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HOME REFINANCE
A mortgage refinance is when you take out a new loan to pay off the existing loan of your current home. Often people refinance to lower their interest rate to reduce monthly payments or to tap into their home's equity to improve cash flow. Others refinance a home to pay off the loan faster, get rid of mortgage insurance, or switch from an adjustable rate to a fixed-rate loan.
Refinance Characteristics
Purchase and Refinance loans have similar requirements and elements, with few changes due
to different processes and outcomes.
The requirements and loan programs to purchase and refinance a property are the same, with a
few differences in the refinance:
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There is no contract.
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Assets (cash) usually are not required (only for a credit check, appraisal, and HOA fees if applicable.)
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Must have the necessary equity on the property to qualify.
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Usually, borrowers skip up to two mortgage payments and get escrow refunded (if there are any.)
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The Loan-to-value (percentage of finance vs. equity) changes depending on the purpose of the refinance and loan program.
Reasons to Refinance Your Property
Refinances empower you to change the terms of your original mortgage, which you may want
to do for a variety of reasons:
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Your credit score has improved: Suppose you are a homeowner who purchased a loan with subpar credit and has since improved your credit situation. In that case, you may be eligible for significantly lower rates, payments, and substantial savings.
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Interest rates have gone down: If interest rates are lower today than when you obtained your original loan, you might refinance to take advantage of the lower rate. It is critical for anyone who secured a loan pre-2008 when rates reached around 8 percent. According to the White House, the average homeowner could save several thousand dollars a year by refinancing their mortgage.
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You want a lower monthly payment: Switching to longer loan terms or switching from a higher interest rate could help you lower your monthly payment. Use a mortgage calculator to determine what a lower payment does for you. Consider the total cost of the loan when calculating this figure. A lower monthly payment now may not mean savings in the long run, but refinancing could do the trick if you need a bit of flexibility immediately.
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Convert an adjustable-rate mortgage (ARM) to a fixed rate: ARM loans have caps that limit the amount interest rates can increase. These caps are set to monitor yearly increases and the total increase over the life of a loan. In other words, a loan will not instantly rise from 5 to 10 percent; often, buyers are informed ahead of time for every interest rate increase. With that said, as your ARM rises, it might be wise to consider refinancing to a fixed interest rate. Suppose you can secure a 20-year or a 15-year refinance. In that case, you will avoid adding a significant amount of time to your loan while reaping the benefits of lower interest throughout your loan, with the potential to save you money over the life of your loan.
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Free up funds from a home equity loan (Cash-out Loans): If you have an existing home equity loan and need to fund a new project, a cash-out loan might be your choice. Through these products, you can take advantage of lower interest rates or even change payoff terms to create flexibility through cash-out refinancing. You can also use home equity to consolidate debt.
Loan Programs
Conventional
A conventional loan is a mortgage loan that a government agency does not back; instead, it is available and guaranteed through the private sector (Fannie Mae and Freddie Mac). Conventional loans remain far and away the most common type of mortgage. It is used mainly for Primary Residences and Investment Properties.
General characteristics to know:
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Loan-to-Value: Loan-to-value means the amount financed against the appraised home
value. For a change in the interest rate or term, the maximum loan-to-value is 95%. For
a cash-out, the maximum loan-to-value is 80%.
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Private Mortgage Insurance: It is a type of insurance that protects lenders from losses
resulting from default on loans. It is typically required when a borrower has less than
20% of equity from the home purchase price. The borrower usually pays the insurance
premium as part of their monthly mortgage payments. The PMI can be requested to be
removed when the property acquires 20% of equity, and the borrower has two full years
of on-time payments, or when the mortgage reaches 78% of its amortization schedule.
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Occupancy: Primary, Second home, and investment.
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Income: Must have income verification through Paychecks/W2s or Tax Returns (Self Employed), Awards Letters, Pensions, etc.
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Debt-to-income Ratio (DTI): The DTI compares how much the borrower owes each month to how much they earn. It's the percentage of monthly minimum debt payments divided by the gross monthly income. For Conventional loans, the DTI, including the new mortgage payment, cannot be higher than 50% of the monthly gross income.
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Credit Score: Will highly impact the Interest Rate and Mortgage Insurance Cost for those loans. It is possible to get approved for a conventional loan with a credit score as low as 620, although some lenders may look for a score of 660 or better.
