Buying a home can be a challenging process, yet is one that ultimately pays off when you move into a place you can truly call your own. But knowing which type of home loan you not only need but also can afford is part of the challenge.
Still, it helps to know something about the types of loans available to most homebuyers. A little education can go a long way when deciding which type of loan will work for you now and in the future.
In case you hadn’t heard, the era of 20 percent down payments to get a loan is long gone. In many cases, as little as 5 percent might do the trick. So buying a home these days might not be as scary as you thought.
We spoke to Danny Valentini, Regional Mortgage Manager for HomeServices Lending, to learn about the loan types you’re likely to encounter as you embark on the quest to #FindYourPerfect financing. We had some questions for Danny about loans, and some term associated with the homebuying process:
Mortgage bankers, banks, and mortgage brokers all sell into FHA, Fannie Mae, Freddie Mac, and VA. They are agencies that purchase from, guarantee, or insure lenders to encourage homeownership in the United States. There are many benefits for homebuyers, but one key benefit these agencies offer is the opportunity to purchase a home with less than 20 percent down. All legal residents of the United States are eligible to qualify. Only U.S. military veterans are eligible to apply for VA loans, which offer a minimum of zero down within certain loan amounts. These agency loans meet most of all borrowers’ needs within “conforming” loan balances under $453,150.A “conforming” loan is a mortgage loan that conforms to Fannie Mae and Freddie Mac guidelines. Click To Tweet
A “conforming” loan is a mortgage loan that conforms to Fannie Mae and Freddie Mac guidelines. The most well-known guideline is the size of the loan, which as of 2018 is generally limited to $453,100 for single-family homes in the continental U.S. Some high-cost areas allow statutory “high balance” loans that vary from county to county. In Los Angeles and Orange counties, high-balance loan limits are $679,650, and in San Diego County it is $649,750. Loans that are greater than the conforming limits typically require loan-to-values of 80 percent, or 20 percent down.
Your debt-to-income ratio or DTI is just one factor that measures your “ability to repay” your mortgage by calculating your overall debt against your overall income. It is calculated by dividing all your monthly debt payments by your gross monthly income.
All four entities (Fannie Mae, Freddie Mac, VA, and FHA) allow approvals with debt-to-income ratios up to 49 percent, depending on several compensating factors. To calculate your debt-to-income ratio, lenders add up all your monthly debt payments and divide them by your gross monthly income, which is generally the amount of money you have earned before your taxes and other deductions are taken out.
Mortgage insurance is an insurance policy that compensates lenders or investors for losses due to the default of a mortgage loan when the down payment is less than 20 percent. It does add cost to the loan and monthly payment, but it also allows a borrower to put less money down.
There is no shortage of loan programs for self-employed borrowers. The rules for qualifying are the same as for non-self-employed borrowers. The criteria or requirement are the same: Does the borrower have the “ability to repay” the mortgage? There are also a few unique niche programs that cater to those borrowers who may not want to submit their tax returns.There is no shortage of loan programs for self-employed borrowers. Click To Tweet
Yes. Again, does the borrower have the “ability to repay” the mortgage(s)? There are loan programs that make it easier to “eliminate” the departing-residence payment. Options range from legitimately renting the departing residence to cross-collateralizing both properties. Programs like these can help those who want to purchase their new home before selling their existing home.
Unfortunately, the Consumer Financial Protection Bureau has not defined what a prequalification or a preapproval is. Regardless of what we call it, it is important that a loan officer complete a detailed analysis of all the factors that can determine if a borrower has the “ability to repay” the mortgage. Some of the documentation the loan officer needs to do an analysis include, but are not limited to, reviewing your income documentation, asset statements, and credit.