When seeking a home loan for a purchase or refinance, it seems like conventional financing is the most sought after option. This is not always because it is the best loan. It just has been assumed to be the best option in most lending circles. Understanding what a conventional loan is will help you make an informed choice.

A conventional home mortgage is any loan that follows Fannie Mae, Freddie Mac, or private label home loan lending criteria. This includes subprime, negative amortization ARM’s, jumbo, and interest only loans. Excluded loans are FHA, VA, USDA, business financing, and commercial loans.

Conventional mortgage loans offer definite advantages for some borrowers. One advantage is that there are no loan limit restrictions. This will not affect the average person, but if you are in the market for a home loan greater than roughly $800,000, this is your only real option.

Another advantage is the option of eliminating mortgage insurance and not having your taxes and insurance included in your mortgage payment. This option is available only if you have a 20% equity stake. These are not options with other types of home loans. Although you will not pay mortgage insurance for the duration of the loan, there will be an insurance cost. You will not be allowed to pay your taxes and insurance on your own. These payments must be escrowed and included in your monthly mortgage payment.

If your income is not easily verified, conventional lending has alternatives that allow for limited or no documentation of income. You will need excellent credit and either a large down payment or a lot of equity due to the inherent risk to this type of loan. The interest rates are also higher due to this risk. Limited income, no income, or stated income loans are largely for a self employed borrower who receives no pay stubs or W-2’s.

In today’s market, conventional home loans do carry some definite disadvantages. The major disadvantage is that the required equity stake is higher than on non-conventional loans. This means a purchaser will need to invest a greater down payment and someone looking to refinance will need a higher value vs. the loan amount requested. Credit underwriting is also stricter and current interest rates tend to be higher for those with average credit scores. The debt to income ratio is less flexible.

Understanding all of your options will help you choose the right mortgage for your needs and qualifications.

Visit the FHA Loans page for expert information about FHA, 100% USDA, and VA financing options.

An FHA 203k loan will allow a prospective buyer to compete with the “all cash” investor. An FHA 203K loan will allow for necessary repairs to a property that would not otherwise qualify for bank financing. This financing is also available for current homeowners to make property repairs or upgrades.

There are 2 types of 203K loans: Full “K” and Streamline “K.”

A full 203k is used for a property that needs structural repairs, or if the repairs will exceed $35,000. Normally a certified HUD plan consultant will be used for work cost estimates. A HUD reviewer makes the paperwork a lot easier because the average contractor will not be familiar with the documentation. The reviewer just allows for a smoother flow, but the HUD reviewer will not do the repairs.

A streamline 203K is the best loan if no structural repairs are necessary and if the scope of work is $35,000 or less. Up to $8,000 of energy efficient improvements may be added to a streamline 203K in excess of the $35,000 limit. The contractor usually prepares the estimate on this loan. The paperwork is less so it can easily be done with without a HUD plan consultant but the written estimate must be detailed.

A full FHA 203k and a Streamline 203K will allow for the use of multiple contractors if that is your desire. You may have a contractor that specializes in flooring, and another that is a licensed plumber. This is allowed, but written estimates must be obtained from each.

The normal process flow is as follows:

• Get Pre-Approved by a Qualified Lender. This is a MUST. I am a Qualified FHA 203K Lender.
  

• Find a home and make an offer.

• If the offer is accepted, chose your contractors and get written work estimates. When a HUD plan consultant is used they will prepare the estimates and paperwork.

• The contract, repair estimates, and necessary paperwork are delivered to a qualified 203k lending specialist. (We are qualified specialists.)

• A mortgage application is prepared.

• The work estimates are given to the appraiser. The appraiser will prepare an  appraisal with a value “subject to” completion of the work.

• The loan is underwritten and approved.

• The seller is paid. You are the new homeowner.

• Work begins.

The contractors will have up to 6 month to complete the necessary repairs. Of course the repairs can be completed sooner. It will depend on the amount of work requested or required. They will be paid in increments as the work is done and inspected.

If there is a lot of required work, a full 203k has a provision where you may remain in your current home with no mortgage payments due while work is ongoing.

If you have more questions or need additional assistance on a New Jersey FHA 203k loan:

Contact me at 732-207-8434, or email mark@njfhapro.com.

I am a New Jersey FHA 203K Lending Specialist!