If you would like to speak with someone about getting an FHA mortgage, please phone our specialists at (866) 259-8987! OR FOLLOW INSTRUCTIONS BELOW GET STARTED RIGHT AWAY BY CLICKING ON YOUR MORTGAGE GOAL:

If you would like to speak with someone about getting an FHA mortgage, please phone our specialists at

(866) 259-8987! 

OR FOLLOW INSTRUCTIONS BELOW GET STARTED RIGHT AWAY BY CLICKING ON YOUR MORTGAGE GOAL:

How to Qualify for a First Time Home Buyer Credit with the F.H.A Read all the Credit Guidelines below

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1. History of bankruptcy and foreclosure.
2. Credit score and down payment.
3. Ratios of borrower income to expense.

The analysis is not conclusive, an underwriter always makes the final decision. However, it is accurate enough to alert borrowers who have no chance of being approved that they would do well to spend their time improving their credentials. In such cases, help is offered that is geared to specific weaknesses. Borrowers who are close to qualifying on one side or the other are shown exactly how close they are.

For more detail on the CLN qualification process, see Can You Qualify in Today's Market? Introducing the Professor's Mortgage Qualification Tool

Decision Support

Mortgage borrowers often make bad decisions regarding the type of mortgage they want, and the best combination of interest rate and fees on the selected type of mortgage. Borrowers approach these decisions with a built-in bias toward the short-term, specifically the initial payment and required cash outlays, and tend to ignore longer-term impacts on their wealth. The process reinforces the bias, rather than countering it..

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1. Borrowers are forced to make these decisions together, which is often confusing.
2. Borrowers do not have access to information that bears on long-run impacts on wealth.
3. LOs are primarily motivated to get deals done and prefer not to raise issues that could complicate and delay the process, even if they were qualified to do so, which many if not most are not.

The CLN, in contrast, prods borrowers to confront and possibly over-rule the biases they bring to the process.

• The decision process is broken down into discrete steps. Borrowers first select the type of mortgage, then the interest rate and fee combination on that type of mortgage, and only then do they select the lender.
• At the first 2 decision steps, for each of the options from which a selection is being made, CLN provides a personalized measure of the impact on wealth over the period the borrower expects to have the mortgage. The professor calls this measure the “Time Horizon Cost”, or THC. It equals:

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• Lost Interest on All Payments at the Borrower’s Opportunity Cost Tax Savings at the Borrower’s Tax Rate
  Reduction in the Loan Balance
  THC
• The counselors available on the CLN are all qualified to guide borrowers who opt for help.

For more detail on how borrowers select their preferred mortgage type and rate/fee combination on the CLN, see Integrated Calculators Ease the Pain of Making Difficult Mortgage Decisions.

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Shop For Mortgage Insurance and Title Insurance

The prevailing practice is for lenders to select the title insurer and mortgage insurer, even though the borrower pays the premiums. That is a major reasons why borrowers are over-charged. See Is Title Insurance Overpriced? and Mortgage Insurance in the Post-Crisis Market: Why Is the Market Rigged Against Mortgage Borrowers?

The CLN will change that. As a beginning, borrowers using the CLN will have access to price quotes on title insurance from Boston National, and on mortgage insurance from MGIC. If the prices posted here are lower than those charged by the insurer selected by your lender, you can instruct the lender to obtain your insurance from Boston National and/or MGIC.  

Lender Certification

Lenders offering loans on the professor’s network are certified as CNLs, which means that they conform to the following rules and principles:

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• CNLs Transmit Their Prices and Underwriting Data to the Professor’s Network Electronically.   
• CNLs Must Disclose Complete Price Data, including all fixed-dollar fees and all features of ARMs that might affect future rate adjustments.
• CNLs can charge borrowers a maximum fee of $295 to lock their loans, with the charge credited back to the borrower at closing.
• CNLs upon locking a loan must provide a lock confirmation statement that includes a specified list of loan features. 
• CNLs that do not lock immediately must lock at the price the lender would quote on the same day on the identical transaction to the borrower’s twin requesting a price quote.
• CNLs that over-ride a price lock because a property appraisal alters the pricing must lower the price when the new appraisal calls for it.
• CNLs who are responsible for failure to close within the lock period will extend the period at no cost to the borrower.
• CNLs accept certified third party service providers listed on the site that have been selected by borrowers.
• CNLs will not give loan officers working with clients on the professor’s network discretion to adjust price, including lock fees

For more detail on CNL certification, see Why Shop Here: Certified Network Lenders..

