Are you ready to be a homeowner and considering getting a mortgage loan? There are many different loan programs and variations available, from low and no down payment options to jumbo loans for your vacation home.
A knowledgable and experienced mortgage banker will be able to walk you through the different programs available to you and help you find the best program for your financial needs. Your lender will consider a few factors to determine the loan programs you may qualify for.
What factors will your lender consider?
When you apply for a mortgage loan, your lender will look at a few things: your credit history, which is broken down on your credit report and translated into your credit score, your debt-to-income ratio (DTI), which covers your income and current debts, and your funds for a down payment and assets.
Generally, your FICO credit score will be a number between 300 and 850. The higher your credit score, the better. Your score is calculated using your payment history, outstanding balances, length of credit history, number of credit inquiries, and types of credit history (student loans, credit cards, etc.). Your lender evaluates your credit history and score to determine how risky it is to lend to you.
A mortgage lender will also look at your debt-to-income ratio to determine your ability to repay your loan. DTI compares your income with the monthly debt payments you already have, like car loans, student loans, and credit card debt.
To calculate your DTI, divide your total monthly debt by your gross monthly income (income before taxes are taken out) and multiple it by 100. This percentage is your DTI.
You’ll also discuss with your lender how much of a down payment you are comfortable making. Your available assets and funds for a down payment will affect what loan programs you may qualify for.
Mortgage Loan Options
Each loan program offers different options for down payments, with loan features for borrowers in all different financial situations. Depending on the loan program you choose, you’ll have to decide on loan terms, or how long your loan will last, and features of your loan.
Every loan program has different specifications for loan amortization, or life of your loan. Some common options are 30-year loans, 20-year loans, and 15-year loans. For example, with a 30-year loan, if you make your payments on time, you will have paid back the full loan amount (plus interest) in 30 years.
Fixed-rate vs. adjustable rate mortgage loans
There are two options when it comes to choosing your loan interest rate: a fixed-rate mortgage or an adjustable-rate mortgage (ARM). Some loan options are only available as fixed-rate loans, so talk with your lender about what is right for you.
A fixed-rate mortgage loan is exactly what it sounds like — the interest rate on your loan you start with will remain the same throughout the life of your loan, unless you refinance down the road.
On the other hand, an ARM’s interest rate will fluctuate throughout the life of your loan. In general, ARMs have a fixed initial interest rate period, during which, the interest rate remains the same. After the fixed initial interest rate period, the interest rate will change. A common ARM structure is the 5/1 ARM, where the fixed initial interest rate period is 5 years, and after that, the interest rate changes annually.
Conforming vs. Non-conforming mortgage loans
Conforming versus non-conforming has to do with the amount of your home loan and the borrower guidelines for that loan.
A conforming loan is any loan that “conforms” to government-sponsored enterprise (GSE) guidelines. These guidelines are set every year by Fannie Mae and Freddie Mac. For 2017, the base conforming loan limit is $424,100. However, conforming loan limits can be higher in certain areas, for example the loan limit is $636,150 in San Francisco. A conforming loan offers lower interest rates to borrowers with excellent credit.
A non-conforming loan is a loan that can’t be purchased by a GSE, and therefore, has different guidelines when it comes to borrower requirements. Additionally, these loans exceed the conforming loan limit of $424,100. Non-conforming loans are generally for borrowers with higher incomes, good credit, and strong assets. Because of the increased loan amount, these loans often have stricter underwriting requirements and may require a higher down payment.
Mortgage Loan Programs
Based on the personal financial information you provide to your lender, your mortgage banker will walk you through the loan programs you qualify for. Each loan program has a minimum qualifying credit score and DTI ratio, along with a few other factors.
A conventional loan is a conforming loan that generally requires a 20% down payment if you want to avoid paying private mortgage insurance (PMI). Over the years, however, loan requirements for conventional loans have gotten less strict in order to cater to the increased numbers of younger generations buying homes.
Conventional Loan Highlights:
- Minimum credit score: 620
- Down payment options as low as 3%
- Loan limit: $424,100 (may be higher for certain areas)
- Fixed-rate or ARM options
The 97% LTV conventional loan is a popular mortgage option offered by Fannie Mae, that offers a 3% down payment for borrowers who are eligible. This option may seem appealing — a conventional loan with only 3% down instead of 20%? This loan requires that one or more of the borrowers be a first-time home buyer, which means they haven’t owned property in the last 3 years.
It’s important to note that a government insured loan is different from a conforming loan. We discussed earlier that a conforming loan means the loan follows borrower guidelines (like minimum credit score and DTI ratio) set by GSEs. However, government loans are insured by the U.S. government, meaning that the government takes responsibility for these loans incase you become unable to make your mortgage payments. Government loans have their own sets of borrower requirements, specific to each loan product.
FHA (Federal Housing Administration) loans are a common government assisted loan program. FHA loans feature a small down payment option, 3.5%, which make them very popular among borrowers who qualify. With an FHA loan, depending on your credit score, your down payment can be a gift or loan from an eligible source, like a family member.
FHA loan highlights:
- Minimum credit score: 620 (580 at Atlantic Bay Mortgage Group®)
- Only 3.5% down payment required
- Fixed-rate and adjustable-rate options available
- Sellers may pay up to 6% of the sales price to be put toward closing costs, prepaids, buy downs, abatements, etc.
The FHA also offers an FHA 230(k) loan option, which provides funding to rebuild or purchase a home that will need some repairs and updates. For example, if you find a fixer-upper in your ideal neighborhood, in a good school district, with a big back yard for your dog, but the kitchen needs to be updated and the bathrooms need repairs, an FHA 203(K) loan could be the right product for you.
VA loans are issued and insured by the U.S. Department of Veterans Affairs, and are available to active duty and retired service members, reservists, and surviving spouses. For those who qualify, VA loans are a great option, with 0% down payment options and favorable loan terms.
VA Loan Highlights:
- Minimum credit score: 620 (580 at Atlantic Bay Mortgage Group®)
- 0% down payment requirement
- No private mortgage insurance requirement
There are other, less common, government loan programs available. USDA loans, for example, are insured by the U.S. Department of Agriculture, and offer a 0% down payment option for borrowers whose properties meet USDA standards. Additionally, many states and local governments offer grants and special programs for homebuyers.
First-time homebuyer loan programs help borrowers achieve their goals of home ownership through both government assisted programs and conventional programs. A borrower is considered a first-time homebuyer if they have not owned any property in the last three years. Both federal and local governments have special programs for first time borrowers, which typically feature down payment assistance, no down payment options, and lower interest rates. These programs have strict requirements and restrictions for borrowers, however, and not everyone will qualify.
Jumbo loans are non-conforming loans because they exceed the base conforming loan limit of $424,100. Because homebuyers who get jumbo loans are borrowing more money, these loans tend to have stricter borrower guidelines and a higher down payment requirement.
Jumbo loan requirements can vary from lender to lender, and are different for different jumbo loan products.
Jumbo Loan Highlights:
- Credit scores range from 680-760
- Down payment requirements range from 5% to 15%
- Fixed-rate and adjustable-rate options
We understand that getting a home loan can seem overwhelming, with all the different features and products, but don’t be discouraged. Now that you know the basics, you’re ready to move forward on your homeownership journey. Remember, it’s OK to have questions along the way. Your mortgage lender is there to answer questions and be your guide through the mortgage industry.