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Non Conforming Loans

If your credit has been damaged, you may not qualify for a conforming ( sold to Freddie Mac or Fannie Mae) loan. However, there are many lenders who will still do the loan, and often at a very reasonable cost! We want you to know all of your options before you apply. Please email me with any non conforming loans questions. I also offer non conforming business equipment leasing to business owners.

The Facts: Conforming Vs. Non-Conforming loans
Not all loan officers write non-onforming loans. As a matter of 
fact, most do not - because they require a lot more work. 

We have had many people come to us after they had been told by other 
loan officers that it was impossible for them to consider buying or refinancing a 
home. In most cases we were able to work with them successfully; by 
getting them the right loan and helping them find the right real 
estate agent and the right house at a price they could live with.
It is the job of the loan officer to decide whether your loan 
package will be a "conforming loan" or a "non-conforming loan".
The simple definition of a "conforming loan" is: A loan you can 
get approved for at most any financial institution have good credit 
with no late payments on any accounts within 12 months, at least two 
years job stability at the same job, have a substantial down 
payment, money for closing costs, at least two months house payments 
extra after all costs, and your income to debt ratio is under 38%. 
Rates for these loans are very close to what you read in the 

The simple definition of a "non-conforming loan" is: You have a job 
and can make the payments. Your credit is used only to determine 
your interest rate and the loan amount to value of the home ratio. 
This ratio is referred to as your "LTV" or "Loan To Value". 
There are many lenders who will lend to borrowers who are in 
foreclosure or who are currently in a bankruptcy. Borrowers who are 
in these situations often have the worst possible credit. Lenders protect 
themselves by keeping the LTV low, about 65% to 70% of the appraised 
price of the property. By doing this, the lender is very well 
protected. If the borrower goes into foreclosure again with the new 
lender, the LTV is low enough that the lender can take the property 
back, sell it at a discount for a quick sale, and still pay off the 
The lender rarely cares if there are other mortgages against the 
property, as long as the lender is in the first position. You see, 
when a lender takes a property back from a borrower the first lien 
position gets the proceeds of the sale first, then the second, then 
the third, etc. Rates for these types of loans are usually 1% to 6% 
higher that conforming rates.


Lenders use three qualifying guidelines to determine what size 
mortgage you are eligible for. They are as follows:

1. Debt ratios:
Your monthly costs (including mortgage payments, property taxes, 
insurance) should total no more than 28% of your monthly gross 
(before-tax) income.
Your monthly housing costs plus other long-term debts should total 
no more than 36% of your monthly gross income.
Basically, lenders are saying that a household should spend not more 
than about one-fourth its income (28%) on housing and not more than 
about one-third of its income (36%) on total indebtedness (housing 
plus other debts). Lenders feel that if they follow these 
guidelines, homeowners will be able to pay off their mortgages 
fairly comfortably and lenders will not have to worry about loan 
defaults and foreclosures.
2. Credit: 
Any late payments must have good explanations and generally no more 
than one 30-day late payment is permitted within 12 months.
3. Funds to Close:
You must have the down payment, which must be your own funds, and 
the closing costs. In addition, you must have at least two months 
extra payments in the bank.


Every non-conforming lender has a different set of guidelines; 
therefore, this section should be used only as a general example. 
These types of lenders are saying that a household should spend not 
more than about one-half of its income (50%) on housing and not more 
than about two-thirds of its income (60%) on total indebtedness 
(housing and other debts). Lenders feel that if they follow these 
guidelines, homeowners will be able to pay off their mortgages 
fairly comfortably and lenders will not have to worry about loan 
defaults and foreclosures. These guidelines can be pushed with other 
compensating factors. 
2. Credit
Used for calculating risk of loan (interest rate).
3. Funds to close
Can come from many different sources; e.g., seller carry-back, gift 
letter, equity.


In the past, banks and savings associations simply loaned their 
deposits to those needing funds. This soon become inefficient for 
two reasons: Savings deposits are considered short term liabilities, 
because a depositor can withdraw funds at any time. Mortgage loans 
are considered long-term assets, because the term of most mortgage 
loans is 25 to 30 years, with some exceptions. History has shown 
that the average mortgage is repaid within 7 to 9 years of its 
inception. This short-term versus long-term problem soon created a 
mismatch forcing some institutions to borrow additional capital to 
meet loan demand.
Simply borrowing more money became too expensive as interest rates 
increased, forcing lenders to seek alternatives. One solution was to 
sell the mortgage loans but retain the right to collect the monthly 
payments. A secondary mortgage market was created whereby certain 
investors purchased the loans, then entered into a servicing 
agreement allowing the institution that sold the loans to collect 
monthly payments, pay property taxes when due, and generally 
administer the loans. The investor simply accepts the monthly 
payments, minus whatever servicing fee is agreed upon. This fee is 
usually about three-eighths of one percent (.375%). This arrangement 
allowed lenders to originate, sell and service mortgage loans year 
around without having to match deposits with loan volume.
As investors started buying these loans it opened up the market for 
the non-conforming lenders. Investors who would like to see a higher 
rate of return on their money and would also accept a higher degree 
of risk started buying higher-risk loans. This kept climbing until 
the market opened up for the serious high-risk, high-rate investor 
who will buy any loan so long as it is secured by real property. 
The secondary market from which lenders draw mortgage money is 
sometimes called the Capital Funds Market. It consists of a great 
variety of institutions: FNMA - Federal National Mortgage 
Association, also known as Fannie Mae; FHLMC - Federal Home Loan 
Mortgage Corporation, also known as Freddie Mac; GNMA - Government 
National Mortgage Association, also known as Ginny Mae (all quasi 
governmental agencies); as well as private financial institutions 
such as banks, life insurance companies, private investors, and 
thrift associations and, lately, Wall Street.
This market also considers alternative investments such as 
government bonds. Buyers of mortgages will often compare the yield 
they are offered with those of government securities. It is best to 
think of money as a commodity, like bread or potatoes. As such, it 
is subject to the forces of supply and demand, and the above example 
is one way the government manipulates the market and influences the 
money supply for housing.

As a Certified Mortgage Planning Specialist, I offer an analysis of your situation today can make suggestions on how small changes in how your consumer and mortgage debt is structured today can have a life changing effect in the years to come.  Read more about this free, no obligation service.


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