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3 / Understanding the Mortgage Loan Market 25 investor, it is wise to have both a mortgage broker and a mortgage banker on your team. Mortgage Brokering Keep in mind that mortgage brokering is an unlicensed profession in many states. If there is no licensing agency to complain to in your state, make sure you have personal references before you do business with a mortgage broker. Conventional versus Nonconventional Loans Conventional financing, by definition, is not insured or guaranteed by the federal government (see discussion of government loans later in this chapter). Conventional loans are generally broken into two categories: conforming and nonconforming. A conforming loan is one that conforms or adheres to strict Fannie Mae/Freddie Mac loan underwriting guidelines. Conforming Loans Conforming loans are a low risk to the lender, so they offer the lowest interest rates. Conforming loans also have the strictest underwriting guidelines. Conforming loans have the following three basic requirements: 1. Borrower must have a minimum of debt. Lenders look at the ratio of your monthly debt to income. Your regular monthly expenses (including mortgage payments, property taxes, insurance) should total no more than 25 percent to 28 percent of your gross monthly income (called “front-end ratio”). Further-
26 FINANCING SECRETS OF A MILLIONAIRE REAL ESTATE INVESTOR Underwriting Underwriting is the task of applying guidelines that provide standards for determining whether or not a loan should be approved. Understand that loan approval is the final step in the loan application process before the money is handed over (known as “funding” a loan). Note that many lenders will give “preapproval” of a loan. Preapproval is really a half-baked commitment. Until a loan is approved in writing, the bank has no legal commitment to fund. And, in many cases, loan approval is often given with conditions attached that must be satisfied before closing. more, your monthly expenses plus other long-term debt payments (e.g., student loan, automobile, alimony, child support) should total no more than 36 percent of your gross monthly income (called “back-end ratio”). These ratios can sometimes be increased if the borrower has excellent credit or puts up a larger down payment. 2. Good credit rating. You must be current on payments. Lenders will also require a certain minimum credit score (discussed in Chapter 4). 3. Funds to close. You must have the requisite down payment (generally 20 percent of the purchase price, although lenders often bend this rule), proof of where it came from, and a few months of cash reserves in the bank. FHA-insured loans (discussed later in this chapter) allow higher LTVs but are more limited in scope and are not generally available to investors (discussed later in this chapter).
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Page 7 and 8: vi CONTENTS Government Loan Program
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CHAPTER7 Partnerships and Equity Sh
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7/ Partnerships and Equity Sharing
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CHAPTER8 The Lease Option The road
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8/The Lease Option 101 is not relie
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8/The Lease Option 103 Famous Optio
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8/The Lease Option 105 job just a s
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8/The Lease Option 107 The house ne
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8/The Lease Option 109 your option
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8/The Lease Option 111 • whether
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CHAPTER9 Owner Financing If you’d
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9 / Owner Financing 115 FIGURE 9.1
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9 / Owner Financing 117 a corporate
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9 / Owner Financing 119 long before
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9 / Owner Financing 121 Simply tell
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9 / Owner Financing 125 Problems wi
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9 / Owner Financing 127 one willing
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9 / Owner Financing 129 This is a b
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9 / Owner Financing 133 of each mon
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APPENDIXA Interest Payments Chart 1
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APPENDIXB State-by-State Foreclosur
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APPENDIXC Sample Forms Uniform Resi
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GL OSSARY abstract of title A compi
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GLOSSARY 181 improvements. Also use
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GLOSSARY 183 applied towards the pu
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GLOSSARY 185 security instrument A
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RE SOURCES Suggested Reading Altern
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IN DEX A Acceleration clause, 118 A
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INDEX 191 blended, 73 Federal Reser
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INDEX 193 W Washington Mutual, 22 W
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