LOANS 101

Topics Covered

What Is An APR?

Can I Improve My Credit? Fast?

What Is PMI?

What Is An 80-10-10 Loan?

What Is A State Income Loan?

What's The Deal With Gift Loans?

The Difference Between a Conventional vs. Jumbo Loan?

Types Of Loans

FHA/VA Loans

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What Is an APR?

The APR reflects the yearly cost of a mortgage, including points and fees. It helps borrowers compare loans on equal footing. It does not affect your monthly payment, which is based only on the interest rate and loan term.

Fees included in APR:

- Discount and origination points

- Pre‑paid interest

- Loan‑processing fee

- Underwriting fee

- Document‑prep fee

- PMI

- Escrow fee

Fees not included in APR:

- Title or abstract fee

- Borrower attorney fee

- Home inspection

- Recording fee

- Transfer taxes

- Credit report

- Appraisal fee

Hand reaching towards floating percentage symbols.

CAN I IMPROVE MY CREDIT.. FAST?

Yes... And No.

FICO scoring models generally evaluate the following types of information in your credit report:

• Have you paid your bills on time? Payment history typically is a significant factor. It is likely that your score will be affected negatively if you have paid bills late, had an account referred to collections, or declared bankruptcy, if that history is reflected on your credit report.

• What is your outstanding debt? Many scoring models evaluate the amount of debt you have compared to your credit limits. If the amount you owe is close to your credit limit, that is likely to have a negative effect on your score.

• How long is your credit history? Generally, models consider the length of your credit track record. An insufficient credit history may have an effect on your score, but that can be offset by other factors, such as timely payments and low balances.

• Have you applied for new credit recently? Many scoring models consider whether you have applied for credit recently by looking at "inquiries" on your credit report when you apply for credit. If you have applied for too many new accounts recently, that may negatively affect your score. However, not all inquiries are counted. Inquiries by creditors who are monitoring your account or looking at credit reports to make "prescreened" credit offers are not counted.

• How many and what types of credit accounts do you have? Although it is generally good to have established credit accounts, too many credit card accounts may have a negative effect on your score. In addition, many models consider the type of credit accounts you have. For example, under some scoring models, loans from finance companies may negatively affect your credit score. Scoring models may be based on more than just information in your credit report. For example, the model may consider information from your credit application as well: your job or occupation, length of employment, or whether you own a home. To improve your credit score under most models, concentrate on paying your bills on time, paying down outstanding balances, and not taking on new debt. It's likely to take some time to improve your score significantly

WHAT IS PMI? (Private Mortgage Insurance)

On a conventional mortgage, when your down payment is less than 20% of the purchase price of the home mortgage lenders usually require you get Private Mortgage Insurance (PMI) to protect them in case you default on your mortgage. Sometimes you may need to pay up to 1-year's worth of PMI premiums at closing which can cost several hundred dollars. The best way to avoid this extra expense is to make a 20% down payment, or ask about other loan program options..

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WHAT IS PMI? (Private Mortgage Insurance)

WHAT IS 80-10-10 FINANCING?

Surprising as it may seem, some folks with hefty incomes find that it’s mighty tough for them to save enough money to make a 20% cash down payment on their dream homes. Using conventional financing, such buyers must purchase Private Mortgage Insurance (PMI) which increases the cost of home ownership and, ironically, makes it even more difficult to qualify for the mortgage.

However, if you’re a dues-paying member of the cash-challenged class, don’t despair. Given that your income is sufficiently high, it’s eminently possible to avoid getting stuck with PMI. That is why 80-10-10 financing was invented. It is called 80-10-10 because a savings and loan association, bank, or other institutional lender provides a traditional 80% first mortgage, you get a 10% second mortgage, and make a cash down payment equal to 10% of the home’s purchase price.

By using this method, you are no longer obligated to take out PMI on your property. The same principle applies if you can only afford to make a 5% down, 80-15-5 financing is also available. However, because a smaller cash down payment increases the lender’s risk of default, do not be surprised when you are asked to pay higher loan fees and a higher mortgage interest rate for 80-15-5 than you pay for 80-10-10.

WHAT IS A STATED INCOME LOAN?

A stated‑income loan lets borrowers qualify without traditional income documents, relying instead on credit strength, assets, and overall financial stability. Lenders use stated earnings alongside bank statements and down payment size to judge whether the borrower can realistically handle the mortgage. These loans usually carry higher rates and larger required reserves because the lender is taking on more risk by not verifying income through tax returns.

