As a mortgage loan is a financial transaction, there are four aspects of your finances that are used to assess whether or not you meet the mortgage requirements.
Credit Score, if you have a very good credit score 740-799 or excellent score 800+ you are likely to get a favorable interest rate and approval.
Down payment, if you are able to provide a large down payment, it allows lenders to understand your saving habits. By doing this it will also provide lower monthly payments. If you do not have any savings or extra funds your loan may be denied.
Debt-to-Income (DTI) ratio, to determine your DTI lenders will divide your total monthly income by your total monthly debt. If you have a DTI of 43% or less this is typically classified as ideal however, each program differs.
Income & Employment, lenders need to ensure you have stability and can afford a consistent monthly payment therefore they will require you to provide two years of federal tax returns, W-2s and paystubs.
Adjustable-Rate Mortgage (ARM)
If you’re seeking to purchase a home and need short-term savings, meaning lower rates for the first 3-10 years of your loan term, then ARM is a mortgage to consider. The rates are typically lower than a 30 year fixed rate for the first 5 years. After that timeframe the mortgage will adjust yearly until the loan is paid in full.
A conventional loan is a type of mortgage that is not guaranteed or insured by the government, such as FHA or VA loans. Real estate conventional loans are offered by private lenders and typically require a higher credit score and a larger down payment compared to government-backed loans. The requirements for a conventional loan for real estate typically include a good credit score, a stable income, a down payment of at least 3%, and a debt-to-income ratio of less than 43%. However, specific requirements may vary depending on the lender and the type of property being purchased.
Federal Housing Administration (FHA)
The Federal Housing Administration (FHA) offers loans to first-time buyers that require a low down payment, low closing cost, and easy credit qualifications. Depending upon your credit score and the area you are exploring to live in, your down payment can be as low as 3.5% of the purchase price for a 30-year term.
FHA 203(k) Renovation Mortgage Program
FHA 203(k) Renovation Mortgage Program, allows first-time homebuyers to make full or limited renovations to their home with below-market interest rate loans. Depending on the estimated cost of the renovation, this will determine if the loan is classified as a standard or limited loan.
Fixed Rate Loans
Seeking a loan that is predictable and in a sense stable as most homeowners? If so, there are two commonly known options: 1.) 30 Year Fixed Rate - typically provides the opportunity for the lowest payment for a longer period of time. 2.) 15 Year Fixed Rate - typically provides the opportunity to pay off one's mortgage in a shorter period of time at a higher rate.
Have a high-cost home in mind or perhaps you’re considering moving to an area that has a high cost of living? If your future home exceeds the Federal Housing Finance Agency (FHFA) loan limits, it makes them non-conforming therefore have different guidelines than that of conventional loans. Jumbo loans typically require a high credit score (e.g. 700+); much higher down payment (20% or more); a low DTI (debt-to-income) ratio (45%>); and several months of cash reserves.
U.S. Department of Agriculture (USDA)
The U.S. Department of Agriculture (USDA), created a special loan program allowing low to moderate income buyers to purchase a home with no down payment in USDA approved rural areas. While a down payment is not required, borrowers are required to pay yearly guarantee fees upfront.
U.S. Department of Veterans Affairs (VA)
The U.S. Department of Veterans Affairs (VA) has established a mortgage loan program for active-duty service members, veterans, and their families to purchase a home. VA loans typically are more lenient when it comes to credit, DTI requirements, and downpayment. Additionally the interest rates are typically lower as are the required closing costs. Note a VA Certificate of Eligibility is required to apply for a VA loan and you will be required to pay a one-time funding fee.