or below the limits, then FHA is a very good alternative for you. If you do require a gift to buy a home and want an FHA loan, the FHA has restricted who can and cannot give you financial assistance. Those who can provide financial aid include family, church, and government agencies.

7.26 CAN I USE A COBORROWER TO HELP ME QUALIFY FOR AN FHA LOAN?

Yes, and this is a unique advantage to FHA loans. If you want to buy a house or condo to live in and can’t quite make the monthly payments on your own, your parents or another family member can help as “nonoccupying coborrowers.”

It used to be that almost every loan allowed for someone else to be on the note to help the borrower qualify from an income or credit standpoint, but recently conventional loans made the owner-occupant qualify on her own. FHA is the only program that allows for the income from nonoccupants to be used when qualifying for the loan. This is a popular program for parents who want to buy a condo or house for their college student to live in. By putting the college student on the note, suddenly it’s considered an “owner occupied” property, resulting in lower rates for the loan.

7.27 DOES FHA HELP ME SAVE MONEY ON CLOSING COSTS?

It used to do so by restricting what an FHA applicant could pay in terms of closing fees, much like VA nonallowable closing costs, but it has modernized and now allows for the borrower to pay for closing costs just like on a conventional loan. Just as VA nonallowables were a hindrance when making an offer on a house, because the seller was asked to pay for some of the buyer’s costs, the FHA began losing market share and revised some of its antiquated guidelines.

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Let’s say there are a bunch of fees, such as attorney charges and lender fees, that add up to $1,000 and a seller is looking at identical offers. If you are asking the seller to pay $1,000 in fees and the other offer isn’t, you’re not getting the deal unless you’re very lucky. All things being equal, of course. There’s another way to have those $1,000 in fees paid on your behalf, and that’s when the lender pays for them. But don’t get too excited, because the lender will only do this by increasing your interest rate enough to cover the $1,000.

On a $100,000 FHA loan with $1,000 in costs to be paid, you simply divide $1,000 by $100,000 and you get .01 or 10 basis points. That’s typically enough to increase your rate by around 1/8 percent. (We’ll discuss this method in more detail in Chapter 14.) In short, the FHA limited which fees an FHA borrower could pay. Later, the FHA eliminated the “nonallowable” closing cost feature entirely, and is now on equal footing with conventional loans. The next step for the FHA would be to increase loan limits, just as VA loans did.

7.27A WHAT IS THE USDA MORTGAGE PROGRAM?

This is an interesting loan program because it’s been around for years with different names but seldom used, which is a shame. The USDA loan program was reintroduced in 1990 and is the only other government-backed mortgage loan that does not require a down payment. However, the loan can only be used in certain areas and there are income limitations for the borrowers.

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This zero-down loan program is designed for rural and semirural areas but encompasses nearly 97 percent of the country’s geography. Yet due to the mapping, you’ll be surprised at areas that are deemed eligible by the USDA as an acceptable location. These maps are updated every 10 years, so some areas that were outside of suburban areas are now located within suburban areas, although the USDA still labels the area as rural.

Further, the total household income cannot exceed 115 percent of the median income for the area. These are the only two restrictions for the program; otherwise the USDA loan can be used by anyone.

The USDA loan should be a strong consideration for those who qualify in the right area seeking to finance a home purchase with as little cash as possible. Interest rates for USDA loans are typically lower than other loan programs and while there is a monthly mortgage insurance payment, it is also lower. The USDA loan carries a government-backed guarantee financed with a “guarantee fee” of 2 percent of the loan amount that is rolled into the mortgage and not paid out of pocket by the buyers.

7.28 WHAT ABOUT FIRST-TIME HOME BUYER LOANS?

It used to be that a first-time home buyer loan was maybe one or two programs designed for people who either never owned a home or hadn’t owned a home in three years. Back then, the first-time home buyer status mostly meant a relaxation of debt ratios by a few percent. Instead of an allowable 36 percent housing ratio, the ratio was 41 percent or some such number. These loans were great. Now, however, there are many more programs for first-time home buyers that don’t necessarily use relaxed debt ratios; they can also be loans that target certain geographic areas or loans that offer down payment assistance.

Often, certain communities and states can issue bonds and form a relationship with Fannie Mae or Freddie Mac to help increase home ownership. The recipient is typically someone who’s never owned a home before.

When I have a first-time home buyer with regular credit and 3 percent to 5 percent down, I first look at both FHA and conventional loans and try to get them qualified on either of those programs. They get the best rates available whether or not they’re first-time home buyers. If there’s a special bond program offering lower rates for a particular segment of home buyers, then yes, I look there first to see if they qualify in terms of income or other qualifications, but in general, FHA and conventional loans are tough to beat. If the buyers have no money down, the best product is Fannie Mae’s HomeReady mortgage, as described in Chapter 4.