WHAT'S THE DEAL WITH GIFT FUNDS?

Lenders expect borrowers to come up with sufficient cash for the down payment and other fees payable by the borrower at the time of funding the loan. Generally, down payment requirements are made with funds the borrowers have saved. If a borrower does not have the required down payment they may receive “gift funds” from an acceptable donor with a signed letter stating that the gifted funds do not have to be paid back.

WHAT IS THE DIFFERENCE BETWEEN A CONVENTIONAL VS. JUMBO MORTGAGE?

A jumbo mortgage is a home loan exceeding conventional conforming limits, requiring stronger credit, larger down payments, and stricter underwriting.

Conventional mortgages follow standard lending guidelines, offer lower rates, and allow smaller down payments because they meet government‑sponsored enterprise requirements.

Borrowers choose jumbo loans for higher‑priced homes, while conventional loans suit typical purchases with easier qualification and flexible financing options.

In California for 2026, the baseline conforming loan limit is $832,750, while high‑cost counties like Los Angeles and Orange allow limits up to $1,249,125, and any loan above these amounts is considered jumbo

Types Of Loans

CONVENTIONAL LOAN

Conventional loans require 5-20% down and can be for homes priced higher than FHA loans allow.

“Conventional mortgage” or “conventional loan” is a term you're bound to encounter when you're shopping for a mortgage. Conventional loans are often the best option for borrowers with strong credit who can contribute a down payment of at least 3%, or perhaps quite a bit more. Find out what conventional means in the mortgage industry, and whether it might be the right type of home loan for you.

ADJUSTABLE RATE MORTGAGE (ARM)

Adjustable Rate Mortgages (ARM)s are loans whose interest rate can vary during the loan's term. These loans usually have a fixed interest rate for an initial period of time and then can adjust based on current market conditions. The initial rate on an ARM is lower than on a fixed rate mortgage which allows you to afford and hence purchase a more expensive home. Adjustable rate mortgages are usually amortized over a period of 30 years with the initial rate being fixed for anywhere from 1 month to 10 years.

Ready to take a DEEP DIVE into the way ARM rates are calculated and how they affect you?

CONVERSIONS

Some ARM loans have a conversion feature that would allow you to convert the loan from an adjustable rate to a fixed rate. There is a minimal charge to convert; however, the conversion rate is usually slightly higher than the market rate that the lender could provide you at that time by refinancing.

CAPS ON ARM'S

When the time comes for the ARM to adjust, the margin will be added to the index and typically rounded to the nearest 1/8 of one percent to arrive at the new interest rate. That rate will then be fixed for the next adjustment period. This adjustment can occur every year, but there are factors limiting how much the rates can adjust. These factors are called "caps". Suppose you had a "3/1 ARM" with an initial cap of 2%, a lifetime cap of 6%, and initial interest rate of 6.25%. The highest rate you could have in the fourth year would be 8.25%, and the highest rate you could have during the life of the loan would be 12.25%.

HYBRID ARM'S

Hybrid ARM mortgages, also called fixed-period ARMs, combine features of both fixed-rate and adjustable-rate mortgages. A hybrid loan starts out with an interest rate that is fixed for a period of years (usually 3, 5, 7 or 10). Then, the loan converts to an ARM for a set number of years. An example would be a 30-year hybrid with a fixed rate for seven years and an adjustable rate for 23 years.

The beauty of a fixed-period ARM is that the initial interest rate for the fixed period of the loan is lower than the rate would be on a mortgage that's fixed for 30 years, sometimes significantly. Hence you can enjoy a lower rate while having period of stability for your payments. A typical one-year ARM on the other hand, goes to a new rate every year, starting 12 months after the loan is taken out. So while the starting rate on ARMs is considerably lower than on a standard mortgage, they carry the risk of future hikes.

INTEREST ONLY LOAN

Conventional loans require 5-20% down and can be for homes priced higher than FHA loans allow. In an interest only loan, you'll see somewhat lower monthly fees for a short span of time before the interest amounts are added to the loan. This allows borrowers a chance to secure a loan when they anticipate an upcoming salary raise or additional income source that will make the higher payments manageable. While making interest-only payments, principal is not reduced.

BRIDGE LOAN

A bridge loan is a short-term loan used until a person secures permanent financing. Bridge financing can be a real path for a homeowner to buy and not have their home currently listed. Many feel that they will sell their current home quickly but will have trouble getting under contract with the new residence. Hesitation in listing with you? This can be the answer!

