Lending is a lot tighter than it used to be. During the height of the housing bubble mortgage loans were large and plentiful, but the new lending market is a lot more discerning. Don’t let that scare you, though. Part of the description of the lending market as tough is in comparison to how very lax it once was, and with loan rates at record super-lows, even the less than great rates are quite a lot better than the high-tide rates of old. Potential homeowners can get great loans, and it isn’t as strict or difficult as you might think.
Choosing a Loan Type
There are a lot of loan products out there, so do some research into what type of loan will be best fit for you. The 30 year fixed mortgage loan is a hallmark of the American mortgage industry, but some borrowers are finding that 15 year loans, adjustable rate loans, and other loan options are better suited to their needs.
For financing, there are three main financing options: Conventional, FHA, and VA. A conventional loan is between you and the lender. Most lenders will require a 20% down payment for optimal rates. Otherwise, the loan may be approved with a mortgage insurance (MI) policy requirement, which will raise the monthly payment (most lenders will allow borrowers to drop mortgage insurance once the loan’s value drops below 80% of the total home value). Lenders may have their own additional requirements and charge fees for loan origination and closing. Conventional loans rely heavily on the borrower’s credit, so the best rates are reserved for borrowers with optimal credit scores.
FHA loans are backed by a government program through the Federal Housing Authority, a part of the Department of Housing and Urban Development (HUD). FHA loans require a minimum 3.5% down payment and low closing costs, but require mortgage insurance with an upfront MI payment into escrow (this can be rolled into the total loan). FHA uses the borrower’s credit to determine rates, but many borrowers with average or even less than good credit may still be qualified under the FHA, even those with high debt-to-income rates. The FHA does however have certain standards for health and safety that may disqualify some home options. These requirements are very specific, and the borrower may be forced to require the seller to make certain repairs in order to purchase a property. For many borrowers, the low down payments, low closing costs, and credit flexibility are worth the extra requirements associated with an FHA loan. Additionally, the FHA does offer a renovation loan that allows buyers to shop fixer-uppers without the health and safety requirements. Not only that, this loan type lets buyers take out an up-front construction loan to conduct repairs and then roll the construction loan into the total mortgage. The FHA does monitor repairs, however, and requires they be completed by an approved licensed contractor.
For honorably discharged veterans and military service members (a certificate of eligibility form 26-1880 is required), the VA will act as a loan financer to guarantee a VA loan, acting in place of mortgage insurance. A VA loan’s biggest benefit to buyers is its lack of any down payment requirement, through having a down payment can greatly reduce the monthly payment (and funding fee, see below). VA loans allow borrowers to roll most fees into their loan total, significantly reducing the amount of ready cash a borrower needs to buy a home. Some borrowers, particularly those applying for their second VA loan, may be charged up to a 3.3% funding fee, however this fee is waived (and can be refunded later) when the borrower receives a VA disability award letter or disability payment. VA rates are not especially credit-determinate: though a credit score of at least 630 is typically required, exceptional credit does not earn a better rate.
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About David Goldstein — David Goldstein is an Owner and Founding Partner of Colibri Real Estate, LLC. which operates online education providers Colibri Real Estate, Insurance License Express and License Tutor. Follow him on Twitter.