The 80 20 mortgage is an excellent loan for those that are lacking the down payment required for other types of mortgages.

The 80 20 mortgage is simply two loans for 100% of the purchase price. It is a first mortgage at 80% of the purchase price with a 20% second mortgage.

If you are a conforming borrower, doing your loan in this manner will save you from having to pay mortgage insurance. Mortgage insurance is almost always required when you have less than 20% down. But with the 80 20 loan you avoid this necessary evil.

If you are a sub prime borrower, doing you loan in this manner will typically keep you interest rates ½% to 1.5% lower than doing a 100% one loan.

Many times you will have two choices when it comes to the second mortgage portion of the 80 20 mortgage. The second mortgage can either be a fixed second mortgage or it can be a line of credit.

If it is a fixed second mortgage. The interest rate is fixed for the entire length of the mortgage. Most fixed second mortgages are a 30 due in 15. Meaning that the second mortgage is amortized over 30 years, but is due in 15 years. Basically it is a balloon payment. Don’t let this scare you. Statistically people refinance or sell their home every 7 to 9 years any ways.

If it is a line of credit as the second mortgage. The interest rate will fluctuate as the Federal Reserve adjusts the prime interest rate up or down. The benefit of going with the line of credit as the second mortgage on your 80 20 mortgage is that the interest rate is normally much lower than the fixed seconds rate. It can be 2% to 5% lower.

If you are considering doing the 80 20 loan have your loan officer compare the two different options if you have both available to you.

You may also want to consider an 80 20 interest only loan. The interest only loan could save you hundreds of dollars in mortgage payments every month.

Adjustable Rate Mortgages (ARMs) first became popular in the early 1980's when interest rates were much higher and more volatile.  They are simply long term mortgages having periodic interest rate adjustments which allows  flexibility in the monthly loan payments.   ARMs are fully amortizing loans and can be structured to fit just about any need or budget.     

Some  ARMs are negative amortizing in that the principal balance of the loan can increase faster than the loan is being paid off through monthly payments.  Usually, these involve shorter  term  loans carrying a balloon balance which will be paid in full at maturity of the balloon.

Important features of ARMs are outlined below:

Index                                                                                                           

Interest rates move in tangent with a short term interest rate index usually published in the Wall Street Journal or other business publication.  Lenders may tie their interest rates on ARMs to either a specific index such as the 1-year  Treasury security yield (based on a constant maturity,)   LIBOR - London Inter Bank Rate, or  the 11th District Cost of Funds (COFI)  or their rates may be tied to a bundle or average of many interest rates or indicators.    The indexes usually move in tangent with other debt instruments and interest rate indicators.

Margin

A "margin"  of an ARM is the interest rate "spread"  (expressed as a percentage)  that is combined with the index comprising the rate of interest charged on the  ARM loan.  Margins remain fixed throughout the loan term and are not impacted by interest rate movements in the financial  markets. Lenders use a variety of margins depending upon the loan product and rate adjustment period.

Interest Rate

The interest rate is the combination of the index plus the margin.

Adjustment Period

The adjustment period that designates when the interest rate will be adjusted is outlined in the mortgage note and remains fixed during the life of the loan.  Adjustment periods can vary from a month to 7 years although most  ARMs  adjust about every  6 months to 1 year. 

Lenders are usually required to notify borrowers before payment and interest rate changes occur.

Periodic Interest Rate Caps

ARMs  usually have interest rate "caps" on the amount that the rate may actually change.   Generally, a mortgage  with a  6-month adjustment period has a cap of 1%  while a 1- year ARM usually has a  2% cap. 

Beware of any lenders that do not offer an interest rate cap but only offer a cap on the payment adjustments.  This type of ARM loan has the potential of creating negative amortization.

Life Cap

The "life cap"  is the maximum rate the loan may have over it's life.  Life caps  vary by lender and/or investor although most have caps of 5% to 6%.

Beware of "teaser rates" that a lender may offer as an introductory rate that is below the fully indexed rate.

Convertible ARMS

Some lenders offer convertible ARMs, loans with a convertible feature that allows the borrower to change from an adjustable rate to a fixed rate at some point in the future. 

Some ARMS are retained in the lenders' portfolio and can be an appealing asset because the indexed rate can be structured to interest rates paid on deposits.  ARMs can also be sold in the secondary market as a capital market debt instrument aggregated into mortgage backed securities.  The primary disadvantage to borrowers is the potential of higher future rates.

Considering An ARM?

How long will I occupy my home? (If you plan to sell in the next 3 or 4 years, ARMs may be a good option to consider.)

Is my income likely to rise if interest rates increase?

Can the monthly payments increase even if interest rates do not?

Am I anticipating any major expenditures in the future (college tuition or a new car) that will require more borrowing?

Note: When comparing ARMs, look closely at the index and margin and discuss with the lender. Some indexes may have higher average values but could  be used with lower margins. Be sure to compare "like" products.