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Interest Rates: Conventional Loans usually offer higher interest rates than FHA, VA, and USDA loans, but typically with lower APR (less cost to originate the loan) and can be either fixed or adjustable rates. The interest rate for this type of loan will largely depend on your credit score and overall credit history. The better the credit, the better the rate. Conventional loans remain far and away the most common type of mortgage, traditionally accounting for almost 80% of new home sales in the USA.
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Loan Limits: Conventional loan limits change every year. The loan limit goes as high as $726,200 for single-family homes in 2023. To purchase a home with a bigger loan than that, unless the property is located in a high-cost area, the borrower will need a Jumbo or Non-QM loan.
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Loan Terms: Conventional loans are typically for over 30 years, but it is possible to qualify for flexible terms, such as 10, 15, 20, and 25-year terms.
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Units: The property can be from 1 to 4 units. Loan limits and qualification criteria may vary depending on the number of units.
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Curiosity: Conventional loans are mortgages purchased by Fannie Mae and Freddie Mac. These two companies are government-sponsored enterprises (GSEs) created by Congress to provide liquidity, stability, and affordability to the U.S. housing and mortgage markets. They are responsible for buying mortgages from banks, helping them create more cash flow to continue originating and processing home loans. Both entities purchase and sell conventional loans. Although they are each backed by the federal government, the loans are not. Private lenders back conventional loans, so the borrower does not apply directly with Fannie Mae or Freddie Mac for a mortgage, but either of those companies may purchase the mortgage loan. Each entity either holds onto those mortgages as part of its portfolio or repackages them into mortgage-backed securities.
FHA
FHA loans are mortgages insured by the U.S. government (the Federal Housing Administration, more specifically), and they are considered slightly riskier to the lender since borrowing criteria are less strict. The government backs the loan to reduce the lender's risk, and the borrower must pay mandatory mortgage insurance for this loan.
General characteristics to know:
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Loan-to-Value: Loan-to-value means the amount financed against the appraised home
value. For a change in the interest rate or term, the maximum loan-to-value is up to
97.75%. For a cash-out, the maximum loan-to-value is 80%.
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Mortgage Insurance Premium: FHA loan requires you to pay mortgage insurance for 30
years when the loan-to-value is more than 90% or 11 years when the loan-to-value is
less than 90%.
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Funding Fee: FHA loans apply a funding fee of 1.75% of the loan amount, which makes its APR usually 1.5 to 2 points higher than conventional fixed-rate mortgages for borrowers with good to excellent credit.
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Occupancy: It can be used only for Primary Residences.
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Income: Must have income verification through Paychecks/W2s or Tax Returns (Self Employed), Awards Letters, Pensions, etc.
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Debt-to-income Ratio (DTI): The DTI compares how much the borrower owes each month to how much they earn. It's the percentage of monthly minimum debt payments divided by the gross monthly income. The DTI, including the new mortgage payment, cannot be higher than 56.99% of the monthly gross income for FHA loans.
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Credit Score: FHA loans are more flexible with challenging credits, in most cases allowing borrowers with credit scores as low as 580 to qualify for a mortgage with the minimum down payment required. If the credit score is from 500 to 579, the borrower may qualify but must come up with a 10% down payment.
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Interest Rates: Interest rates for FHA loans are typically lower than conventional loans but can vary depending on the credit history, loan amount, and other factors. Usually, FHA loans are available with fixed or adjustable rates.
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Loan Limits: the FHA loan limit changes accordingly to the county in which the property is located. FHA's nationwide forward mortgage limit "floor" and "ceiling" for a one-unit property in 2023 are $472,030 and $1,089,300, respectively, depending on the county and number of units the property has. In Florida, most counties respect the floor limit, but more expensive counties, like Miami-Dade, Broward, and Palm Beach, have their limits at $557,750.
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Loan Terms: FHA loans are typically for over 30 years, but it is possible to qualify for flexible terms, such as 10, 15, 20, and 25-year terms.
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Units: The property can be from 1 to 4 units. Loan limits and qualification criteria may vary depending on the number of units.
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Closing costs: An FHA loan lets you finance some closing costs (funding fee) and spread them out over time as part of your mortgage payment.
VA
VA loans are a type of mortgage specifically for veterans, military members, and their surviving spouses. These loans typically require no down payment and can offer lower interest rates than conventional loans; also, there is no minimum credit score requirement.
General characteristics to know:
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Loan-to-Value: Loan-to-value means the amount financed against the appraised home
value. For VA loans, the borrower may go up to 100% financing.
