6 Conventional Loan Types That All Texas Home Buyers Need To Know
Conventional loans are a common mortgage option, that even works for first-time home buyers. Yet you may not know that there are different types of conventional loans.
Here is more information about the primary conventional mortgage product types, and how they differ and what they might mean to you.
1. Conforming Conventional Loans
If conventional loans are under the maximum loan amounts that the Federal Housing Finance Agency has set and it matches the other loan standards that the Fannie Mae or Freddie Mac have set, it is known as a “conforming loan”. Because Freddie and Fannie are both government-sponsored enterprises, these are also known as “GSE loans”.
2. Nonconforming Conventional Loans
When conventional loans exceed the FHFA loan limit or it has used underwriting standards which differ from the ones set by Freddie Mac and Fannie Mae, it is known as a “nonconforming conventional” loan. The Jumbo loan is one of the common non-conforming conventional loans. You might require a Jumbo loan if you need finance for something that exceeds $484,350, in most of the counties in the U.S.
3. Fixed-Rate Conventional Loans
Whether they are nonconforming or conforming, every mortgage comes with interest that you have to pay back. With fixed-rate conventional loans, your interest rate will remain the same for the duration of the mortgage. Most buyers prefer the 30-year fixed-rate conventional loan since it translates into affordable monthly payments. There are also shorter terms made available.
4. Adjustable-Rate Conventional Loans
This is an alternative to fixed-rate mortgage as these loans offer an ARM or adjustable-rate mortgage. The conventional loan linked with an adjustable-rate is also called hybrid ARM, which has a rate that might go down or up over time. ARM rates typically adjust annually, from the initial fixed-rate period which is usually 3, 5, 7, or 10 years.
5. Low-Down-Payment Conventional Loans
There was once a time where obtaining conventional loans would require a 20% down payment. Since borrowers that match these requirements only need 80% of the value of the home, this is also known as the “80/20 conventional loan”. However, the requirements for down payments have become a lot more flexible.
3% Down Payment: Home Possible and HomeReady are two conventional-mortgage options that require low down-payments, sometimes as little as 3%. This is also known as a “3-down conventional loan”. Borrowers that qualify for the 3% down payment, have to obtain finance for the remaining 97%.
5% Down Payment: The borrowers that have a low credit score may have to put down a 5% down-payment or more to obtain one of the conventional loans. This means that they would have to finance 95% of the value of the home.
Zero Down Payment: If you wanted to know if you can get 100% conventional-loan financing, the answer would be yes. However, these are not always easy to find. Certain lenders which are usually credit unions provide in-house, non-conforming conventional programs for mortgages that offer 100% financing, yet specific qualification requirements usually apply.
6. Conventional Renovation Loans
It can be difficult to find the ideal home within your budget. Investing in a fixer-upper is one of the ways to own a home when move-in ready inventories are low or the price of properties is too high.
You can use any of the interactive features on our website or call us anytime to speak to a seasoned mortgage expert directly. We hope to work with you soon!
Tips For Applying For A Conventional Loan In Texas
Conventional loans are the most commonly got loans in America. Perhaps, that is why they have obtained the title of being conventional. You should consider several factors before deciding to apply for a conventional loan. First of all, it is extremely important to make sure you meet the requirements to apply for one. Not everyone meets the requirements needed to obtain a conventional loan. They aren’t that stringent; however, they do require an adequate credit score. A poor credit score will be the most likely reason why you are turned down. Let’s look at all the conventional loan requirements in Texas:
Conformity To The Federal Housing Financing Agency
Conventional loans are given by a bank. They are not backed by the government in any situation. With that said, they do have to follow the laws set by the Federal Housing Financing Agency. Most of these laws pertain to loan limits and credit scores. Here are some of the requirements that are largely set due to the Federal Housing Financing Agency:
Adequate Credit Score
You will need to have a credit score that does not fall below 620 in almost all situations. Some banks require you to have a credit score of at least 640. Any credit score that is below 600 will most likely disqualify you from taking out the loan. So how can I get approved for a mortgage with bad credit? Do not become too discouraged if you have an extremely low credit score. There are many ways to fix it. Paying off credit card debt is the number one way to do it. It is important to try to at least make the minimum every month. Do not expect yourself to pay it all down in a few months.
Small Amount For A Deposit
You do not need to put down a large deposit if you are getting a conventional loan in most cases. This is designed to help homeowners become housed if they do not have a lot of liquid cash available. Some loan companies will have a higher minimum down payment. This rule is not standard. If you can pay at least 20% of the down payment. This will make you exempt from having to get private mortgage insurance in most situations.
The Limit Amount
You cannot buy a $10 mansion with a conventional loan. With that said, you can buy a pretty nice home if you are a decent qualifier. In most areas of the country, the loan limit is $510,400. That is enough for a small mansion in Texas. Those who live in more expensive areas can expect to see a loan limit of $765,600. A house can be bought in Brooklyn for $500,000. How do I get a mortgage on my house?
