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Tuesday, May 16, 2006

Mortgage Guarantees for Rural Properties

The United States Department of Agriculture (USDA) through their Rural Housing Service division offers mortgage guarantees to lenders for borrowers who have qualified rural properties. Through this program USDA will provide a guarantee that they will reimburse the lender for a high percentage of the borrower's loan amount should the borrower default on the loan. This makes it much easier for borrowers to obtain a loan on rural property, which lenders would otherwise consider more risky.

To qualify for this program a property must be verified as being in a recognized rural area. There are also restrictions on the LTV and DTI limits, loan amounts and payment shock. These limits are generally similar to conforming loans.

If you are having trouble qualifying for a loan on a rural property ask your lender to contact USDA for a guarantee approval. USDA offers an automated qualification system that can process an application in seconds.

Basic Terminology: Payment Shock

One common qualification guideline for mortgages is known as Payment Shock. Payment shock is the difference between a borrower's current mortgage or housing payment and the monthly payment on their new mortgage.

For example, say you currently have a mortgage or rent payment of $800 per month (lucky you), and you are applying for a new mortgage that would have a monthly payment of $1200. In this case the payment shock is $1200/$800, or 1.5.

Lenders set guidelines for payment shock that range up to 2.0 and higher. This lets the lender deny higher risk loans where the borrower is not accustomed to having such a high payment. However, not all lenders have payment shock guidelines, and those that do don't always apply them to every type of loan.

Monday, May 08, 2006

Basic Terminology: HELOC and HELoan

As a borrower there are two main options for tapping into your home's equity. A HELOC, or a Home Equity Line Of Credit, is known as an open-ended loan. A HELoan, more commonly just refered to as a 2nd mortgage, is also known as a closed-end loan.

In a HELoan scenario the borrower receives a fixed sum at the beginning of the loan period with repayment terms that are similar to a 1st mortgage. HELoans do not allow subsequent withdrawals. With a HELOC the borrower has a line of credit to draw from, and the payments are based only upon the portion of the credit line that is being used. HELOC payments are often amortized over a shorter time period than a closed-end loan, with a monthly payment that varies based on the unpaid balance and the current interest rate.

HELOCs have some of the best interest rates for any type of mortgage, but they are almost always variable rates. For an identical loan amount and withdrawal amount a HELOC might still have a higher monthly payment than a HELoan because of the shorter term, but the loan will be paid down faster.

HELOC withdrawals are normally made via special checks or credit cards. Many lenders require a minimum initial withdrawal, and subsequent withdrawals are also often subject to a minimum. The main benefits are the low interest rate and that you are only paying for the part of the credit line that you are actually using.

Sunday, May 07, 2006

Insider Tip: Improve Your Debt Ratio

Most lenders have underwriting guidelines in place that allow their underwriters to ignore installment liabilities with less than 10 payments remaining. Installment liabilities are credit agreements where the balance is paid off in a set number of payments, such as a home loan or a car loan. Credit cards are revolving liabilities since they don't have a fixed number of payments.

By paying an installment liability down to the point that there are 10 or less payments remaining you can have it ignored in your debt ratio (DTI) and you might be able to borrow more money or qualify in situations where you otherwise would not. You can either pay down the liability prior to applying for the loan (best for purchases) or pay down the debt with your loan proceeds as part of a debt consolidation refinance.

While this is a common practice across most mortgage lenders they also almost always exclude auto leases from this policy. In general an auto lease will be replaced with a similar lease or a new loan at the end of the lease term, so the lender uses your current payment as an indication of what your payments will be with a new lease or loan.

Basic Terminology: Debt Consolidation

A debt consolidation loan is almost always a refinance where high interest rate debt is paid off with a lower interest rate mortgage. Purchase loans rarely allow any additional payment other than the home purchase, but refinance loans are often directed towards allowing a borrower to pay off their high interest rate credit cards, auto loans and home equity loans with a lower interest rate first or second mortgage.

For most borrowers it makes sense to payoff an 18+% interest rate credit card balance by rolling that debt into a home mortgage, but this does leave you with secured debt rather than unsecured debt. What that means is that your debt is now backed by your home, so if you miss too many payments the lender will take your house. With a normal credit card you can only forfeit the items you have purchased (in most cases), rather than the home you have been paying off for possibly the last several decades.

If you are certain that you will make all payments and you just want a lower interest rate then a debt consolidation refinance may be right for you. If you have trouble making your payments on time and miss payments occasionally then you should stay away from consolidating your loans, since a few missed payments could cost you your home.

Consolidating loans is a great idea if you can obtain a lower overall interest rate and lower your monthly payments. However, if you are in a situation where you might miss a few payments you should avoid using your home's equity to back your unsecured debt. It might cost you your home and your financial stability.