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Mortgage Insurance: There is no mortgage insurance on VA loans.
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Funding Fee: Unless the Veteran is 10% disabled or more, which makes them exempt from any funding fee, first-time VA borrowers who make a down payment of less than 5% will pay a fee equal to 2.3% of the loan amount. Subsequent borrowers with the same down payment pay a little bit more; 3.6%. If they put down a larger down payment, the funding fee will be lower. This fee can be paid at closing or financed into the loan.
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Occupancy: It can be used only for Primary Residences, but the borrower may be eligible to turn their primary residency into an investment property and get another VA loan to purchase a primary residency.
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Income: Must have income verification through Paychecks/W2s or Tax Returns (Self Employed), Awards Letters, Pensions, etc.
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Debt-to-income Ratio (DTI): The DTI compares how much the borrower owes each month to how much they earn. It is the percentage of monthly minimum debt payments divided by the gross monthly income. The ideal DTI ratio for a VA loan is 41%. Still, it is essential to note that the Department of Veterans Affairs does not set a maximum limit on the DTI ratio but rather provides guidelines for VA mortgage lenders who
set their criteria based on the borrower's credit score and other financial factors, which usually set the maximum DTI ratios allowed around 50%.
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Credit Score: There is no minimum credit score requirement. Instead, VA requires a lender to review the entire loan profile. Lenders typically have less restrictive credit requirements for VA loans than conventional mortgages.
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Interest Rates: VA loan rates are generally lower than any other mortgage. Rates are determined based on several factors, including the borrower's credit score, loan type, and current market conditions.
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Loan Limits: If the borrower does not have a loan through the VA, he has no loan limit. But if the borrower is currently using a VA loan, their VA home loan limit is based on the county loan limit where they live. If the veteran defaults on the loan, the VA will be responsible for paying the lender up to 25% of the county loan limit minus the amount of the entitlement the veteran has already used.
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Loan Terms: VA loans are typically for over 30 years, but it is possible to qualify for flexible terms, such as 10, 15, 20, and 25-year terms.
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Units: The property can be from 1 to 4 units. Multifamily properties will require up to six months in assets reserves from the borrower. Loan limits and qualification criteria may vary depending on the number of units.
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Frequency: Eligible to use the VA loan can use their loan benefit as often as they would like throughout their lifetime. As long as they are still eligible for a VA loan and are able to qualify with a lender, there is no limit to how many of these mortgages they can take out throughout their life. Simultaneously, it is possible to have more than one VA loan in certain circumstances.
Jumbo
A jumbo loan, or jumbo mortgage, is a home loan for an amount exceeding the Federal Housing Finance Agency (FHFA) limits. Unlike conventional mortgages, a jumbo loan is not eligible to be purchased, guaranteed, or securitized by Fannie Mae or Freddie Mac. Jumbo mortgages are designed to finance high price properties and homes in highly competitive local real estate markets and have unique underwriting requirements and tax implications.
General characteristics to know:
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Loan-to-Value: Loan-to-value means the amount financed against the appraised home
value. For Jumbo loans, for rate and term and cash out, the loan-to-value depends on
each bank’s guidelines, among with the dollar amount cashing out. Usually, the loan-to-
value goes up to 80%.
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Credit Score: Higher credit scores. Many lenders require a credit score of about 700 or better for many jumbo loans and typically accept no score lower than 660.
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Income: Must have income verification through Paychecks/W2s or Tax Returns (Self Employed), Awards Letters, Pensions, etc.
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Debt-to-income Ratio (DTI): Requires a greater cash flow. Mortgage lenders typically look for a debt-to-income (DTI) ratio—calculated by dividing monthly debt payments by gross monthly income—of around 43% when issuing jumbo mortgage loans.
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Reserves Required: Additional assets. As a safeguard against the possibility of missed payments on jumbo loans, lenders often require applicants to prove they have access to savings or other liquid assets sufficient to cover as much as one year of loan payments.
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Interest Rates: Higher interest rates. The additional risk associated with this type of loan typically leads lenders to bump up interest by 1 or 2 points in fixed rates compared with the prevailing rates on conventional loans; however, an adjustable-rate mortgage is a well-explored option to secure the lowest possible rate.
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Loan Terms: Jumbo loans are typically for over 30 years, but it is possible to qualify for flexible terms, such as 10, 15, 20, and 25-year terms.
