Frequently Asked Questions About Home Loan Programs
Technically, a first time buyer is someone who has not owned a home within the last three years.
What types of programs are reserved for first time buyers?
Most programs designed for first time buyers are designed to assist with a down payment and closing costs. Many first time programs are issued by local, county and state governments. Fannie Mae has a program called HomeReady which asks for a down payment of 3.0%.
How do I know how much I qualify for?
How much you can borrow depends upon current interest rates, the term of your loan, your gross monthly income and current credit obligations such as an automobile loan and credit cards. Generally, you can borrow approximately 41% of your gross monthly income including all debt.
How do I know if I’m ready to buy my first home?
There won’t be any big “A-ha!” moment but if you have a two year employment and rental history, it’s probably time to ask a few questions about monthly payments, closing costs and other factors with your loan officer. If you’re curious about owning instead of renting you’re probably a lot closer than you think.
How much of a down payment do I need?
If you’re eligible for a VA loan or buying a property in a rural area with a USDA loan, you won’t need any down payment. There is a first time buyer program that needs a 3.0% down payment and FHA loans ask for a 3.5% down payment. With a conventional mortgage, if your mortgage is greater than 80% of the sales price, you’ll need a private mortgage insurance policy, or PMI.
What is PMI?
Private Mortgage Insurance is in fact an insurance policy that protects the lender from the difference between your down payment and 80% of the sales price of the home.
Do I need a real estate agent?
Yes. While you can certainly do your own house hunting on your laptop real estate agents are almost a necessity. Buying a house is more than just getting a mortgage. You will provide your agent with a list of needs and wants and the agent will take over from there. Once a prospective property is picked out, your agent will craft an offer and negotiate on your behalf. There’s no need to do this on your own. You don’t want to overpay for a home or live in an area that is in decline.
How much does a real estate agent cost?
Representing you, the buyer, costs nothing from you. Instead, the sellers will pay your agent’s commission.
What if the sellers turn down my offer?
When sellers turn down an offer they will typically respond with an offer counter to yours. If you offer $300,000 the seller might respond with a counter of say $285,000. You and your agent can decide which figure is best for you.
What about any upfront costs?
When you submit an offer and it’s accepted you’ll need to provide an Earnest Money deposit which is kept with a third party until your loan closes. This deposit will be credit to you at the settlement table. Should your offer fall out, your earnest money deposit will be refunded to you. Earnest money amounts vary by location but a deposit of 1-2% of the sales price is common for most areas. You may be asked to pay for a credit report and an appraisal upfront as well. Your loan officer will detail any upfront fees for you.
How much do I need at the closing table?
You’ll need your down payment plus your closing costs.
How much are closing costs?
You will be provided a closing cost estimate but you can estimate lender and non-lender charges to run anywhere from $3,000 to $4,000. This is a moving target depending upon several factors but your loan officer can give you a good idea over the phone.
What type of paperwork will I need for my application?
You will submit your application, either online, in person with your loan officer or by mail and your loan officer will provide you with a list of items needed. You can expect to provide your most recent pay check stubs covering a 30 day period, your last two years of W2 forms, most recent bank statements and a signed authorization form. Self-employed borrowers will need to provide the last two years of tax returns and a year-to-date profit and loss statement. As your loan moves through the approval process you may be asked to provide additional documentation.
Is an inspection and an appraisal the same thing?
No, they’re different. An inspection is a physical evaluation of the property. A licensed inspector will walk through the entire home, flip on light switches, check for faucet leaks, appliances and any signs of physical deterioration. An inspection is optional but highly recommended. An appraisal is used by the lender to establish current market for the home and is a requirement. You may be asked to pay for the appraisal upfront.
A conventional mortgage is one where the lender assumes the risk for making a loan. This is compared to a government-backed loan such as VA, FHA and USDA which carry some degree of compensation to the lender in case of default.
Where do I get a conventional mortgage?
A conventional mortgage is by far the most common residential mortgage loan issued today and are widely available. A conventional conforming loan is one where the loan amount does not exceed $484,350 for most areas.
What are the rates for a conventional mortgage?
Each lender is responsible for settings its own rates. There are no universal conventional rates.