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Generating Quality Rent to own homes Loan Prospects

The primary benefit of the CLN to participating lenders is that they receive quality loan prospects for which the rate of conversion into borrowers is high. The following features contribute to this:         

• Unqualified borrowers weed themselves out.
• Borrowers who contact lenders have been through a decision support process and know what they want.
• Borrowers are confident that the lender they select can’t give them a fast shuffle.
• Borrowers select a single lender.

A high conversion rate lowers lender origination costs, and because the CLN is competitive, the savings will be passed on to borrowers.

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​How Does a Rent to own homes Loan work?

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Negative amortization arises when the payment made by the borrower is less than the interest due and the difference is added to the loan balance. Negative Amortization and Related Concepts Ordinarily, the mortgage payment you make to the lender has two parts: interest due the lender for the month, and amortization of principal. Amortization means reduction in the loan balance the amount you still owe the lender. For example, the monthly mortgage payment on a level payment 30-year fixed-rate loan of $100,000 at 6% is $600. (For convenience, I am leaving out the pennies). In the first month, the interest due the lender is $500, which leaves $100 for amortization. The balance at the end of month one would be $99,900.

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Because a payment of $600 a month maintained over 30 years would just pay off the balance, assuming no change in the interest rate, it is said to be the fully amortizing payment. A payment greater than $600 would pay off the loan before 30 years. A payment less than $600 would leave a balance at the end of 30 years. 

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Suppose you made a payment of $550, for example. Then only $50 would be available to reduce the balance. Amortization would still occur, but it would be smaller and not sufficient to reduce the balance to zero over the term of the loan. $550 is a partially amortizing payment. Next, suppose you pay only $500. Since this just covers the interest, there would be no amortization, and the balance would remain at $100,000.

The monthly payment is interest-only. Back in the 1920s, interest-only loans usually ran for the term of the loan, so that the borrower owed as much at the end of the term as at the beginning. Unless the house was sold during the period, the borrower would have to refinance the loan at term. Today, some loans are interest-only for a period of years at the beginning, but then the payment is raised to the fully-amortizing level. For example, if the loan referred to above was interest-only for the first 5 years, at the end of that period the payment would be raised to $644. This is the fully-amortizing payment when there are only 25 years left to go. See Interest Only Mortgages.

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Finally, suppose that for some reason, your mortgage payment in the first month was only $400. Then there would be a shortfall in the interest payment, which would be added to the loan balance. At the end of month one you would owe $100,100. In effect, the lender has made an additional loan of $100, which is added to the amount you already owe. When the payment does not cover the interest, the resulting increase in the loan balance is negative amortization. Purposes of Negative Amortization

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Historically, the major purpose of negative amortization has been to reduce the mortgage payment at the beginning of the loan contract. It has been used for this purpose on both fixed-rate mortgages (FRMs) and adjustable rate mortgages (ARMs). A second purpose, applicable only to ARMs, has been to reduce the potential for payment shock a very large increase in the mortgage payment associated with an increase in the ARM interest rate.

The downside of negative amortization is that the payment must be increased later in the life of the mortgage. The larger the amount of negative amortization and the longer the period over which it occurs, the larger the increase in the payment that will be needed later on to fully amortize the loan.

Negative Amortization on Fixed-Rate Loans

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On fixed-rate loans, negative amortization is a tool for reducing the mortgage payment in the early years of a loan, at the cost of raising the payment later on. Instruments that incorporate this feature are called graduated payment mortgages or GPMs. See What Is a Graduated Payment Mortgage?

Negative Amortization and Payment Shock on Graduated Payment Adjustable Rate Mortgages

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In the high-interest rate environment of the early 80s, negative amortization on some adjustable rate mortgages (ARMs) served the same purpose as on GPMs allowing reduced payments in the early years of the loan. Payments in the early years of these "GPARMs" were deliberately set lower than the interest due the lender, resulting in negative amortization. As with GPMs, the amount of this negative amortization was known in advance.

If interest rates on GPARMs rose from their initial levels, however, it could result in additional negative amortization that was not known in advance. This in turn could result in payment shock. These instruments experienced default rates even higher than those on GPMs, and they soon stopped being offered in the marketplace.

