Non-conforming Home Loans vs Conforming Loans

The simple definition of a "non-conforming home 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 debt.

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.

CONFORMING LENDERS' GUIDELINES

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 oits 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 month's extra payments in the bank.

NON-CONFORMING LENDERS' GUIDELINES

1. DEBT RATIOS:
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.

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