What kind of credit do I need?
Minimum credit scores can vary based upon the selected loan program but most conventional loans ask for a minimum score of 620.
What are the approval guidelines for a conventional loan?
Most conventional loans use guidelines set forth by Fannie Mae and Freddie Mac. Income is verified with two years of W2 forms, recent pay check stubs, and two years of federal income tax returns if self-employed. Sufficient funds to close is verified with recent bank and investment statements. Minimum credit scores will also be required. There are other requirements but these are the most important.
Can I use a conventional loan to finance a rental property?
Yes, you can use a conventional loan to finance a rental property. In fact, a conventional loan is the most common option when buying a rental or investment property.
Can I use rental income to help qualify for a rental?
Yes, but the guidelines ask that you have verified rental income for the past two years. This verification is made with a review of your last two years of tax returns, specifically Schedule E of your return where rental income, depreciation and expenses are listed.
What are the closing costs for a conventional mortgage?
Closing costs for a conventional mortgage are much the same as any other type of loan. You can be provided with a list of potential closing costs by your loan officer.
How much down payment do I need for a conventional mortgage?
There are conventional programs that ask for a down payment of just 3.0% but designed to finance homes in underserved areas and/or for low-to-moderate income buyers. Otherwise, the minimum down payment is 5.0% of the sales price. Private mortgage insurance will be required if the mortgage exceeds 80% of the sales price of the home.
How much is private mortgage insurance?
Private mortgage insurance, or PMI, varies based upon multiple factors such as the amount of down payment, loan term and credit score. Lower down payments with lower scores will have more expensive PMI compared to a larger down payment and good credit scores.
An FHA loan is one underwritten to guidelines set forth by the Federal Housing Administration, or FHA. It is used to help buy and finance a residential, owner-occupied property.
Do I apply with the FHA?
No, you apply directly with an FHA-approved lender.
What is the least I can put down on an FHA loan?
The minimum down payment is 3.5% of the sales price.
Can I get an FHA loan if I’m a first time buyer?
Yes, the FHA loan is the most popular choice for first time buyers.
How much can I borrow with an FHA loan?
There are loan limits that can vary county by county but how much you can borrow is limited by your gross monthly income and current credit obligations.
What type of credit do I need to get an FHA loan?
FHA loans are a bit more forgiving as it relates to someone’s credit compared to other low-down payment loan programs. The minimum credit score for an FHA loan is 580 when putting 3.5% down. With 10% down the minimum score can be as low as 500.
What types of loan choices do I have with an FHA loan?
You get both fixed and variable rate loan choices. FHA loans can also come in the form of a hybrid. A hybrid is a variable rate loan that is fixed for an initial period of time before turning into a loan that can adjust once or twice per year.
Can I use an FHA loan to buy a rental property?
No, FHA loans can only be used to finance a primary residence.
What is the Funding Fee on FHA loans?
There are two different forms of mortgage insurance with an FHA loan. The initial, upfront mortgage insurance premium which is rolled into the final loan amount and an annual premium that is paid in monthly installments. Should an FHA loan go into default, the lender is compensated for the loss.
No, VA loans are available for not just veterans but active duty personnel with at least 181 days of service, members or veterans of the National Guard and Armed Forces Reserves with at least six years of service as well as unremarried spouses of those who have died as a result of a service related injury.
What are the closing costs for a VA loan?
That will vary based upon the area, the selected lender and other third party charges. Your loan officer can give you a cost estimate over the phone or through an email. However, the veteran is only allowed to pay certain costs and is restricted to only pay for an appraisal, title, origination fees, credit report and recording charges. Lender fees such as processing and underwriting are considered “non-allowable” fees, for example.
How does the VA view credit?.
The VA doesn’t require a minimum credit score but most lenders do and this can range from 600 to 620. Lower in certain circumstances yet getting approved for a VA loan is easier compared to a conventional loan with a small down payment.
Do VA loans take a long time?
No, VA loans don’t take any longer than any other type of loan program. In today’s market, a VA approved lender performs all necessary tasks to approve an application. The VA is not involved.
Does the VA guarantee mean I’m automatically approved?