Many people mistakenly believe that first-time home buyers automatically get a special interest rate that is way below market rate. While there may be certain bond programs in a particular city or state that offer better rates, usually first-time home buyers don’t get better rates. Now, first-time home-buyer status is more of a requirement for special loan programs issued by various lenders and governments. These special programs can be designed for people with credit scores as low as 600 and who are allowed to borrow closing costs. Special first-time programs can target a specific income group or a census tract within a city.

7.29 WHAT DOES “PORTFOLIO LENDING” MEAN?

A portfolio loan is a loan made by a direct lender, usually a bank, that is designed to be kept in-house. This means that it is made by a lender with no intentions of selling the loan or having it underwritten to any external guidelines. Instead, the loan is made and kept in the lender’s loan portfolio. Unfortunately, portfolio lending is a term that’s bandied about too often, encompassing loan programs that are nothing near portfolio. Often a portfolio loan is incorrectly described as any loan that’s not a conventional or government loan.

Portfolio loans go by their own guidelines and don’t necessarily follow loan rules established by others. Why would someone want a portfolio loan? Perhaps when their loan application doesn’t quite meet the guidelines of a conventional loan. Or when no government program will work.

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Let’s say you just found an apartment building with 10 units and need financing. Conventional or government loans don’t cover apartment buildings, so those loans won’t work. Instead, you’ll need a portfolio loan. Or maybe you found a fourplex but had no money for a down payment. If you found conventional financing at all, it might require a higher down payment or other special circumstances that you might not find attractive. Are you a real estate investor and have so many residential properties that conventional lenders think you have one too many? Go portfolio. Portfolio lending is more of a “commonsense” loan that might not fit the conventional guideline, but shucks, it looks like such a great deal.

Where do you get a portfolio loan? From your bank. But don’t be surprised if your portfolio loan is of a shorter term or maybe a hybrid. Retail banks certainly like to make loans, but they also don’t like to tie themselves into any one rate for an extended period. If a bank makes a portfolio loan at 6 percent, and then three years later rates are at 9 percent, they’d like to make more loans, just at the new, higher rates.

7.30 WHAT’S THE DIFFERENCE BETWEEN SECOND HOMES AND RENTAL PROPERTY?

Second homes are usually vacation homes. Someone may own a home in the North to live in during the summer and have another home in the sunny South when winter comes rolling along. Rental or investment homes are used for income purposes. You collect rent on them. No big deal, really, except that some lenders charge higher rates on loans for rental properties than for owner-occupied homes.

Rental homes require more down payment and a slightly higher interest rate than a second home. Why? Risk for investment properties is higher. If a homeowner falls on hard times and is having difficulty deciding whether to pay for the mortgage on his family’s home or on the rental property across town, which one do you think that homeowner will let go first? The family’s own home? Nope. It’s almost always the rental properties that go first.

Interest rates for rental properties will usually increase by 150 basis points, or 1/4 percent to 3/8 percent in rate. In addition, minimum down payments for conventional investment loans start at 10 percent. And you’ll have a higher mortgage insurance premium on investment loans as well. Most competitive rental rates start when the buyer has at least 20 percent to put down.

Second homes aren’t rented out. They’re used exclusively by the owner. There’s very little increase in rates for a second home when compared to a primary residence, with a 1/4-point increase in discount point being a common charge. With some lenders, the rates for a primary and secondary home are identical.

7.31 HOW DOES THE LENDER KNOW THAT A PROPERTY IS A SECOND HOME AND NOT A RENTAL UNIT?

There are a couple of ways. The first way is to simply consider the property in question. Is it a duplex across town or is it a home about 500 miles away on a beach? Vacation homes aren’t duplexes across town. If you try to convince a lender that your new purchase 15 miles away is your dream vacation home, they won’t buy it.

A second way to identify the property comes during the appraisal. When the appraiser inspects the property and there are other people living there, that appraiser will most likely ask the tenants if they’re renters. If they are, the appraiser is required to perform another appraisal function, called a “rent survey,” which will be included with the full appraisal. Are you refinancing an existing investment property and trying to claim that it’s a vacation home and not a rental property? Your lender will see that you have rental income on your tax returns.

Trying to make a rental home look like a second home to save on fees and rates rarely works. Lenders have seen all the tricks, and if they determine that your vacation home isn’t a vacation home but a rental, expect the rental loan program. Don’t lie on your application.

7.32 CAN I USE RENTAL INCOME TO QUALIFY FOR A MORTGAGE?

Normally, no. Unless you’re a seasoned real estate investor, a lender won’t count the rental income to help qualify you. This sometimes looks like a great opportunity when a potential buyer sees a nice duplex for sale and plans to use the rent from the unit next door to help offset the mortgage. While the rent next door will certainly help to do that, the lender won’t normally use this rental income to offset debt ratios unless you’ve got some direct experience in being a landlord.