There is such a thing as a nonconforming conventional loan. Lenders have more freedom to decide the amount of the loan. At the highest, you will be able to get a loan of $2 million. The credit score you need to apply for this type of loan is much higher, so is the down payment.
Is A Conventional Loan A Good Idea?
A conventional loan is a great option for those who are at least middle class. Working-class and under individuals should consider loans that are backed by the government or have subsidized. You should be cautious if you’re worried that your financial situation may change. Remember, you do not have to have an outstandingly high credit score to get a conventional loan. With that said, you should not even try if you have a credit score below 600.
What is the easiest mortgage to qualify for? One of them is a Conventional loan can be a great way to get housing. They are the most popular choice among Americans. Those who are in better financial straits should even consider getting a non-conventional or jumbo loan to purchase a home. Getting a conventional loan will make it possible for you to get the home you want.
Before making a decision, let one of the experts at The Texas Mortgage Pros help you find out exactly what loan is best for you. Contact us today Or Call Us @ (866) 772-3802
If you want to purchase a home this year and wondering how to qualify for a mortgage, you can find the right loan program by learning the minimum borrowing guidelines. In 2020, mortgage options will be available at relatively higher loan amounts that indicate the increasing home prices across the U.S.
By going through the guidelines for the most popular loan types, you should know the amount of mortgage that you can qualify for.
Undoubtedly, conventional loans are the most common mortgage option, but no government agency guarantees them. Compared to the borrowing requirements for government-insured loans, Freddie Mac and Fannie Mae set conventional loan standards, which are stricter.
If you want a mortgage for a more expensive home, it’s much easier to qualify this year since loan limits are increasing up to $510,400 for a majority of the country in 2020. For conventional lending, below are the latest minimum mortgage loan requirements.
A Conventional Loan’s Current Minimum Requirements
Down payment. For conventional loans, the minimum down payment is usually 3% and can come as a gift from a family member or simply your money.
Mortgage insurance. The lender needs security with private mortgage insurance (PMI) for conventional loans that have less than 20% down in case you default. Each year, you’ll pay anywhere between 0.15% and 1.95% of your loan amount; however, the premium can even exceed 2.5%, especially if you have a small down payment and a low credit score. Typically, you pay the premium as part of your monthly payment, but you can also pay in a lump sum upfront during closing.
Employment. Since lenders need proof of your steady income, they’ll review your income and employment history from the past two years. Those with variable incomes and self-employed borrowers alike will need to present extra paperwork to verify income.
Credit score. For a conventional mortgage, the minimum score is 620. Most likely, you’ll receive a more favorable interest rate offers with higher credit scores.
Income. There are no income limits with many conventional loans. Freddie Mac’s Home Possible loans and Fannie Mae’s Home Ready, however, demand that borrower’s incomes should fall within that area’s income limits.
Occupancy. Generally speaking, conventional financing can be useful in purchasing a primary residence, an investment property that you can rent out, or a second home (also called a vacation home).
Debt-to-income ratio. The measure of your overall debt divided by your specific gross income is your debt-to-income ratio (DTI). A DTI of 45% or less is much preferable to most conventional lenders but might extend it to 50% with considerably higher credit scores, along with additional cash reserves. Mostly, borrowers with DTI ratios exceeding 45% might be needed to have a minimum credit score of 740 by private mortgage insurers.
One of the most accessible home loans to obtain is a mortgage-backed by the FHA or the Federal Housing Administration. Since the FHA insures the mortgage, there are more favorable terms and rates available with FHA-approved lenders, particularly to first-time homebuyers.
Borrowers trying to qualify for a mortgage for high-priced homes will have some relief in 2020. In most parts of the country, there has been an increase in the FHA loan limits to $331,760 in 2020. Affluent areas might receive even more FHA bang for the buck since the maximum loan amounts can stretch up to $765,600.
An FHA Loan’s Current Minimum Requirements
Down payment. Whether it’s from your funds or as a gift, FHA demands a 3.5% minimum down payment. With a credit score ranging from 500 to 579, the down payment goes up to 10%.
Mortgage insurance. There are two kinds of mortgage insurance when it comes to FHA loans. The upfront mortgage insurance premium (UFMIP) can be rolled into your particular loan and is often 1.75% of the loan balance due. As part of your monthly payment, you’ll also incur an annual mortgage insurance premium (MIP), and those costs vary between 0.45% and 1.05% of the loan amount. Regardless of credit score, FHA mortgage insurance premiums are similar.
Employment. Typically, FHA loan requirements focus on the consistency of employment and earnings for the last two years. Job hoppers must explain gaps or changes in employment.
Credit score. With a 10% down payment, you can have a low credit score of 500. Homebuyers will require a minimum score of 580 if they make a 3.5% down payment.
Income. FHA loans have no income limits. In most parts of the country, the maximum FHA loan is, however, capped at $331,760 as opposed to $510,400 for conventional loans.
Occupancy. Whether it’s a single-family or multi-unit property, the property must be your primary residence for a minimum of one year after buying it.