Subprime lending can be defined simply as lending that involves elevated credit risk. Whereas prime loans are typically made to borrowers who have a strong credit history and can demonstrate a capacity to repay their loans, subprime loans are typically made to borrowers who are perceived as deficient on either or both of these grounds. Obviously, lenders take a borrower's credit history into account when determining whether a loan is sub prime; however, they also take into account the mortgage characteristics, such as loan-to-value ratio, or attributes of the property that cause the loan to carry elevated credit risk.

A borrower's credit history is usually summarized by a Fair Isaac and Company (FICO) credit score. Everything else being the same, borrowers with FICO scores below 620 are viewed as higher risk and generally ineligible for prime loans unless they make significant down payments. But it is noteworthy that about half of subprime mortgage borrowers have FICO scores above this threshold, indicating that a good credit history alone does not guarantee prime status.

Compared with prime loans, subprime loans typically have higher loan-to-value ratios, reflecting the greater difficulty that sub prime borrowers have in making down payments and the propensity of these borrowers to extract equity during refinancing. They are also somewhat smaller in size. Whereas only about 1 percent of prime mortgages are in serious delinquency, the rate for serious delinquency on sub prime is more than 7 percent. Not surprisingly, subprime mortgages also carry higher interest rates than those for prime loans. Evidence from surveys of mortgage lenders suggests that a weak credit history alone can add about 350 basis points to the loan rate.

The growth in subprime lending represents a natural evolution of credit markets. Two decades ago subprime borrowers would typically have been denied credit. But the 1980 Depository Institutions Deregulatory and Monetary Control Act eliminated all usury controls on first-lien mortgage rates, permitting lenders to charge higher rates of interest to borrowers who pose elevated credit risk, including those with weaker or less certain credit histories. This change encouraged further development and use of credit scoring and other technologies in the mortgage arena to better gauge risk and enabled lenders to price higher-risk borrowers rather than saying no altogether. Intense financial competition in the prime market, where mortgage lending was becoming a commodity business, encouraged lenders to enter this newer market to see if they could make a profit.

This evolutionary process was pushed along by various federal actions. The Community Reinvestment Act (CRA) of 1977, and later revisions to the regulation, gave banking institutions a strong incentive to make loans to low- and moderate-income borrowers or areas, an unknown but possibly significant portion of which were subprime loans. The Federal Housing Administration, which guarantees mortgage loans of many first-time borrowers, liberalized its rules for guaranteeing mortgages, increasing competition in the market and lowering interest rates faced by some subprime mortgage borrowers. Fannie Mae and Freddie Mac, giant secondary market purchasers, sought to meet their federally mandated affordable housing goals by expanding into the prime and lower-risk segment of the subprime mortgage market. They now provide many direct mortgage lenders with other potential buyers for their subprime mortgages. Fannie and Freddie are both working on techniques to extend automated underwriting to the subprime market, an innovation that should further lower costs in this market.

Lending Limits for FHA Loans
This section allows you to find the FHA mortgage lending limits for a variety of housing types in your state or county.

Closing Costs
The FHA defines allowable closing costs that may be charged to the borrower. These costs are determined as reasonable and customary by each local FHA office.

Mortgage Insurance
FHA insured loans require mortgage insurance. Mortgage insurance is a policy that protects lenders against some or most of the losses that result from defaults on home mortgages.

Debt to Income Ratios
According to FHA guidelines, borrowers and / or their spouse must qualify according to set debt ratios which are used to determine whether the borrower can reasonable be expected to meet the expenses involved with home ownership.

Credit Issues
FHA will analyze a borrower's past credit performance in determining the loan for approval. A borrower who has made timely payments serves as a guide and demonstrates their willingness to repay future credit obligations.

Your Loan Checklist
Before you start the loan process, you'll need to have some information at hand for all loan applicants. In addition, you will need to pay for a credit report and appraisal of the property.

 The FHA defines allowable closing costs that may be charged to the borrower. These costs are determined as reasonable and customary by each local FHA office. All other costs in the transaction are considered non-allowable and generally paid by the seller when purchasing a new home or by the lender when refinancing your current FHA mortgage.

Allowable Fees:

The appraisal fee and any inspection fees

Actual cost of credit reports

Lender's origination fee

Deposit verification fees

Home inspection service fees up to $200

Cost of title examination and title insurance

Document preparation (by a third party not controlled by the lender)

Property survey

Attorney's fees

Recording fees, transfer stamps and taxes

Test and certification fees, water tests, etc.

Allowable in a refinance: courier fees, wire transfer fees, fees to payoff bills, reconveyance fees.

 FHA insured mortgages require mortgage insurance. Mortgage insurance is a policy that protects lenders against some or most of the losses that result from defaults on home mortgages and it's required primarily for borrowers making a down payment of less than 20%.