In the late 90s, a new type of negative amortization ARM arose called an "option ARM" or "flexible payment ARM" because the borrower had a choice of making a fully-amortizing payment, an interest-only payment, or a "minimum" payment that did not cover the interest. I wrote a number of pieces about these mortgages in 2005 and 2006. See Option ARMs.

​Many wannabe house purchasers wonder whether or not they can afford the price quoted on the house they would like to buy. Or if they have not started their house shopping, they may be wondering what price range they should be exploring. 

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If you intend to buy with all cash, you can pretty much answer the affordability question on your own. But if you will need a mortgage, as most home buyers do, the decision is no longer yours alone. A lender is also involved, and behind the lender are multiple government agencies that set rules that the lenders are obliged to follow. These rules define the minimum document-able income and cash  borrowers must have, and the maximum debt payments they are allowed to have. In addition, when the purchaser’s down payment is less than 20% of the price, mortgage insurance is required at premiums set by private insurers or by FHA. 

To qualify for the mortgage required to execute a purchase, affordability must be calculated three times using three different rules. These are the "income rule", the "debt rule", and the "cash rule." The final affordability figure is the lowest of the three.

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The Income Rule: The income rule says that the borrower's monthly housing expense (MHE), which is the sum of the mortgage payment, property taxes and home-owner insurance premium, cannot exceed a percentage of the borrower's income specified by the lender. If this maximum is 28%, for example, and John Smith's income is $4000, MHE cannot exceed $1120. If property taxes and insurance are $261 and mortgage insurance is $103, the maximum mortgage payment is $756. At 4% and 30 years, this payment will support a loan of $158,353. Assuming a 5% down payment, this implies a sale price of $166, 687. This is the maximum sale price for Smith using the income rule.

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Note that the income used to qualify would-be purchasers today is not the income they believe they have but the income that they can document. The documentation rules today are much stricter than they were before the financial crisis.

The Debt Rule: The debt rule says that the borrower's total housing expense (THE), which is the sum of the MHE plus monthly payments on existing debt, cannot exceed a percentage of the borrower's income specified by the lender. If this maximum is 41%, for example, the THE for Smith cannot exceed $1640. If taxes, property insurance and mortgage insurance are $364, existing debt service of $240 raises the total to $608, reducing the maximum mortgage payment to $1032. At 4% and 30 years, this payment will support a loan of $216,164. Assuming a 5% down payment, this implies a sale price of $227,541. This is the maximum sale price for Smith using the debt rule.

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The Required Cash Rule: This rule says that the borrower must have cash sufficient to meet the down payment requirement plus other settlement costs. If Smith has $20,000 but must allocate $3,000 of that to points and $6,000 to other closing costs, the $11,000 left for down payment at 5% will support a price of $220,000. That is the maximum sale price using the cash rule.

Since the maximum sale price of $166,687 under the income rule is the lowest of the three affordability measures, it is the affordability estimate for Smith. Removing Constraints on Affordability: When the income rule sets the limit on the maximum sale price, the borrower is said to be income constrained. Affordability of an income constrained borrower can be raised by an increase in the maximum MHE ratio, or access to additional income sending a spouse out to work, for example.

When the debt rule sets the limit on the maximum sale price, the borrower is said to be debt constrained. The affordability of a debt constrained borrower (but not that of a cash constrained or income constrained borrower) can be increased by repaying debt. 

When the cash rule sets the limit on the maximum sale price, the borrower is said to be cash constrained. Affordability of a cash constrained borrower can be raised by a reduction in the down payment requirement, a reduction in settlement costs, or access to an additional source of down payment a parent, for example.  

Using an On-Line Calculator to Measure Affordability: On-line calculators that measure affordability use two approaches. One approach was used above to explain the three affordability rules. It begins with a potential purchaser whose finances are known, and calculates the maximum price under each of the three rules. The lowest of the three is the affordability estimate. 

The second approach begins with an assumed house price that the user wants to check. The calculator then shows:

• The minimum cash required for the down payment and closing costs.
• The minimum monthly income required for the mortgage payment, taxes, homeowners insurance and mortgage insurance.
• The maximum allowable non-mortgage debt payments. 

If the user can meet all three of these requirements, the assumed house price is affordable.

My calculator 5a, developed with Chuck Freedenberg, is unique in using both approaches. Users can pick the approach with which they feel most comfortable.