7.33 ARE LOAN LIMITS FOR RENTAL PROPERTIES THE SAME AS FOR PRIMARY RESIDENCES?

Yes, but there’s also a bonus. Fannie and Freddie both have the same conforming limits, but they also set the maximum loan limits for what they call 1–4 units. The base single-family limit as of 2007 is $417,000. The maximum loan limit for a duplex, or a two-family unit, would be $533,850. A three-unit limit would then be $645,300, and finally a four-unit purchase limit would be $801,950. If you’re eyeing a nice duplex but the price is above the current conforming single-family limit, don’t forget the multiunit limits are higher than for a single-family home. These limits change each year just as single-family limits do. The FHA also provides financing at higher loan amounts for apartment buildings, also called multifamily units.

7.34 WHAT ABOUT SELLER FINANCING?

Seller financing is certainly an option, as long as the seller knows about it, of course. You’ll go through a lot fewer hoops to qualify than when applying with a mortgage company. Just understand that you’re still applying for a mortgage loan, except that it’s an individual loaning you the money instead of a mortgage lender.

Seller-financed notes almost always carry higher interest rates than conventional or government loans. Why? Well, why wouldn’t they? If a buyer approaches a seller and asks for financing, there is usually a reason the buyer didn’t go to a mortgage lender in the first place. Most likely it’s due to a poor credit situation or hard-to-prove income. If you go for seller financing, be prepared to show not only some down payment money, but also your credit report.

The rest of the closing process will look similar to a conventional closing. Because it’s an individual financing the note, that individual may or may not require the same things a lender would require, such as a title examination, title insurance, or even a flood certificate. Do you want to know if your new house sits in a flood zone? Of course you do, but unless you get a flood certificate declaring your flood status, then you won’t know. The same goes for title issues. Is the seller in fact bringing a clear title to the closing table? Your real estate agent, if you have one, can help guide you through the process, but don’t forget about title insurance and legal review. You want this sale to go through as smoothly as any other. Not only that, but when you go to sell this property or if you decide to refinance later on, you, too, will be asked to provide evidence of clear title, flood zone, and the property being legally recorded as yours.

Another time to ask for seller financing might be for a second mortgage. For example, you want to buy a house for $100,000. The lender agrees to finance 80 percent of the sales price, or $80,000, but no more, but you only have 5 percent available to put down. You need to find another 15 percent to close the deal. Your lender, however, may not care that you seek additional funding outside of what the lender provided, as long as the combined loan-to-value ratio doesn’t exceed 95 percent. In this instance, you take an $80,000 first mortgage, you put down 5 percent, or $5,000, and the seller agrees to a second note for the remaining 15 percent. You’ve just secured an 80–15–5 loan, with the seller providing the 15 percent.

Often, subprime loans work this way, where lenders may allow higher combined loan-to-value ratios as long as they’re only exposed to 80 percent or so, but they don’t care if you finance the rest of it, all the way to 100 percent of the sales price.

Make sure all seller financing is recorded, just as with any other loan. Take precautions as a buyer to review the property with an appraisal, inspection, title report, and flood certificate, and use a seasoned settlement agent to help guide you through the process when you go to close. Seller financing can be a good option, but it can also be a nightmare if something isn’t done properly to transfer ownership.

7.35 HOW CAN I RENT-TO-OWN OR USE A LEASE-PURCHASE TO BUY A HOUSE?

A lease-purchase agreement, also known as rent-to-own, is a viable option when someone wants to buy a property but isn’t quite there yet. Or if they find a house they like and lease the home until they have saved up enough money for a down payment to qualify for a conventional mortgage.

There are a few key ingredients to making a successful lease-purchase. In a typical lease-purchase agreement, the renter agrees to buy the house she is living in at a particular price at a future date, say, two years from now. In addition, each month a portion of the monthly rent payment goes toward the down payment. At the end of two years, the borrower retrieves her down payment monies from the owner and then qualifies for a conventional mortgage from a mortgage company. So far so good, but if the agreement is not drawn properly, the buyer could be out both the house as well as the down payment savings.

A proper lease-purchase agreement has to set up rent payments each month independent of any portion that goes to a down payment. That portion must be above and beyond the current market rents for the area. If you’re in a two-bedroom house and two-bedroom houses in the area rent for $750, then anything above the market rent can be considered yours. If you pay $950 each month, then $750 will go to rent and $200 will go to your down payment. If your monthly payment is not over and above market rent for your area, it’s possible that your lender won’t count any of that $200 and will instead look upon it as either rent or a $200 gift each month from the seller of the property. Gifts have to come from relatives or qualified institutions. Furthermore, extra payments need to be held in a separate account by your landlord and not commingled with his general account.