The Mortgage Insurance charged is .5% per year of the loan amount and is charged to the homeowner each month. In addition, FHA charges an upfront mortgage insurance premium of 1.5%.

FHA's monthly mortgage insurance payments will be automatically terminated when these conditions occur:

For mortgages with terms more than 15 years, the annual mortgage insurance premiums will be canceled when the Loan to Value ratio reaches 78%, provided the mortgagor has paid the annual premium for at least 5 years.

For mortgages with terms 15 years and less and with Loan to Value ratios 90% and greater, then annual premiums will be canceled when the Loan to Value ratio reaches 78%, regardless of the amount of time the mortgagor has paid the premiums.

Mortgages with terms 15 years and less and with Loan to Value ratios of 89.99% and less will not be charged annual mortgage insurance premiums.

According to FHA guidelines, borrowers and / or their spouse must qualify according to set debt ratios which are used to determine whether the borrower can reasonable be expected to meet the expenses involved with home ownership. There are two ratios.

Add up the total mortgage payment (principal and interest, escrow deposits for taxes, hazard insurance, mortgage insurance premium, homeowners' dues, etc.). Then, take that amount and divide it by the gross monthly income. The maximum ratio to qualify is 29%.

	Total amount of new house payment:	$650.00
	Borrower's gross monthly income (including spouse, if married):	$2,400.00
	Divide total house payment by gross monthly income:	$650/$2,400
	Debt to income ratio:	27.08%

Add up the total mortgage payment (principal and interest, escrow deposits for taxes, hazard insurance, mortgage insurance premium, homeowners' dues, etc.) and all recurring monthly revolving and installment debt (car loans, personal loans, student loans, credit cards, etc.). Then, take that amount and divide it by the gross monthly income. The maximum ratio to qualify is 41%.

	Total amount of new house payment:	$650.00
	Total amount of monthly recurring debt:	$300.00
	Total amount of monthly debt:	$950.00
	Borrower's gross monthly income (including spouse, if married):	$2,400.00
	Divide total monthly debt by gross monthly income:	$950/$2,400
	Debt to income ratio:	39.58%

Please note that the above indicators do not exclusively determine whether or not a candidate will qualify for an FHA loan. Other factors will be considered, including credit history and job stability.

FHA will analyze a borrower's past credit performance in determining the loan for approval. A borrower who has made timely payments serves as a guide and demonstrates their willingness to repay future credit obligations. On the opposite side, a borrower who reflects continuous slow payments, judgments and delinquent accounts is not a good candidate for loan approval.

Below is a list of items concerning the borrower's credit.

When the underwriter analyzes the borrowers credit; it is the overall pattern of credit behavior that must be reviewed, rather than isolated cases of slow payments. A period of financial difficulty does not disqualify the borrower if a good payment pattern has been maintained since then.

In the event a borrower does not have any credit lines (two needed) on their credit report, the FHA will allow substitute forms of credit such as utility payment records, rental payments, car insurance payments, etc.

The FHA guidelines state that a minimum of two years must elapse since the discharge date of the borrower and / or spouse's Chapter 7 bankruptcy, not the filing date. A full explanation of the bankruptcy will be required. The borrower must also have re-established good credit, qualify financially and have good job stability.

The FHA guidelines state that they will consider a borrower still paying on a Chapter 13 Bankruptcy if the payments to the court have been satisfactorily made and verified for a period of one year. In addition, the court trustee will need to give written approval to proceed. A full explanation of the bankruptcy will be required. The borrower must also have re-established good credit, qualify financially and have good job stability.

The FHA guidelines state that if a collection is minor in nature, it usually does not need to be paid off as a condition for loan approval. Judgments must be paid in full prior to closing. A borrower is not eligible for the loan if they are delinquent on any federal debt. This can include tax liens, student loans, etc. Payment arrangements that would bring the borrower up to date may be considered for loan approval.

A borrower whose previous residence or other real property was foreclosed on or given a deed-in-lieu of foreclosure within the previous three years is generally not eligible for an insured mortgage. However, if the foreclosure of the borrower's main residence was the result of extenuating circumstances beyond the borrower's control, and they have since established good credit, an exception may be granted. This does not include the inability to sell a home when transferring from one area to another.

 Before you start the loan process, you'll need to have some information at hand for all loan applicants:

Social Security numbers

Residence addresses for the past two years

Names and addresses of your employers over past two years

Your current gross monthly salary

Names, addresses, account numbers and balances on all checking and savings accounts

Names, addresses, account numbers, balances and monthly payments on all open loans

Addresses and loan information of other real estate owned

Estimated value of furniture and personal property

Certificate of Eligibility and DD-214, (for veterans only)

W2's for the past two years and current check stubs

For self-employed individuals, you will need to provide personal tax returns for the past two years, current income statement and balance sheet for the business

In addition, you will need to pay for a credit report and appraisal of the property.