DTI ratio. FHA loans have a front-end DTI ratio of 31%, while the back-end ratio is often 43%. Only housing-related costs matter with the front-end ratio, such as your insurance, property taxes, and monthly mortgage payment. Meanwhile, the back-end ratio considers credit card payments, car loans, mortgage payments, and other recurring debt payments. With proof of extra cash reserves or strong credit scores, higher DTI ratios might be approved.
VA Loan Requirements
Generally speaking, the U.S. Department of Veterans Affairs makes it much easier to qualify for a mortgage loan, especially for active-duty military personnel, eligible spouses, veterans, and reservists. There are no longer loan limits with VA mortgages in 2020. That implies that VA borrowers may be in a position to purchase homes with VA financing instead of a jumbo loan, or perhaps financing for loans that surpass conventional loan limits.
A VA Loan’s Current Minimum Requirements
Certificate of eligibility. If you want to qualify for a VA loan, a VA loan certificate of eligibility (COE) will be necessary since it proves you satisfy the military service requirements demanded by a VA loan. Most lenders can acquire a COE online; however, veterans and military personnel can apply for one online.
Mortgage insurance. No PMI is needed since the VA guarantees loans given to eligible borrowers.
Down payment. For a VA loan, no down payment is needed. Lenders might, however, demand a down payment, especially if the loan surpasses standard loan limits. The source of your down payments can be your funds or simply a gift from an employer, a close friend, a relative, charity, or government agency.
Funding fee. Many VA loans have this fee to defray the program cost to taxpayers. Generally, the amount varies depending on the down payment amount, the VA loan benefit usage, and the type of service. If military borrowers have service-related disabilities, they might be eligible for a waiver. VA funding fees jump to 0.15% for those borrowers who come up with 10% or less of the buying price. That sums up to an additional $1,500 in funding fee costs per $100,000 borrowed.
Employment. Proof of two years of employment is necessary, and the only exceptions are recently discharged veterans.
Credit score. Although there’s no credit score requirement with a VA home loan, VA-approved lenders need a 620 score.
DTI ratio. 41% is the preferred DTI ratio. VA-approved lenders might approve higher DTIs, especially if the borrower has additional money leftover after-tax deductions, or has residual income, and there’s a subtraction of monthly maintenance costs. Generally, the amount required varies depending on your family size and location.
Occupancy. Primary residences are fundamental to VA loans.
Typically, the U.S. Department of Agriculture (USDA) provides a mortgage program made to allow low- to moderate-income families to purchase homes in rural areas. Apart from restrictions on the home location, USDA mortgage loan requirements include income limits.
A USDA Loan’s Current Minimum Requirements
Down payment. For eligible USDA buyers and properties, no down payment is needed.
Home location. The location of the home should be within one of the USDA’s assigned rural areas if you want to be eligible for a USDA loan.
Mortgage insurance. Mortgage insurance isn’t a requirement with USDA loans.
Guarantee fee. A 1% upfront fee is often charged, as well as an annual fee of approximately 0.35% of the loan amount. Like the mortgage insurance fee charged on an FHA loan, the annual fee is rolled into the monthly mortgage payment, and the upfront fee financed.
Income. For USDA loans, it’s usual to have proof of income history and two years of job. Considering all household member’s income is required, irrespective if or not they apply for the loan. Income limits are also a thing with USDA loans, which vary by family size, county, and city. Using USDA’s map tool, find out your area’s income limit.
Credit score. A minimum credit score of 640 is needed with USDA mortgage loans for automatic approval, as long as income and employment requirements are met. Homebuyers with lower credit, however, might still be approved in case a temporary hardship impacted their scores, or if the new housing payment is less compared to the amount the borrower is paying.
DTI ratio. For USDA loans, 29% is the maximum front-end ratio, and the maximum back-end ratio is 41%. With higher DTI ratios, borrowers might still qualify with a stable income history, large cash reserves, and a credit score ranging around 680 or higher.
Occupancy. Only primary residences matter with USDA loans.
Texas Conventional Loans: Everything You Need To Know
Remember as a kid, you used to dream about purchasing a home? Maybe you didn’t want to rent anymore, and that’s when you started to daydream about it. Whatever the case is, you probably envisioned everything from a gorgeous backyard to a front yard with a tree in it, all the way to what your rooms were going to look like.
Know what you weren’t imagining? You weren’t picturing research mortgage options and speaking to lenders. Now you probably are overwhelmed and you might prefer to go back to daydreaming. So, what should you be doing now?
Let’s start things off by talking about the conventional loan. This loan is the most common mortgage option out of there. You might have even had a person recommend this type of loan to you.
However, do you know what a conventional loan is? How are they in regards to other loan options? Before you decide whether or not to apply for a conventional loan, make sure you read the rest of this article.
What Is This Type Of Loan
It is a mortgage loan. It isn’t guaranteed by the government, nor is it insured. Instead, private lenders are the ones backing the loan. The borrower typically pays the insurance.