No, the VA guarantee is for the lender. As long as the lender used approved VA guidelines to approve a loan and the loan goes into default, the lender is compensated up to 25% of the loss. However, this is rare as VA loans have the lowest default rate of any other mortgage program.
Can I buy an investment property?
VA loans can only be used to finance the purchase of a primary residence. No rentals, beach houses or vacation homes are allowed.
What is the minimum credit score for a VA loan?
The VA does not set minimum credit scores but lenders do. The minimum score for a VA loan is 620 in most cases.
A USDA loan is one that follows guidelines set by the United States Department of Agriculture and designed to finance properties in a rural area.
Where are the rural areas?
The rural areas are originally designated by the U.S. Census Bureau.
How do I find out if a property I’m interested in is located in an approved area?
Contact your loan officer and provide that person with the property address. Your loan officer can input that information into the Bureau’s database to see if the property qualifies.
Are there any other restrictions for the USDA loan?
The other restriction limits the amount of household income to approximately 115% of the median income for the area. This income limit is also based upon the number of adults 18 and over who occupy the property.
What is the minimum down payment for a USDA loan?
There is no down payment needed for a USDA loan.
What types of loan choices do I have with a USDA loan?
The USDA loan is offered as a fixed rate program.
Where do I get a USDA loan, do I contact the USDA directly?
You should work with a USDA approved mortgage company and a loan officer experienced with the program.
What are the closing costs with a USDA loan?
Closing costs with a USDA loan are much like any other financing option. Your loan officer can provide you with a written estimate of closing costs.
What is the Guarantee Fee?
The Guarantee Fee is a form of mortgage insurance. It is 1.0% of the loan amount and is rolled into the final loan amount. Should the loan ever go into default, the lender is compensated for the loss. There is also an annual fee paid in monthly installments.
What is the minimum credit score for a USDA loan?
The minimum credit score for a USDA loan is currently 640.
A jumbo loan is one where the loan amount exceeds local conforming or high balance limits. For 2019, anything above $484,350 for most parts of the country. In areas where the median home values are higher compared to most parts of the country, a jumbo loan can be anything above $726,525. These figures are for single family homes. Duplex, triplex and fourplex properties have higher limits.
What is the down payment requirement for a jumbo loan?
The minimum down payment for a jumbo loan is 20% of the sales price. Borrowers can obtain slightly better rates with a down payment of 25%. There are other jumbo loan structures where there are two loans instead of just one, where the first lien is at 20-25% of the sales price and a second lien making up the difference between the first lien balance and the amount of down payment.
What is the minimum credit score for a jumbo loan?
For most jumbo loan programs, the minimum credit score is 700-740. If there is more than one borrower on the application, the lender uses the lowest middle score for both borrowers.
What is a “middle score?”
When lenders request a credit report and credit scores, the request is made to each of the three main credit repositories of Equifax, Experian and TransUnion. The scores will be similar but rarely the same. The lender ignores the highest and lowest scores and uses the one in the middle.
Can I use a jumbo loan to buy a rental property?
Yes, you can use a jumbo loan to finance a residential rental property. Down payment and rate adjustments will be made.
What are the closing costs for a jumbo mortgage?
Closing costs for a jumbo mortgage are mostly the same as with any other type of conventional loan.
Can I make a lower down payment and use private mortgage insurance?
No, there are no private mortgage insurance, or PMI, policies available for jumbo loans.
How much higher are the rates for a jumbo mortgage?
Rates for a jumbo mortgage are typically about 0.25 to 0.375% higher than a conforming rate for the same program. This range however has varied in the past but this is a common variance.
Can I use rental income to help qualify for a jumbo mortgage?
If you’re currently receiving rental income from a property you own and have been receiving it for at least two years it can be considered when applying for a jumbo loan. If you want to buy a property and rent part of it out using a jumbo loan, the rent won’t be counted as income.
What are the appraisal requirements?
The appraisal requirements must meet industry standards and detail at least three similar properties that have sold within the past six to twelve months, supporting the subject property’s value. In some instances, especially on loan amounts much higher than the conforming limit, two separate appraisals will be required. The lender will use the lower of the two values in this instance.
