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If you are planning to buy a home, one of the most important issues to consider is how you will be financing the purchase. Real estate is not cheap. However, a house is an excellent long-term investment. The property should appreciate in value over time. Homeownership also comes with significant tax advantages compared to renting. And of course, it’s the American Dream to own a home.
The primary way most home buyers finance is through a mortgage loan. Mortgage loans are a specialized type of hard money loan offered by mortgage lenders. You will need to have a relatively solid financial situation to qualify for a home loan, and there are other important factors to understand. We will cover some of the “Mortgage Loans 101” basics in this article.
Mortgage Lender vs. Mortgage Broker
As a home buyer, you can opt to work directly with a mortgage lender or a mortgage broker. A lender is either a bank or a financing company that provides funding for the loan. A mortgage broker is a third-party entity who may work with multiple lenders. A mortgage broker can “shop around” on your behalf to find you a great loan, but the service may come with additional brokerage fees. Working with a direct mortgage lender may save you any brokerage fees. However, you could be limited by their selection of mortgage loan products.
Whether you work with your bank, a mortgage lender or mortgage broker, it’s important to find someone you trust to help you explore your home loan options and can offer different types of loans. You may qualify for a special loan program like an FHA loan, VA loan or USDA loan.
Conventional Mortgage Loans vs. FHA/VA/USDA Loans
A conventional mortgage loan is the industry standard. The loan amount you can qualify for will be subject to the current conforming loan limits (CLLs) and you will generally be required to pay at least 20% of the home’s purchase price as your cash down payment.
FHA loans are backed by the U.S. Federal Housing Administration and are designed to help first-time home buyers who might not be able to afford such a high down payment. You must meet certain qualification standards and will still be required to put down at least 3.5% of the purchase price. Be sure and ask your lender to see if you qualify for an FHA mortgage loan.
VA loans are backed by the U.S. Department of Veterans Affairs. They are available only to active military service members, military veterans and surviving military spouses. VA loans can be 100% financed, meaning you don’t have to apply any down payment. There will be specific qualification requirements depending on the loan and the lender.
USDA loans are backed by the U.S. Department of Agriculture. They are available to home buyers in rural areas who have a total household income less than the current requirements, which are updated each year. USDA mortgage loans also offer up to 100% financing with no down payment required. They aren’t available in all areas and not all lenders are USDA-certified, so make sure you talk with the right lender if you think you might qualify for this type of home loan.
If you pay less than 20% for your down payment, you will likely be subject to mortgage insurance payments. This is an additional fee collected by the lender to protect them in case you default on your payments. This fee will be part of your monthly mortgage payments until you have paid off 20% of the principal amount of the loan. The amount will vary depending on the type of loan. VA and USDA loans typically have lower PMI rates than FHA or conventional loans.
Mortgage Loan Qualification Requirements
The qualification requirements for mortgage loans will vary depending on the type of loan, the amount of the loan and the lender offering the loan. Here are the primary financial factors they will review:
Debt-to-Income Ratio (DTI)
The lender will calculate your DTI by adding up your total monthly household income and then dividing that by your current monthly debt payments (credit cards, car loans, student loans and other consumer debts). You generally need to have a DTI of less than 50%, though again the requirement may vary.
Your lender will run a credit check to determine your credit rating (aka FICO score). A low credit score might not prevent you from qualifying for a mortgage loan, but it may force you to pay a higher interest rate or put more money down.
Your job situation will have a significant impact on your ability to qualify for a mortgage loan. Lenders will typically want to see how long you have been at your current job and know that you are in a solid work situation. A strong employment history is definitely beneficial.
Even though some mortgage loan programs like FHA, USDA and VA allow you to put less than 20% down toward your home loan, you should aim to save up as much as you can for your down payment. The higher down payment you can make, the better your loan terms will be. You can qualify for a much lower interest rate, which then means lower monthly mortgage payments. You can also avoid mortgage insurance if you pay at least 20% of the home’s purchase price.
Explore Your Mortgage Loan Options
These are some of the basic issues you need to understand if you are applying for a mortgage loan. It’s always best to talk to a lender and see what options may be available to you. It is also highly recommended that you get pre-approved for your home loan before you start searching for a house. The pre-approval process will let you know what you can truly afford and will also make your purchase offers much more appealing to sellers. In addition, pre-approval should help make the final closing (and final loan approval) process go smoother.
If you have mortgage loan questions and want to see what mortgage loans might be available to you as a home buyer, contact Moreira Team | MortgageRight today. Let us help you buy a home and find the loan program that’s right for you.