Conventional loans are more common than loans backed by the government. In fact, over 70% of new home sales involved conventional loans. That was just in the first quarter of 2018 alone.
There is a lot of flexibility with conventional loans. But, they are extremely risky due to not being insured by the government. Not only that but qualifying for a conventional loan can be extremely difficult.
Conventional Loans & Government-Backed Loans: The Difference
When you’re considering a mortgage, you have to know the difference between government-backed loans and conventional. Government-backed loans are loans like VA loans and FHA loans. These types of loans are backed by the government, in some capacity. For example, the Veterans Administration backs VA loans and that administration is part of the government.
An FHA loan requires you to put down 3.5%, at the very least. You have to pay a mortgage insurance premium every single month too. The insurance is paid to the lender in the event you default on the loan.
In order to get a VA loan, you have to be or have been in the military. This includes being a member or former member of the National Guard, or you have an eligible surviving spouse. You don’t need a down payment with a VA loan, but there is a funding fee you pay. It’s a one-time fee and it is around 2% of the loan amount.
If you default on the loan, the lender is the one at risk, who will sell your home via a short sale or foreclosure if you do end up defaulting. The bottom line is you don’t get out of this loan simply by defaulting on it. Just like any other kind of loan, there are consequences associated with not keeping up with payments or defaulting.
Lenders take on additional risk. This is why you have to pay private mortgage insurance. The way to avoid this is to put at least 20% down.
Conventional Loans: The Different Types
There are two types. One is a conforming loan. The other is a non-conforming loan. Below are a few key differences between the two types of conventional loans.
Conforming Conventional Loans
Fannie Mae and Freddie Mac have guidelines that loans have to meet in order to be classed as a conforming conventional loan. These two enterprises are sponsored by the government, and they buy mortgages from lenders.
The loan limit is one of the rules set forth by the two enterprises. A one-unit property has a baseline loan limit of around $450,000. The limit may be higher if the property is located in a high-cost area. If you want to find out what the current conforming loan limits are in your area, then you can contact lenders and ask them or you can ask your current lender.
Nonconforming Conventional Loans
How about loans that exceed the limit? These loans are called non-conforming conventional loans. They are also called jumbo loans.
Nonconforming loans are loans that aren’t purchased by Freddie Mac or Fannie Mae. This is because the loans don’t meet requirements for loan amounts. Private institutions or lenders are the ones that fund these types of loans.
Qualifying For Conventional Loans
You have to speak with a lender, as this is the first step you take. If you’re in the middle of buying a home, speak to Texas Mortgage Pros. They can give you excellent advice.
When you speak with a lender, they’ll ask you for info. This includes documentation such as bank statements, pay stubs and tax returns to name a few. The point of this is to make sure you have income coming in on a regular basis.
A down payment is required in order to be approved for a conventional loan. The amount could be as little as 3% of the amount. However, it’s a good idea to put down 20% or 10% at the very least, that way you won’t have to pay PMI.
Speak with your lender and ask how to become a certified home-buyer. You will have to take a few extra steps in order to do this, but it is worth it. In short, this will help you get to the closing part of the process much quicker, so essentially you will have an edge over other people searching to buy a home.
Need Additional Mortgage Help
Do you need additional mortgage help, even after reading all of the above? Remember, the type of mortgage you decide to go with can impact your financial future. This is why you want to learn as much as you can about the different options out there. The more research you do, the better off you’ll be.
You want to choose a lender that will thoroughly explain what your mortgage options are and a lender that will help you make a well-informed decision. This is why you should speak with Texas Mortgage Pros. They have helped many people get the financing they need for the home of their dreams. Go ahead and contact them today or whenever the time you want to buy a home comes.
With interest rates on the rise, you might want to seriously consider purchasing a house sooner instead of later. The next thing that you might be thinking about is whether you can qualify to get a mortgage or not given where interest rates are currently.
Although lenders have somewhat relaxed their standards since the height of the financial crisis that started ten years ago, there are certain minimum standards that you will need to meet in order to qualify for certain mortgages.
Specific financial documents, a decent debt-to-income ratio, and good credit scores are a few things that you will need for applying and qualifying for a home loan.
The specific requirements will mainly depend on the kind of loan you apply for. Therefore, in this guide, we have broken the lending requirements down for several different kinds of loans.
Requirements of FHA Loans
One of the easiest types of home loans to obtain is a mortgage from the Federal Housing Administration. Because insurance is provided on the mortgage by the FHA, quite often FHA-approved lenders can offer terms and rates that are more favorable.
Also, lenders are more comfortable with borrowers who are potentially more riskier given that 90 of the mortgage is backed up by the FHA. FHA mortgages have lower downpayment requirements which make them good for first-time homebuyers who might not have enough money in saving to make the regular 20% downpayment is when buying a house.
For FHA-approved mortgages, the following are the current minimum requirements:
A minimum 3.5% downpayment and credit score of 500 at least. A 10% downpayment may come from your personal bank account, a local downpayment assistance program, or gift from one of your relatives.