Lastly, there’s the agreed-upon sales price of the home. Let’s say that two years ago you agreed to buy the property at $150,000, but since then property values have steadily declined; today the home is only worth $120,000. Remember that lenders use the lower of the sales price or appraised value when making loans. You’ll need to come up with the $30,000 difference or renegotiate. If the seller doesn’t want to renegotiate, you’re most likely out of the deal and have lost all your money in the transaction. Don’t let this happen.

In your original lease-purchase agreement with the owner, don’t agree upon a certain price. Instead, agree upon a price that has to be justified by an appraisal. That way the protection works both ways. It works to your favor in times of property devaluations and works in the seller’s favor if values increase. Lenders can be leery of lease-purchase deals, so it’s mandatory that everything you do is documented and that both you and the owner follow the prescribed procedures.

7.36 WHAT’S A WRAPAROUND MORTGAGE?

There’s another way to get financing and that’s called a wraparound mortgage, or a “wrap.” A wrap mortgage is a mortgage “wrapped” around another mortgage. It works like this: A homeowner sells to someone and also acts as his mortgage lender, while never retiring the original mortgage. The buyer makes mortgage payments to the seller, who then continues to make mortgage payments to her mortgage company.

This means that borrowers don’t go through a mortgage company to get a loan but instead work up terms agreeable to the seller. More often than not, the original lender never knows that the house has been sold because the lender continues to receive payments from the original customer. This can be dangerous.

Many mortgages have an acceleration clause that basically says, “Don’t change the ownership in this property or we’ll immediately ask for all of our money back.” Or what if the new buyers become late on their payments to the seller, who then becomes late on the original mortgage payments? People who use a wraparound mortgage must understand all the implications of a wrap before getting involved in one. However, if all parties do what they’re supposed to do, then a wrap is certainly an option.

7.37 WHAT IS A BIWEEKLY LOAN PROGRAM?

This is a loan program where you pay every two weeks instead of once per month. Such programs, which are good because they can help pay off your loan sooner, work similarly to making one extra payment per year. Using the extra payment example in Question 7.13, take that same $661 extra payment, divide it in half, to $331, and pay that amount every other week. Since there are 26 biweekly periods in a year, that works out to 13 full mortgage payments, accomplishing the same goal as if you simply made one extra payment per year. Too often, such biweekly programs are established by third-party businesses that charge fees to set up the program. If you’re okay with paying $300 or $400 just to set up a biweekly, that’s fine. Personally, I think it’s not a very good deal if it’s something you can effectively do yourself without paying anyone more money for the privilege.

7.38 ARE SUBPRIME MORTGAGES GONE?

Mostly, yes, especially compared to the era from 2000–2007. There are, however, a few fearless lenders who are making loans designed for those with damaged credit, but those lenders are difficult to find. To offset lower credit borrowers, these lenders will require a higher down payment—at least 20 to 30 percent down—low debt ratios, and a solid explanation why credit scores are so low. Negative-amortization mortgages are also a thing of the past. Neg-am loans could actually grow rather than being paid down over time as borrowers with neg-am loans had the option of paying an amount that would not be applied to the loan balance as well as not paying the fully indexed interest each month.

7.39 WHAT ARE HAMP AND HARP?

The Home Affordable Modification Program, or HAMP, and the Home Affordable Refinance Program, HARP, were both introduced in 2009 with two different objectives. HAMP’s mission was to assist homeowners who were in danger of default and HARP was enacted to help homeowners refinance when they owed more than the home was worth.

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HAMP is a loan modification. A loan modification replaces an existing mortgage with a new one that is more in line with the borrower’s current financial situation. A HAMP is not a refinance, but a modification. A HAMP lender will document your current monthly income and attempt to adjust the mortgage until your mortgage payment is below 31 percent of your gross monthly income. A lender using HAMP guidelines can lower the interest rate on the loan, extending the loan term or issuing a payment forbearance, which writes off delinquent mortgage payments and begins anew. This program was expected to expire in 2016 but was extended yet again by Congress.

HARP is a refinance program introduced to help so-called underwater borrowers refinance an existing mortgage. HARP requires the mortgage loan be owned by either Fannie Mae or Freddie Mac. Typical refinancing of a conventional loan requires at least a 10 percent equity position. If someone owed $200,000 on a mortgage and the property was appraised at just $150,000, the borrower couldn’t refinance to get a lower rate. With HARP, there is no appraisal needed and therefore no “underwater” status whatsoever. HARP is scheduled to expire in September of 2017.