A reverse mortgage is for homeowners 62 years of age and older and provides cash to the owners in the form of one lump sum, monthly installments, a line of credit or a combination of any of these. There are no payments with a reverse mortgage as long as the borrowers occupy the property as a primary residence.
How much can I get with a reverse mortgage?
That can vary but is primarily based upon the current appraised value of the property and the age of the youngest borrower occupying the property. Speak with your loan officer about your specific situation.
Is this the same as a cash-out refinance?
No. A refinance replaces an existing mortgage while providing additional cash proceeds to the borrowers at the closing table. Monthly payments are required with a cash out refinance.
What about my current mortgage?
A reverse mortgage must be in a superior position. If there is an existing mortgage, the reverse mortgage will first pay off the existing loan(s).
What credit score do I need?
Reverse mortgages don’t have a minimum credit score but instead the lender looks for a responsible credit history over the past two years. An occasional late payment or two shouldn’t affect an approval. The lender will also determine whether or not you have enough monthly income to cover the property taxes and insurance for the home in addition to other monthly living expenses.
When do I have to pay off the reverse mortgage?
Even though there are no monthly payments required you may still make payments toward the balance. There are no prepayment penalties. Ultimately, the loan comes due when the last borrower leaves the house. The loan is paid off with the sale of the property.
What if the sale of the property isn’t enough to pay off the reverse mortgage balance?
The lender must accept whatever the sales price is and the heirs are not responsible for repayment. Reverse mortgages come with a mortgage insurance policy to cover any shortfall.
Will I have to pay income tax as a result of getting a reverse mortgage?
No, a reverse mortgage is viewed as unearned income. For tax questions, consult a qualified tax professional or accountant.
Does the reverse mortgage lender own the home?
No, title does not change hands and you will continue to be the sole owner.
Will this income affect my social security or Medicare?
No, social security benefits and Medicare are not affected.
Is there a limit on what I can use the cash proceeds for?
No, there are no limitations as to what the funds can be used for. You can use funds from a reverse mortgage for anything you wish.
A construction loan is one used to build a new home from the ground up. The loan is used for materials, labor and “soft costs” such as zoning and permit requirements. A construction loan is only for the time it takes to build the new home. When the home is designated as ready-to-occupy, the construction loan comes due and must be replaced.
What is the down payment for a construction loan?
Most construction loans ask for a down payment of at least 20%. However, if someone already owns the vacant lot where the home will be built, the equity in the lot can make up for part or all of the 20% equity requirement.
What is the minimum credit score for a construction loan?
The minimum credit score for most construction loans range from 680-720 but can vary based upon individual circumstances. Your lender will provide you with various credit score guidelines. Typically, the more equity you have in the transaction, the lower the credit score requirement.
Can I use a construction loan to buy the land and the construction at the same time?
Yes, you can get a construction loan that finances both the construction and the vacant lot.
Do I get the money from the bank for the construction?
No. The construction funds are held in escrow and distributed in installments to the contractor based upon the degree of completion.
When are these installment payments made?
At various, predetermined stages during construction. For example, an initial installment might be for the acquisition and preparation for the lot. The second might be for permits and zoning issues. The third might be pouring the foundation, and so on. At each stage, the lender orders an on-site inspection of the completed work before the next installment payment will be issued.
Do I make monthly payments during construction?
Yes, you will make payments during construction based upon the interest rate for the loan and the amount distributed. For some construction programs, interest will accrue on the note and must be paid once construction has been completed.
Can I use my own builder?
Yes, you can. If your builder is not on the lender’s approved contractor list, the builder must first go through the approval process. The lender keeps a list of approved contractors and can provide that list to you.
What is a Construct-to-Perm loan?
A construct-to-perm loan is one where both funds needed to build the home and a permanent, replacement mortgage when construction is complete. With a traditional construction loan, there will be two separate closings, one for the construction and one for the permanent mortgage. With two closings there will be higher overall closing costs. A construct-to-perm loan eliminates the need for two separate closings.
How do I apply for a construct-to-perm loan?
Your mortgage company will provide you with information on how to apply but the initial application process is much the same as any other. You can apply online or in person. Approval and documentation requirements can be provided at your request.