The debt-to-income ratio on FHA mortgages is set by the Department of Housing and Urban Development (HUD). The front-end ratio currently is 31% with a 43% back-end. The front-end ratio only considers housing-related costs, like the monthly mortgage payment, insurance, and property taxes. The back-end ratio considers all monthly debt, which includes housing costs, credit card payments, car loans, and any other forms of recurring debt.
The house must be your primary residence for the first year at least. That includes whether you are purchasing a single-family house or a four- or two-unit property.
You are required to have proof of employment and steady income for the past two years, along with explanations if you have frequent employment changes.
On an FHA loan, you are required to have mortgage insurance no matter how much your downpayment is. On FHA loans you need to pay two different mortgage insurance premiums – an upfront mortgage insurance premium payment and your monthly mortgage insurance payments that are paid each month for the entire life of your loan. The upfront mortgage insurance premium that must be paid is 1.75% of the balance of your loan. It is due at closing and normally financed as part of your loan. Once you make your 3.5% minimum downpayment, then you will need to pay a yearly 0.85% fee of the total amount of your loan. That amount is divided by 12 and then is part of your monthly payments for the life of your FHA loan.
Requirements On Conventional Loans
A conventional 15-year or 30-year mortgage as requirements that are slightly stricter compared to an FHA loan. However, it does come with some longer-term benefits and flexibility.
There are some lenders that might let you make as low as a 3% downpayment in order to qualify to get a conventional mortgage, but you will be required to have mortgage insurance. Some low downpayment programs might have income limits, so make sure you check the address on the properties along with your loan officer to find out if there are any restrictions or not.
On a conventional mortgage, you are not required to carry private mortgage insurance (PMI) and pay for it every month if you can make at least a 20% downpayment on the property. However, if you pay a lower downpayment, then you will need to pay 0.15 to 1.95% of the balance on your loan in FMI fees every year.
Another benefit that conventional loans offer is that after you have the principle down to 78% of the original property value, the lender is required to stop charging mortgage insurance if you make your payments on time. On an FHA loan, when you make a minimum downpayment, the only thing that you can do to eliminate monthly mortgage insurance is refinancing your loan.
On a conventional mortgage, the minimum score that you need to have is 620. However, there are some lenders that might require a 640 minimum score. Remember that having a better (higher) credit score will allow you to receive a better interest rate along with a lower mortgage insurance monthly payment.
Proof of regular income is required by lenders and they will look more closely at your earnings and employment history from the last two years.
Conventional lenders, as of 2018, allow for up to 50% DTIs in certain cases. For any with a debt ratio more than 45, there is one caveat: For people with higher debt ratios, Numerous mortgage companies now require a 700 minimum credit score.
Requirements For VA Loans
The Veteran Affairs Department offers a mortgage for active-duty military personnel, veterans, reservists, and their families. Part of the loan is guaranteed by the VA, which allows lenders to offer military personnel more favorable terms.
Certificate Of Eligibility
In order to qualify to receive a VA mortgage, you also are going to need to get a VA loan certificate of eligibility. It verifies that the military service requirements are met by the applicant in order to be eligible to get a VA mortgage. Certain identification and documents. Veterans and military personnel may apply, by mail, or via a lender after the form is completed.
There is no downpayment that is required.
There are no PMI fees that come with VA loans. However, a funding fee is charged. It is charged at closing and normally is financed with the loan amount. The funding fee amount will depend on whether or not it is the first time that the veteran is using their eligibility. If an applicant has a disability that relates to her or his military service, then the funding fee might be waived.
There is no minimum credit score requirement on VA loans. However, a majority of lenders funding VA loans do have a minimum 620 credit score requirement. The VA loan program just requires the lender to review the whole loan profile in order to ensure that the veteran applying for the loan has the ability to repay it.
No minimum income threshold must be met, although applicants do need to provide steady income proof.
It is recommended that your debt-to-income ratio be no higher than 41% to qualify for VA loans. A higher debt ratio might be approved since a VA lender will also look a the residual income of the veteran, which is calculated based on the borrower’s after-tax income, less expense along with a monthly maintenance calculation that is based on the number of members in the veteran’s family and size of the home.
Requirements for USDA Guaranteed Loans
A mortgage program is offered by the U.S. Department of Agriculture to give low to moderate-income families the opportunity to own their own house in designated rural areas. Applicants may relocate, improve, rehabilitate, or build a dwelling that is located in an eligible rural area. 2010 U.S census data on population is used to determine the rural designated areas.
On USDA-guarantee loans, the program backs 90% of the amount of the loan, and that enables USDA-approved lenders to take borrowers into consideration that might not qualify to get a conventional home loan. A 640 minimum credit score is required on UDA mortgage loans to be automatically approved – as long as the other requirements are met as well. However, homebuyers that have lower credit scores still might be considered for a loan that is underwritten manually.
Special eligibility requirements for your state must be met in order to qualify for a USDA mortgage. The USDA online tool can be used to determine whether or not the property is in a designated rural area. You will have to enter the address, city, and state of the house into the tool. That will confirm whether or not the house you are interested in buying is in one of the USDA designated rural areas or not.
