Finding a Loan Product that Makes Sense

Finding a Loan Product that Makes Sense - May 2006

The low interest rate environment and real estate boom of the past several years has created an explosion in the mortgage business. There are many more mortgage brokers and lenders and many more loan originators then there were even a few years ago. There are also many more innovative loan products for a borrower to choose from. This has resulted in tremendous competition to develop and improve new and existing lending products to attract more borrowers and the current environment of rising rates is going to make it even more competitive.

Two lending products attracting a lot of attention are "No Doc" and "Super Jumbo" loans which in the past have not been readily available in mainstream lending but are getting a lot of attention lately.

What is a "No Doc" Loan?

No Doc loan stands for No Documentation Loan. The definition of a "No Doc" loan may vary from one lender to another, but in mortgage industry terminology a REAL no doc loan is one where the lender evaluates primarily 3 things only: the borrower's credit, the appraisal and the title to the property. There is no employment verification, no income or asset verification and no tax returns are required to secure a loan. Interest only and low down-payment options are also available with a No Doc loan.

You do pay a price for these types of loans, because a No Doc loan will usually have a higher interest rate. However, most borrowers aren't as concerned with the rate because they either cannot or do not want to provide documentation and they consider the higher rate a fair trade off for lack of documentation. The lender verifies the borrower's credit and credit scores and evaluates the property being purchased or refinanced. Credit scores of 680 or more are the starting point with most lenders with more favorable interest rates for those with higher scores.

Borrowers who don't have a regular income, are unemployed, live from investments or inheritance or simply don't want to give up their privacy by disclosing personal financial information benefit from No Doc loans.

There are numerous variations on No Doc Loans and the two most popular are Stated-Income (or Low Doc) Loans which are most popular with the self-employed or people who are paid with commission or bonus income and No Ratio loans. These loans are typically for borrowers who have good credit and assets but do not want to disclose income. There is no "debt to income" ratio calculated on these loans and they are a good option for those not comfortable stating their income. Typically, you will pay lower interest rates with the last two types of loans than with No Docs.

What is a jumbo loan?

A jumbo loan is any loan above the "conforming limit" currently established by Fannie Mae or Freddie Mac.

What is a "Super Jumbo" Loan?

Super Jumbo Mortgage loans are usually used to describe mortgage loans exceeding $650,000. Most lenders use the term to define products offered above and beyond the average jumbo loan amount. Many lenders will finance up to $1 or $2 million while some others advertise that they will finance as high as $20 million. These loans typically carry a higher interest rate because the lender is taking on more risk. SuperJumbo loans are also available as "stated income," "no income" or "no doc loans.

It is even possible to get 100% financing with a Super Jumbo Loan and combine it with an interest only option. Interest only loans are probably the most popular Super Jumbo loans on the market. They are a convenient option for those looking for lower monthly payments while still getting the benefit of writing off the interest on their loan(s)*. They give you some control over your cash-flow by allowing you to pay only the interest due each month instead of the full principal and interest. The larger the loan amount the greater the amount of savings per month when compared to a principal and interest loan. Most Interest only loans allow the borrower to make interest only payments for a set time, for instance 10 years, before going to a fixed rate.

Not too long ago lenders were commonly turning away potential buyers who could not supply personal financial information or did not have a down payment stashed away. Many more borrowers are able to pull cash out of their homes or qualify to purchase a house today than in years past and these innovative loan programs are part of the reason. We will likely see more progressive mortgage products as the current mortgage market continues to shift to more of a purchase driven environment and lenders will need more business to stay profitable. Keep in mind that these products provide opportunities to borrowers that were unheard of in the past, but they can also be a dangerous way to go if your financial situation is not very secure. Doing what's best means educating yourself on the loans available from lenders today, borrowing no more than you can truly afford and selecting the loan program that suits you best.

Please consult your tax advisor on deductibility of mortgage interest.

John King of MyMortgageBanker.com takes a consultative approach to mortgage lending and educates his clients about all possible mortgage options. MyMortgageBanker.com offers many different loan products including Stated Income, Super Jumbo and Interest Only as well as traditional financing.