Buying a home will probably be the most exciting yet agonizing time of your life. The process should not scare you away as long as you know what to expect.
During the home buying journey the most exciting part typically centers on home shopping. Taking weekends looking at homes while imagining how you would decorate is the fun part.
The agonizing part starts with getting approved for a mortgage loan. Here are six facts that can make the mortgage approval process easier.
1. Most Common Loan Types
FHA and Fannie Mae. The Federal Housing Administration (FHA), and the Federal National Mortgage Association (Fannie Mae) are related agencies designed to promote loans, especially to low- and moderate-income home buyers. These agencies do not directly make mortgage loans, but both have resulted in banks making many more home loans than they otherwise would have. There is a downside to FHA loans. FHA loans require monthly mortgage insurance premiums. Lenders who underwrite loans to Fannie Mae or Freddie Mac, the nation’s two largest government-backed mortgage investors, do not require mortgage insurance if the loan amount is less than 80 percent of the home’s value.
Conventional Loans. Conventional loans are not backed by any federal agency and most banks and lenders offer conventional loans. Because conventional loans are not backed by the government lenders follow stricter underwriting guidelines which require good credit, a strong financial status and lower loan-to-value ratios. To qualify for a conventional loan, a borrower must have a credit score of at least 620 but in reality this credit score would result in higher mortgage payments due to the addition of risk-based lender fees. Conventional loans generally require at 5 percent down payment
VA Loans. VA loans are home mortgages guaranteed by the federal government through the Department of Veterans Affairs. Both active-duty military and veterans are eligible to use the VA loan program to finance the purchase of a home. VA loans do not require a down payment.
USDA Loans. USDA Home Loans allow 100% financing for a home purchase, so there is no down payment required. The minimum credit score required for automated approval is 640 and no late housing payments for at least one year. However, there are exceptions made to the credit score requirement for borrowers with thin files.
2. Down payment requirements differ depending on type of loan
- 0% percent down payment. Under the U.S. Department of Veterans Affairs program, VA loans do not require a down payment. A veteran can purchase a home for no money down. This type of loan allows for 100% financing all the way through the maximum conforming loan limit in the county in which the property is located. In fact, this type of loan can allow for even higher than the maximum conforming loan limit if you do have a down payment.
- 3.0 percent down payment. Fannie Mae and Freddie Mac will back mortgages with down payments of as little as 3% of the home’s price. The 3% loans from Fannie and Freddie offer some advantages over the 3.5% down loans offered by FHA. The FHA loans require borrowers to pay for private mortgage insurance premiums for the entire term of the mortgage.
- 3.5 percent down payment. FHA loans require a minimum 3.5% down payment. Most lenders can lend up to $417,000 with the exception of Alaska, Hawaii and Guam. But keep in mind FHA loans come with a monthly mortgage insurance payment, which can make it more expensive than a conventional mortgage.
- 5.0 percent down payment. Conventional loans typically require a 5% down payment. Unlike an FHA loan once a borrower accumulates 20% equity, private mortgage insurance is no longer required.
3. Credit score requirements differ depending on type of loan
FHA requires a credit score of at least 580. However, since FHA doesn’t actually make loans, they only insure loans made by banks; the individual bank may require a higher minimum score. Typically banks offering FHA loans require a minimum credit score of 620; although in 2014 some FHA lenders like Wells Fargo reduced that credit score requirement to 600. Wells Fargo is the country’s biggest mortgage lender. Other banks are following its lead in lowering credit score requirements for FHA loans due to the decline in mortgage refinances. Banks are now motivated to increase lending to homebuyers to fill that revenue gap.
4. Refrain from credit disputes during loan process
Do not dispute credit accounts during the loan process. When you initiate a credit dispute the creditor places the account in the dispute status, changing the credit reporting to “in dispute.” The underwriting system used by mortgage lenders ignores any accounts in dispute.
Because the underwriting system ignores the accounts with the dispute notation, the mortgage lender will not get an accurate credit score. This may sound good to some homebuyers but there are consequences. Once the lender manually reviews your credit report you will be asked to have the creditor remove the “in dispute” notation. Any temporary gain in credit scores will be lost. The lender requires accurate scores based on all the information in your credit files. The loan process is stalled because the lender has to rerun credit reports.
5. Don’t apply for new credit accounts during the loan process
If your mortgage loan has not closed, taking out additional debt could change your credit score. The mortgage lender may run your credit report several times during the loan process, don’t mess it up! Taking on more debt will change your debt-to-income ratio and jeopardize your loan approval. As tempting as it may be to start furniture shopping and home decorating – wait until you get the keys to your new home.
6. Consider a Mortgage Broker
When your situation is outside the norm like being self-employed or retired, a mortgage broker may be able to track down a lender when others turn you down. Mortgage brokers tend to have many contacts. They review your personal financial information and look over an array of lenders and try to match you with one who will give you the best rate and terms. The advantage is choice because the broker will have lots of lenders to match you with. The National Assn. of Mortgage Brokers at: http://www.namb.org offers referrals.
Get pre-approved. There is a difference between being pre-qualified and getting pre-approved. Anyone can get a pre-qualification letter. Getting pre-approved means that a lender has already looked at your financial information and has let you know how much they will lend you. A pre-approval letter always expedites the contract process when you’re ready to make an offer on a property.
Don’t forget closing costs.Closing costs include all of the expenses and fees associated with buying a home. Closing costs can come from a lender or a 3rd party for services rendered regarding the home buying process. Here is a sample of who will involved in closing costs:
- Mortgage application fees or loan origination fees
- Inspection fee
- Appraisal fees
- Title search fee
- Recording fees
- Brokerage commission
- Home warranty
- Property insurance
- Property taxes