The USDA map can be used to choose your state and then determine whether you meet the income eligibility requirements. The income limits vary based on family size, county, and city.
The homebuyer must meet the following basic requirements as well in order to qualify to get a USDA mortgage:
Agree to personally occupy the house as their primary residence. The home cannot be rented out or used as a second house.
Must be either a qualified alien, noncitizen national or U.S. citizen.
Can incur a loan obligation legally. That just means the homebuyer hasn’t been declared to be incompetent and has the ability to enter into legally binding contracts and understand what the debt obligations are.
Has not been banned or suspended from participation in federal programs.
Indicate a willingness to meet their loan obligations on time.
Buys a property that satisfies all of the criteria of the USDA program, including being located in a rural designated area.
For UDA home loans, the standard DTI ratio is 29%/41% of the gross monthly income of the applicant. On a UDA loan, the maximum allowable DTI is 32%/44% of the person’s gross monthly income, when all of the applications of a loan have credit scores of 680 at least. Under some circumstances, higher ratios are allowed by the USDA on a case-by-case basis. In order to get a waiver for a higher ratio, the borrower must request it from a USDA-approved lender and have it documented by them.
Requirements For HomePossible & HomeReady Loans
The HomeReady mortgage program is offered by Fannie Mae, which is a government-sponsored agency.
The programs are designed to assist prospective homebuyers with low and moderate incomes and limited funds for a downpayment on a house.
A 3% downpayment is required from a gift or the borrower’s own funds.
A minimum 620 credit score is required.
For homeowners lacking a credit score due to not having a credit history, a HomeReady loan can be a good solution. They can offer financial statements as a substitute such as on-time rental payments for 12 months or other types of monthly payments such as utility bill payments that don’t appear on a credit report.
The HomePossible and HomeReady programs may be approved with up to a 50% debt-to-income ratio with strong credit along with other compensating factors like retirement funds or extra savings for reserves.
This program is managed by Freddie Mac.
The HomePossible mortgage is similar to the HomeReady one, but there is one key difference between them. The HomePossible programs allow a borrower to include a non-borrower’s income into the financial calculations – which is income from another individual or individuals who are living in the house to count towards the total monthly income, even when those people are not on the mortgage loan. That can frequently benefit a homeowner who is taking care of a family member who lives in their home who receives Social Security or disability.
A minimum 620 credit score is required.
There is a 3% minimum downpayment required, and additional flexibility in terms of what the source is for the downpayment. The HomePossible guidelines allow the total downpayment now to come from sweat equity, meaning that the borrower can contribute handyman skills rather than money towards their downpayment.
There is a 43% maximum DTI, but there are exceptions up to 50% depending on how strong the borrower’s credit and income are, and whether or not they have any extra money in their bank account (reserves) for making future mortgage payments.
Key Mortgage Documents
Before you apply for a mortgage, the process can flow a lot smoother if you organize all of the paperwork and financial documents that are typically required by lenders on the loan application.
They may include:
Pay stubs for the past 30 days
W-2’s for all jobs that go back two years
A signed purchase agreement with the home’s seller
Tax returns dating back two years
Bank statements for the past 60 days
If you are self-employed, 1099 forms
Homeowners insurance proof
Documented sources of income such as stock earnings and dividends
Proof of any bonus income
If applicable, disability or Social Security income award letters
Securities documents like life insurance policies, bonds, and stocks
Some lender might require written verification of your position and salary, printed on the company letterhead of your employer. The might send a form for verifying employment to the human resource department of your employer to complete.
Before shopping for a house, it is wise to find out the amount you potentially will qualify to borrow. This means you don’t have to waste your time looking at houses that are outside of your price range. When you have a mortgage pre-approval, that means that the lender has examined your current finances, income stability, and credit history, and is prepared tentatively to provide you with a loan on a house.
You will need to provide the following in order to obtain a pre-approval from your lender:
Your social security number and identification.
All of the banks on your bank statements from the two most recent months.
Employment verification, which consists of either W-2’s for two years (or if you are self-employed tax returns) or a month’s worth of pay stubs.
Your credit report will also be pulled by the lender.
Usually, a mortgage pre-approval is good for a maximum of 90 days. Once that time has passed, a creditor will normally want to review your fiance again to see if there have been any changes.
You don’t need to worry about having several inquiries on your credit report if you obtain pre-approval from several different lenders. All of them will count as just one hard inquiry when they are done within a short period of time (typically 15 to 45 days).
Purchasing a house is a major financial commitment and culminates a lifelong dream for many people. Texas Mortgage Pros can assist you with comparing mortgage offers and products. It might be a long road to homeownership, but it doesn’t need to be a rocky one. If you arm yourself with the necessary information ahead of time about various loan programs that are available and what the minimum requirements are for each of them, and the financial documents that you will need to have, then you will have taken the important first steps towards smoother mortgage processing.
