Understanding the Requirements for a Mortgage Loan in 2016 Roger Odoardi Step one before you start looking for a home is to figure out how in the world you’re going to pay for it. We’d all love nothing more than to pay cash for our dream piece of property, but that’s not realistic for the general population. The next best thing is to find a mortgage that won’t eat up your entire savings account and leave you living paycheck to paycheck every month. Grasping the requirements for a mortgage will be the best preparation to find one that’s right for your financial situation. Whether you’re a first-time homebuyer, borrowing for a commercial space or searching for your dream retirement spot, there are endless types of loans available from a variety of different lenders. Here’s a breakdown of the requirements for conventional, FHA and VA mortgage loans in 2016 so you can get a head start on finding the right one. Conventional Loan Requirements Conventional mortgages are standard loans for those with good or excellent credit. The better your credit, the better the interest rate you’ll receive. If you go the route of this mortgage loan, you’ll need to follow guidelines set by mortgage lenders Fannie Mae and Freddie Mac, which include: Credit Score A minimum credit score of at least 620 is required to qualify for a conventional mortgage loan. If your credit is below this threshold, you’ll probably want to wait until you can improve your score to begin looking for a home or consider applying for an FHA loan. Low Debt-to-Income Ratio Your debt-to-income ratio is the percentage of your monthly income that goes toward paying off debts like: Other mortgages Student loans Auto loans Child support Credit card payments We all have at least some debt, but the amount you owe each month will impact the stipulations of your loan. For a conventional mortgage, your total monthly debt shouldn’t be more than 45% of your gross monthly income. Minimum Down Payment The majority of mortgage lenders require a down payment of at least 3%. However, the type of home you are purchasing and your financial history can impact this. FHA Loan Requirements FHA loans are mortgages insured by the Federal Housing Administration. The FHA is not a lender—they are just the insurer. This means that borrowers need to get their loans through an FHA-approved lender and not through the actual FHA. With this insurance, the mortgage lender is protected from loss in the event that a borrower defaults on their loan. FHA loans are ideal for those with: Low credit scores High debt-to-income ratios Small down payments Little equity (for refinancing) This option has more flexible qualifications and lower down payment requirements than a conventional loan. However, there are still certain criteria to meet in order to qualify: Credit Score Your credit score for an FHA loan won’t necessarily be a deal breaker—it will just determine your required down payment. For a mortgage with a down payment as low as 3.5%, you’ll need a credit score of at least 580. If your score falls between 500 and 579, you’ll need to make a down payment of at least 10%. For credit scores less than 500, you’ll probably be ineligible for an FHA loan. However, they do make exceptions in certain instances for potential borrowers with “nontraditional” or insufficient credit. Flexible Debt-to-Income Ratio The FHA allows borrowers to spend up to 57% of their income on monthly debt obligations, which is more leeway than a conventional loan. Down Payment A minimum down payment of 3.5% is typical with an FHA loan, however, this can fluctuate depending on the loan stipulations and cost of the property you are purchasing. VA Loan Requirements A Veterans Affairs (VA) loan assists active service members, veterans and eligible surviving spouses. The actual loan is provided by private lenders, like banks or mortgage companies, with the VA guaranteeing a portion. This allows the lender to offer more favorable terms, like lower interest rates. There are limits on loan amounts, which will vary by county. Credit Score The majority of VA lenders use credit benchmarks and most are looking for a score of at least 620. Of course, this will vary depending on the mortgage lender. Debt-to-Income Ratio The maximum debt-to-income ratio for a military mortgage borrower is 41%. Those with residual income and a debt-to-income ratio greater than this percentage can potentially be granted an exception. Down Payment If you qualify, there’s no down payment necessary if you’re borrowing for your primary residence. This is unless required by the lender or if the purchase price of the home is more than the reasonable value of the property. Additional Tips Regardless of which type of loan is best for your financial situation, you’ll be better prepared if you have the following: Savings Account It’s sensible to grow your savings account to help you with your down payment. It’s not sensible to deplete that account before you even start furniture shopping for your new home. While it might be tempting to put all of your savings into your down payment to lower your monthly mortgage, what if an emergency happens? You don’t want to be left with nothing after closing costs and your first mortgage payment. Mortgage Estimates You’re probably not going to settle on the first and only home you look at, so you should also shop around when it comes to your mortgage loan. Lender fees tend to vary, which is why it’s important to get a variety of estimates. Getting a range of estimates—also known as prequalifying—will also help you see how much money you’ll be able to borrow based on your financial standing. You can get a general estimate here. It’s important to note that prequalifying for a loan is not the same as being preapproved for a loan. Preapproval is an official agreement. Required Documents When it comes time to fill out loan applications, you’ll want to make sure you have all the necessary documentation to streamline processing and avoid administration delays. Some of the most common items needed include: Two forms of ID W2s Pay stubs Bank statements Certain lenders may ask for different documents, but it’s always better to be over-prepared in this situation. You can download a helpful checklist for all of the documents you’d potentially need here. Solid Employment History If you’ve worked for the same employer for two or more years, you’ll likely get a more favorable loan option and interest rate than someone who has job hopped for the last few years. Lenders favor longevity so they can be confident you’ll have a steady income to pay your mortgage. For those who are self-employed or whose salary is commission-based, lenders will likely ask to see your bank statements to understand your income history. The type of mortgage loan you apply for will ultimately depend on your financial standing. Also keep in mind that some qualifications for a mortgage loan will vary by lender. Blue Water Mortgage has helped countless borrowers prepare for the mortgage loan process and find terms that are ideal for their specific situation—both financially and personally. Don’t hesitate to contact us with any questions you have about the application process. Also check out our tools, tips and resources to calculate how much you can afford, your ideal monthly payments and more. Roger Odoardi Roger is an owner and licensed Loan Officer at Blue Water Mortgage. He graduated from the University of New Hampshire’s Whittemore School of Business and has been a leader in the mortgage industry for over 20 years. Roger has personally originated over 2500 residential loans and is considered to be in the top 1% of NH Loan Officers by leading national lender United Wholesale Mortgage.
