Loans: Know the Options

Source: AICPA CPA Insider

Excerpts from this article by Alan Haft are reprinted with permission from the AICPA.

To help your clients obtain a loan, the first step is to understand the various options.

Government Loans

Federal Housing Administration (FHA) loans offer some of the most flexible loans on the market today. For owner-occupied borrowers, these programs require a minimal down payment of around three-and-a-half percent and lenders do consider approving borrowers with below-average credit.

Thankfully, this program is not just for the low-money-down or poor-credit crowd. Government loans also consider high-debt-to-income ratios. For borrowers outside the more stringent requirements of other programs below, FHA loans can be a fantastic option.

Conventional Conforming Loans

Traditional “conforming loans” (up to $417,000) typically offer the lowest rates. Lenders typically set rates according to the same benchmark, so if you see a big difference in the rate, it's usually a sign of a higher fee built into the loan itself.

High-balance Conforming Loans

Back in the recent real estate train wreck, investors ran away from mortgage-backed securities (MBS) and the only market available for loans was typically through Fannie or Freddie.

The problem was that these entities were unable to purchase loans above $417,000. Faced with the possibility that the housing market would completely shut down, Congress created one of the many stimulus packages and increased this limit to $729,750.

Jumbo Loans

“Jumbos” are sometimes called “portfolio loans” because these days, lenders are often forced to keep them in their portfolios. Because of the risks associated with the higher loan amounts, your clients may find the costs of these programs significantly higher than the alternatives above.

Lending guidelines on these loans have tightened the most. One of the major guidelines a lender will analyze closely is that of liquidity. Lenders want to see how much cash your client has after a down payment is made.

For the complete article, read “Improve Your Client's Chances of Getting a Loan.”

From AICPA CPA Insider, July 19, 2010, www.CPA2biz.com.