The Texas Mortgage Pros
Our team at the Texas Mortgage Pros is comprised of mortgage professionals all across the state of Texas. We are dedicated to providing all of our clients with the best service possible for all of your mortgage needs. When combined with the lowest interest rates and the multiple loan programs that are available in your local area – Houston, Austin, Dallas, the Woodlands, Tomball, San Antonio, and Spring, Texas. Our mortgage professionals have years of experience and will work personally with you to ensure that you receive a home loan that is specifically tailored to meet your expectations and situation. Whether you are consolidating debt, refinancing your existing loan, buying your first house or dream home, our highly experienced loan officers can assist you with finding the best loan programs at the lowest possible rate.
Our ultimate goal is to develop a lasting relationship with all of our clients so that we can continue providing them with outstanding service for many years into the future. Unlike many large nationwide mortgage companies, we will keep all of your information private and secure. Throughout the entire lending community, our name is a highly trustworthy one.
To speak with one of our experienced mortgage professionals directly, just call us anytime or use any of the interactive tools that we provide throughout our website. We look forward to meeting and working with you.
If you have any questions, please feel free to contact us today!
Texas Loan Companies: What You Need To Look Out For
We have all been there. You have an emergency or bills to pay but have no money at all. A personal loan is the first thing that comes in mind when in a tight spot and need cash fast. With dozens of loan companies at your disposal, you are spoilt for choice, or are you? You, however, shouldn’t borrow from the first company you come across.
There are several important factors that one should consider applying for a loan from any company.
Understanding Personal Loans
A personal loan can be defined as money borrowed from a lender to be paid back with interest at a later time. Lenders have to determine a person’s eligibility for a loan before processing or approving a loan application. Lenders will look into an applicant’s:
Credit history and score
After submitting the loan application papers, the lender starts processing the loan immediately, then calculates how much you should pay for the same. You will, however, get these details once the loan has been approved. Should you be unable to repay the loan in full, the lender might choose to use debt collectors or even use legal action against you.
Why Should You Get A Loan?
Most people are eligible for different types of loans. Nonetheless, you should go about applying for loans simply because you can borrow. Financial experts advise against this and only recommend going for one for genuine reasons. Personal loans should, therefore, be treated with the utmost care to avoid building a mountain of debt on yourself. You should also avoid inquiring about a loan too often, as this too can affect your credit score.
Outlined below are some of the good reasons why people get personal loans.
1. To Pay For Medical Expenses
You can never prepare adequately for a medical emergency. Even your medical insurance might not be enough to cover for all expenses. If your savings are running low and unable to settle the medical debt, you can apply for a personal loan. With the personal loan, you should be able to clear the expenses more conveniently. The loan repayment plans are more manageable as compared to having to pay a lump sum at once.
2. For Home Improvement
A home improvement project can help give your home a value boost. That said, some projects can be too costly for the homeowner, forcing him/her to seek financing instead. A personal loan will come in handy in funding some of the expensive projects such as roof replacement or extensions. Some of these improvements tend to pay the loan off in one way or another.
3. Debt Consolidation
There are times when you will have several loans to service. This means some of the loans might end up being forgotten, forcing you to make late payments. Going for a debt consolidation loan can however help you manage these loans at once. The loans are consolidated into one, meaning you only have to think of one loan from that moment on. This reduces the risk of late payments and additional charges that may come with late payments.
4. Significant Purchases
Big purchases may put a huge dent to your savings account. Some investments, such as when you need to replace appliances in the house, or need to buy a car require lots of money. You can take a personal loan to help top up the amount you already have. Many people take loans to pay for their cars and other major purchases in the house. As long as you are confident, you’ll be able to repay the loan on time, then taking a personal loan can be beneficial.
Factors To Consider When Looking For A Loan Company
As mentioned earlier, it wouldn’t be wise of you to apply for a loan from the first company you see. Shopping around can land you a better deal. Here are some of the factors you need to consider when looking for a lender.
1. Interest rates: Check to see how much the company charges in interest. Variable interest rates may seem enticing but are riskier in the end. 2. Reputation: Look for a company reputable enough to stick to the terms of the contract. In addition to this, the company shouldn’t share your information with other companies or advertisers.
Important Things You Should Know About Home Equity Loans
Home equity loans offer a way to borrow money to purchase big-ticket times. It is critical to understand the facts about these loans to ensure that you make the best financial decisions.
If you are thinking about taking a home equity loan out, first you should know about the 13 things below.
1. What Is a Home Equity Loan? (HEL)
This type of loan is where a borrower uses the equity in their home as collateral on the loan. Home equity loans let you borrow a large lump sum of money based on your home’s value, determined by a professional appraiser, and the current equity in your property.
There are both adjustable-rate and fixed-rate home equity loans that are available and they also have different amounts of time for repaying the debt, and typically range from 5 to 30 years. There are also closing costs that must be paid, but they are much less than the ones paid on a full mortgage.
Fixed-rate home equity loans offer the predictability of a fixed interest rate from the very beginning, which is preferred by some borrowers.
