Financing Options and Programs
There is so much to know when considering a mortgage. Which loan type is best? How long should I finance my home for? Do I even qualify?? How much are closing cost and down payment, and is there a program that can help me pay for down payments and closing cost?
Lending Criteria - The most basic criteria for all major loan types are the same.
- Credit Scores - Scores from all three credit bureau's (Experian, Equifax, and Transunion) are pulled, and the middle score is used. That means if Experian shows a score of 650, Equifax shows 620, and Transunion shows 700 - the middle score (650) is used. Also note: you can not have any disputed credit lines on your report.
- Debt-to-Income Ratio- This takes into account how much debt you owe (calculated on a monthly basis and including the mortgage note for which you are applying) as a percentage of the income that you make. Let's use easy numbers for an example:
Gross earnings (amount earned before employer takes taxes out) = $10,000/month
Monthly Debt payments: $500 car payment, plus $50 minimum credit card payment, plus $250 student loan, plus $500 furniture payment,
plus $2500 for the new mortgage payment you are applying to buy = $3800 a month in monthly debt
So $3800 divided by $10,000 = 38% DTI Ratio
3. Employment History- As a minimum, you need to show 30 days on your current job. There are other qualifying factors to be able to use overtime income as part of your income.
Loan Types Explained
There are many different types of financing available. This page will discuss the 3 main types, and how the lending criteria above is considered in each.
FHA Loans: is a government-backed mortgage insured by the Federal Housing Administration, or FHA. The perks of doing an FHA loan is reduced downpayment amount and lower credit score flexability.
- Down payment for credit scores of 580 or higher is 3.5% of the sales price (so for example: a sales price of $100,000 the down payment would be $3,500). FHA will also allow for down payment money to come from a verified gift from a relative or government program.
- For credit score of 500-579, FHA will require a 10% down payment
- Steady employment history or 2 years work experience with the same employer.
- Income is verifiable through pay stubs, federal tax returns, and bank statements.
- Property must be being purchased for you to live in as your primary residence
- Property must be appraised by an FHA approved appraisal and meet FHA living requirements and value must be at or more than the sales price
- Your debt to income ratio (mortgage, plus all monthly debt payments) should not exceed 43% of your gross monthly income. Some lenders have different requirements, and some lenders may allow a ratio up to 50% in some cases.
- For any bankruptcy, you must wait 2 years to apply. For any previous foreclosure, you must wait 3 years to apply. In the interim, you must also have re-established a positive credit history. Lenders may make exceptions on waiting periods for borrowers with extenuating circumstances.
- FHA will charge a Private Mortgage Insurance as well that will be stay in effect for the life of the loan. Those premiums vary per applicant.
- Loan Limit is $331,200 in both Harris and Chambers County.
Conventional Home Loans - is a loan that is not backed by any Governmental entity, but by private insurance agencies. Conforming conventional loans will still meet the lending requirements of Fannie Mae and Freddie Mac, the two largest buyers of mortgage loans in the US.
- Minimum credit score is between 620-640. The higher the score the better.
- As opposed to FHA, conventional home loans can be used to purchase your primary property, or vacation, rental, or secondary home.
- Conventional loans can be used for single family residence as well as multi-family (duplex, condo, or townhouse)
- DTI should be around 43%, and income is determined by recent check stub, W2, and tax transcripts. We are starting to see stated income and check stub only income requirement again.
- Private mortgage insurance is needed if down payment is less than 20%. If you borrow more than 80% of the value, the private mortgage insurance requirement will fall off after 78% LTV is reached, which will reduce your payment.
- Common loan lengths are 15, 20, 25, and 30 years
- Down payments can be as a little as 3% (for those qualified), and go up to go 20%. Typical down payments are 5% or 10%.
- Interest rates can be fixed or adjustable
- Loan limit is $484,350
VA Home Loans - allow for our very beloved veterans to buy a home with 0% down payment, and 0 Private mortgage insurance. While a veteran must still qualify for the mortgage, the qualifications for the VA benefits are providing satisfactory credit, sufficient income, and a valid Certificate of Eligibility (COE) to be eligible for a VA-guaranteed home loan. The home must be for your own personal occupancy. The eligibility requirements to obtain a COE are listed below for Servicemembers and Veterans, spouses, and other eligible beneficiaries.
VA home loans can be used to:
- Buy a home, a condominium unit in a VA-approved project
- Build a home
- To refinance an existing VA-guaranteed or direct loan for the purpose of a lower interest rate
- To refinance an existing mortgage loan or other indebtedness secured by a lien of record on a residence owned and occupied by the veteran as a home
The VA does not provide the loan, they only guarantee it to the lender. The lender will still have their own set of guidelines such as:
- typically around a 620 or greater score
- DTI ratio around 41%
- Property must meet minimal standards as set forth by VA appraisal
- Steady employment for 2 years (doesn't have to be with the same employer)
- Loan limits are $484,350 and there is a VA funding fee of 0 to 3.3% of the loan amount is paid to the VA which may also be financed into the loan.
You will need the following paperwork to apply:
- Copies of your W2 statements for the past two years, so your gross household income can be confirmed,
- Copies of your previous two pay stubs,
- Documentation of other assets (checking accounts, savings accounts, financial investments, trust funds, etc.),
- If self-employed, two years of consecutive tax returns will be required.
- The Veteran also needs to supply their DD 214 or Certificate of Guarantee