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Non Conforming Loans

Don't think you can qualify for a "conforming" loan? Is your quest to become a homeowner "dead in the water"? Not necessarily.

Consider the services of a mortgage broker. Much as an "independent" insurance agent represents a host of insurance companies and can select a policy well suited to your needs, a mortgage broker represents multiple lending sources.

Mortgage brokers often represent companies who offer "non-conforming" loans that can meet the needs of borrowers who do not qualify for a "conforming" loan. "Non-conforming" mortgage loans are loans made to borrowers who cannot meet the strict requirements of a "conforming" loan program.

A "non-conforming" lender will tolerate a history of late payments, as long as the potential borrower has established a at least a mediocre track record of making rent or mortgage payments on time over the past year. As these loans are more risky by their very nature, their portfolios are illiquid on the open market and therefore do not command as attractive interest rate for the borrower.

SHOP, SHOP, SHOP, before selecting a "non-conforming" loan. "Non-conforming" lenders charge significantly higher closing costs and interest rates than do "conforming" lenders, and their costs and rates vary dramatically from lender to lender.

Ask the "non-conforming" lender what "class" of borrower you fall into, based upon your payment history. Then, based upon a proposed purchase price within your financial means, ask for a "Good Faith Estimate" (GFE) of closing costs, followed by a "Truth in Lending" (TIL) statement based upon that GFE.

The "Annual Percentage Rate" listed on the TIL provides a gauge to compare the total loan costs of different lenders, assuming that the loan is not paid early.

If you anticipate refinancing the loan in the near future, give closer consideration to loans with lower closing costs. Ask about the prepayment penalty, and consider fully its ramifications if you chose to refinance.

Beware of "Adjustable Rate Mortgage" (ARM) loans.

While offering potential interest cost savings over fixed rate loans, they do transfer the risk of future higher interest rates to the borrower.

Compare and consider the affects of rate ceilings (how high the note rate can rise), rate floors (how low the note rate can fall), adjustment periods (when the rate adjusts), and adjustment caps (maximum rate of increase or decrease each adjustment period).

The note rate on an ARM should be based upon two components: the Index Rate, and the Margin.

The Index Rate is based on a standard cost-of-money indicator like the US Prime Interest Rate, LIBOR (London Inter-bank Offered Rate), or other indicator.

Ask what indicator the Index Rate is tied to, how the Index Rate is determined, and what the current Index Rate is. The Margin is the premium charged over and above the Index Rate. Find out what your margin rate will be, based upon your borrower classification. Check the Wall Street Journal or the financial section of any major metropolitan newspaper to confirm the accuracy of the appropriate Index Rate quoted by the potential lender. The sum of the Index Rate, which you have verified, and the margin, should equal the quoted note rate.

If the sum of the index rate and the margin is higher than the quoted note rate, you are probably being offered an "Introductory" note rate which is designed to hide the true cost of the loan.

In this instance, the note rate will increase by the adjustment cap at each adjustment period until the note rate equals the sum of the Index Rate and the Margin, regardless of whether the Index Rate changes during the adjustment period. Some lenders may market these "Introductory Rates" as "cost savings" for the borrower. A savvy buyer should consider them an attempt by the lender to legally falsify government-mandated GFE and TIL statements.