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Additional appraisals: In addition to the standard property appraisal required for any mortgage loan, jumbo lenders may require a "second opinion" appraisal to confirm the property's market value. Because properties subject to jumbo loans are often large and unusual compared to neighboring properties, each appraisal is likely to be more expensive than a more traditional property.
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Higher closing costs: To help cover the cost of the more extensive verification process required for jumbo loans, lenders typically charge a higher percentage of the purchase price (i.e., more "points") as loan origination costs.
Non-QM
A Non-QM loan, or a non-qualified mortgage, allows you to qualify based on alternative methods instead of the traditional income verification required for most loans. That is the main difference between the QM and Non-QM loans. This type of mortgage does not meet the Consumer Financial Protection Bureau's (CFPB) requirements to be considered a qualified mortgage (QM Loan)
These loans are for borrowers with unique income-qualifying circumstances and possible credit issues.
Non-QM loans are the only way to make investment opportunities plausible for many potential homeowners and real estate investors.
Non-QM Mortgage Benefits
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Most of its programs do not require Tax Returns for income verification
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Greater underwriting flexibility
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Flexibility on income calculations
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Flexibility on job history requirements
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A 10% down minimum Down Payment is required for Primary Residences
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Flexibility on Credit Scores (with a higher impact on the interest rate and loan-to-value)
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No Income Loans or Stated Income Loans on investment properties
Counting rental income (including Airbnb & VRBO)
Non-QM Mortgage Products Available
Non-QM loans tend to be flexible and adaptative accordingly to market conditions. Due to these circumstances, the Non-QM products are constantly changing and updating and coming on and off their availability.
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Bank Statement Loans
For this Non-QM program, bank statements are the only document required to verify income. Borrowers can qualify with as little as three months' bank statements; however, the most popular programs are the 12-month or 24-month bank statement loans. This loan is often a good solution for self-employed borrowers, business owners, realtors, consultants, and entrepreneurs.
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No Income Investment Loans (DSCR Loans - Debt-Service-Coverage-Ratio)
DSCR investment loans allow investors to build their real estate portfolio with fewer hiccups. The Debt-Service-Coverage-Ratio loan uses the property's rental income to qualify and does not consider the borrower's income. The ratio is calculated by dividing the property rental's annual net operating income by its total annual debt service payments. If the DSCR is 1.0 or higher, it is generally accepted by the lenders, and if it is lower than 1.0, some exceptions must be considered to qualify.
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Foreign National Loans
A foreign national loan is a type of loan designed for non-U.S. citizens who are looking to purchase a home in the United States. There is no need for a valid Social Security number, U.S. FICO score, or Individual Tax Identification Number (ITIN). To qualify, the borrower will need only a valid passport and the down payment (usually 30% of the purchase price), and the closing cost available.
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Jumbo Loans with 10% Down
While traditional jumbo loans still often require 20% down, we offer near-miss jumbo loans up to $3 million with as little as 10% down, up to a 50% debt-to-income ratio, and flexibility on credit scores. Jumbo loans with 10% down are often the ideal solution for first-time buyers who might still have large student loans and other credit debts, such as student loans or medical bills. The 10% down jumbo loan program is also suitable for high-income earners looking to invest their cash in other assets.
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ITIN Loans (Individual Taxpayer Identification Number)
An ITIN mortgage loan is a type of mortgage loan specifically designed for individuals who do not have a Social Security number. Instead, they use their Taxpayer Identification Number (ITIN) as the primary form of identification. The documentation and credit requirements vary by lender, but generally, we use Tax Returns, Profit & Loss statements, Bank Statements, or Seasoned Assets to document income.
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Interest-Only Home Loans
There are interest-only home loans on 40-year fixed loans, 30-year fixed loans, 7/1 arms, and 5/1 arms. You will only pay the interest during the first 10 years of the loan, providing significant savings over the life of the loan. However, it is essential to remember that you will not be paying down the principal balance during the interest-only period.
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Recent Credit Event Loans
Recent credit events can make it challenging to secure a loan because many lenders view them as a red flag. However, there are loan programs for borrowers with recent credit events, including foreclosure, short sale, and bankruptcy. While there are options for as little as one day out from the credit event, loan terms typically improve the longer it has been, even in a year or two.
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Commercial Rental Property Loans
There are a variety of loans built explicitly to the needs of real estate investors who want to expand their portfolio to include single-family homes, 2 to 4-unit properties, condos, townhomes, multi-use, and multifamily five or more-unit properties.
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