Home Loan Information
Obtain the Best Rates & Lowest Closing Costs
When you’re ready to purchase a home, it’s clearly important to negotiate from the strongest possible position. In a strong real estate market, it’s not uncommon for buyers to have to compete for the home they want which gives the seller the ability to be selective regarding which buyer they choose to negotiate with. It’s important, then, that you leverage your own advantages to ensure your offer is the one the Seller accepts.
The vast majority of Buyers put themselves at an overwhelming disadvantage by approaching the process entirely wrong.
If you take a look at the process from the Seller’s perspective, the point becomes clear. If you were selling your home and were faced with multiple offers, clearly you would favor the offer which had a Certificate showing Financing Approval over other offers which were Conditional on Financing. In the first case, there’s certainty that the buyer has the resources to buy. In the second case there’s not. Looked at this way, it’s difficult to understand why so many buyers fail to start looking for financing until after they’ve found a home. Regardless of whether most people will eventually be approved, the timing of having a Certificate of Financing Approval matters. Having this document when you make your offer gives the Seller permission to accept your offer immediately over others who don’t have this certain approval.But there are cost advantages for you as a Buyer as well, because starting the process early means you can get a firm grasp on interest rate and closing costs and avoid putting yourself under any time constraints that may force you to overpay.
There are three basic types of Home Loans: FHA, VA, and Conventional Loans.
What is an FHA loan?
An FHA loan is the easiest type of real estate mortgage loan to qualify for because it requires a low down payment and you can have less-than-perfect credit. Also, because FHA insures your mortgage, lenders are more willing to provide loans. Another advantage of an FHA loan is it’s assumable, which means if you want to sell your home, the buyer can “assume” the loan you have. FHA loans can be used for a home purchase or a refinance.
- You must have steady employment history, or worked for the same employer for the last two years.
- Must have valid Social Security number, lawful residency in the U.S., and be of legal age to sign a mortgage in your state.
- Must make a minimum down payment of 3.5% on the house, or 10% down if your credit score is between 500 and 579. The money can be gifted by a family member (conventional financing does not allow gifting).
- Must have a property appraisal from an FHA-approved appraiser.
- Mortgage payment (including principal, interest, property taxes, property insurance) needs to be less than 31% of your gross monthly income.
- Monthly debt (mortgage, credit cards, auto, student loans, etc.) cannot be more than 43% of your monthly income.
- Must have a minimum credit score of 500. A credit score of 640 and above requires a 3.5% down payment and a credit score of 500-579 requires a 10% down payment. FHA-qualified lenders will use a case-by-case basis to determine an applicants’ credit worthiness.
- Must be two years out of bankruptcy, with good credit.
- Must be three years out of foreclosure, with good credit.
What is a VA loan?
VA loans are home loans available to consumers who have served or are presently serving in the U.S. military for purchase of a primary residence. While the Veterans Administration (VA) does not lend money for VA loans, it backs loans made by private lenders (banks, savings & loans, or mortgage companies) to veterans who qualify.
- No down payment required (unless required by the lender or the purchase price is more than the reasonable value of the property).
- Buyer informed of reasonable value.
- Negotiable interest rate.
- Ability to finance the VA funding fee (plus reduced funding fees with a down payment of at least 5% and exemption for veterans receiving VA compensation).
- Closing costs are comparable with other financing types (and may be lower).
- No mortgage insurance premiums.
- An assumable mortgage.
- Right to prepay without penalty.
- For homes inspected by VA during construction, a warranty from builder and assistance from VA to obtain cooperation of builder.
- VA assistance to veteran borrowers in default due to temporary financial difficulty.
What is a Conventional Loan?
By definition, a conventional loan is any mortgage that is not guaranteed or insured by the federal government. A conventional loan is generally referring to a mortgage loan that follows the guidelines of government sponsored enterprises (GSE’s) like Fannie Mae or Freddie Mac. Conventional loans may be either “conforming” or “non-conforming”. Conforming loans follow the terms and conditions set by Fannie Mae and Freddie Mac. Nonconforming loans don’t meet Fannie Mae or Freddie Mac guidelines, but they are also considered conventional.
- Your income and your monthly expenses. Standard debt-to-income ratios are 28/36 for Conventional Loans. These ratios may be exceeded with compensation factors.
- Your credit history (this is important, but Conventional’s credit standards are flexible). A FICO score of 620 or above is very helpful in obtaining an approval.
- Your overall pattern rather than to individual problems you may have had.