CASH-OUT REFI LOAN

A cash-out refinance replaces your current mortgage with another loan that pays off your current mortgage balance and allows you to use the equity in your home to provide additional funds for other purposes. Depending on the circumstances, this can be a valuable alternative to a home equity loan.

For example, say you have $60,000 left in your mortgage and your payment history is in great shape. You decide you want another $20,000 to add a small room to your home, but you don’t know where you’re going to get the money. With a cash-out refinance you can refinance your mortgage for $80,000 to get the better rate for your $60,000 balance AND an extra $20,000 for the new room.

BANK STATEMENT LOAN

A Bank Statement loan is for someone who is self-employed. Typically this borrower has a lot of tax deductions and writes off a lot of expenses therefore on paper, the net income is too low to be used for a conventional loan program. Here at TLS, we verify your income or cash-flow by asking for 12 months of personal bank statements or 24 months of business bank statements to calculate what your monthly deposits are. We use the bank statements to calculate the average so that number can be used for your monthly income.

FHA LOANS:

WHAT IS AN FHA STREAMLINE REFINANCE LOAN?

The FHA Streamline Refinance program gets its name because it allows borrowers to refinance an existing FHA loan to a lower rate more quickly. Avoiding a lot of paperwork, and often without an appraisal, the Streamline option saves borrowers time and money. You can reduce the interest rate on your current mortgage without a full credit check, yet you need to have paid your mortgage on time over the last 12 months. There is no requirement for income verification either.

FHA Streamline Home Loan Refinance: The FHA Streamline program is fantastic and if you have an FHA loan and plan on refinancing into one this loan program is definitely for you. Keep in mind:

You must currently have an FHA loan attached to your home
It must be at least 201 days since you last closed your current FHA mortgage
Interest rates must be lower
You must be current on your mortgage payments
You need a 620 or higher credit score

Here Are The Main Highlights:

No Credit Check
No Income Verification
No home Appraisal
No LTV limitations since you don’t need an appraisal
Lower your interest rate

As you can see this is a great program and it’s only available to those who currently have an FHA loan.

WHAT IS AN FHA CASH-OUT LOAN?
The FHA cash-out refinance option allows homeowners to pay off their existing mortgage, and create a larger home loan that provides them with extra cash. The amount of money that can be borrowed depends on the amount of equity that's been built up in the home's value.

To be eligible for an FHA cash-out refinance, borrowers will need at least 20 percent equity in the property based on a new appraisal. Equity is the difference between the current value of a property and the amount owed on the mortgage.

WHAT IS AN FHA 203k LOAN?

FHA's Limited 203(k) program permits homebuyers and homeowners to finance up to $35,000 into their mortgage to repair, improve, or upgrade their home.

Homebuyers and homeowners can quickly and easily tap into cash to pay for property repairs or improvements, such as those identified by a home inspector or an FHA appraiser. Homeowners can make property repairs, improvements, or prepare their home for sale. Homebuyers can make their new home move-in ready by remodeling the kitchen, painting the interior or purchasing new carpet.

VA LOANS:

WHAT IS A VA STREAMLINE LOAN?

Often called a “streamline” refinance, an IRRRL may help you to: Lower your monthly mortgage payment by getting you a lower interest rate, or Make your monthly payments more stable by moving from a loan with an adjustable or variable interest rate (an interest rate that changes over time) to one that’s fixed (the same interest rate over the life of the loan) On a no-down-payment loan, you can borrow up to the Fannie Mae/Freddie Mac conforming loan limit in most areas—and more in some high-cost counties. You can borrow more than this amount if you want to make a down payment.

WHAT IS A VA CASH-OUT LOAN?
A VA-backed cash-out refinance loan lets you replace your current loan with a new one under different terms. If you want to take cash out of your home equity or refinance a non-VA loan into a VA-backed loan, a VA-backed cash-out refinance loan may be right for you. Find out if you’re eligible—and how to apply for your Certificate of Eligibility.

How To Start Your Mortgage Search

Each home loan program has unique benefits that cater to a certain type of buyer. Your goal should be to find the one that matches your ‘wants’ and your ‘needs.’

Here are a few questions you should be asking yourself as you explore the different loan types:

• Which loan has the lowest monthly payment?

• What option requires the least amount upfront?

• What option will cost me less over time?

• Which loan type is suitable for my credit score?

• How does my income affect the products for which I’m eligible?

• What’s my price range for home buying?

• How long do I plan to stay in the home?

Your answers to these questions will help you evaluate

the different types of mortgages below and

think about which one(s) could be best for your situation.