2. What Are The Best Uses For A Home Equity Loans?
Usually, home equity loans are best used for individuals who need money to pay for a major expense, such as a home renovation project. One thing that home equity loans are not especially useful for is to borrow small sums of money.
Typically lenders don’t want to deal with making small home equity loans. About the smallest amount that you can get is $10,000. For example, Bank of America has a minimum of $25,000 for its home equity loan amount, while Discover offers $35,000 to $150,000 home equity loans.
3. What Is a Home Equity Line of Credit? (HELOC)
This is a revolving line of credit that is based on your home’s equity. After the limit has been set by the lender, you will be able to draw on the line of credit whenever you want to over the life of your loan by simply writing a check against this line of credit.
A HELOC in some ways is similar to credit cards: you don’t have to borrow the entire amount of the loan, and your available credit gets replenished as you continue to pay it back. You could, in fact, pay the loan back in full over the draw period, then re-borrow the total line of credit amount, and then repay it once again.
Typically the draw period will last around ten years with a repayment period of 10 to 20 years. You only pay interest on the amount you borrow from the total amount that is available, and usually, you are not required to repay the loan until the draw period closes.
Sometimes HELOC loans also have an annual fee. The repayment period for a HELOC has adjustable interest rates, and usually, they are based on the prime rate, although often they can be converted over to a fix-rate loan following a certain time period. Also, there are usually closing costs that need to be repaid on a loan.
4. What Is A Home Equity Line Of Credit The Best For?
A HELOC is usually best for individuals who are expecting to need a varying amount of money over time. For instance, to get a business started. If you do not need as much as is required by a home equity loan, you can choose a HELOC instead, and borrow only what you actually need.
5. What Are the Benefits of Home Equity Lines of Credit and Home Equity Loans?
Beyond having access to large amounts of money, home equity lines of credit and home equity loans also have the advantage is usually the interest that you pay is tax-deductible for people who itemize deductions, since it is same as conventional mortgage interest.
Federal tax law lets you deduct mortgage interest on home equity debt of up to $100,000 ($50,00 each for married people who file separately). However, there are some limitations, so consult with your tax adviser in order to determine what your eligibility is.
Because home equity line of credit and home equity loans are secured by your house, the interest rates tend to be lower as well compared to what you would pay on an unsecured loan or credit card.
6. What Are the Main Disadvantages of Home Equity Lines of Credit and Home Equity Loans?
The debt that you are taking on from a HELOC or HEL is secured by your house, which means that your property is the collateral on the loan and may be at risk if you do not make all of your loan payments. You could potentially be foreclosed on your home and lose if you are delinquent on your home equity loan, and also the same thing is true on your main mortgage.
In the event of a foreclosure, the first to be paid off is the primary mortgage lender, then the home equity lender gets paid with whatever is remaining.
If the value of your home declines, you might go underwater and end up owing more money than your home is worth. Rates on HELOCs and HELs also have a tendency to be higher than what you would pay currently on a mortgage and then fees and closing costs can start to add up.
7. Can I Determine What My Equity Is?
If you have an interest in learning how you can qualify to get a home equity loan, the first thing that needs to be determined is the amount of equity you have in your home.
Equity is the part of your house that you own, while that part that you owe is owned by the bank. If your house has a $250,000 value and you owe $200,000 still on your mortgage, and the equity that you have is $50,000, or 20%.
This information is commonly referred to as the loan-to-value ratio – which is the balance that is remaining on your loan that is compared to the value of your property – and in this case, it is 80% ($200,000 is 80% of $250,000).
8. How Can I Qualify To Get a Home Equity Loan?
In general, lenders will usually require you to have an 80% loan-to-value ratio at least that remains after a home equity loan to be approved. This means you will need to own over 20% of your home before being able to qualify to get a home equity loan.
If you own a $250,000 house, you need 30% equity at least – a mortgage loan balance of a maximum of $175,000 – to qualify to get a home equity line of credit or equity loan of $25,000.
9. If I Have Bad Credit Can I Still Get A Home Equity Loan?
Many lenders require a good or excellent credit rating in order to qualify to get a home equity loan. To get a home equity loan it is recommended to have a credit score of at least 620 and to get a home equity line of credit you might need to have an even higher score than that.
However, there are some situations where someone with bad credit might still be able to get a home equity loan if they have a low debt-to-income ratio and have a high amount of equity in their house.
If you believe you will be shopping for a home equity line of credit or home equity loan fairly soon, you should first consider taking the steps to improve your credit.
10. How Soon Will I Be Able To Get A Home Equity Loan?
You can technically get a home equity loan right after you buy a house. However, home equity usually builds up slowly, and that means it may be a while before you have built up enough equity in order to qualify for a home equity loan.
It may take five to seven years to start to pay down on the principal of your mortgage and start to build equity.
The normal processing time for a home equity loan can be anywhere from two to four weeks.
11. Is It Possible To Have More Than One Home Equity Lines of Credit?
It is possible to have more than one home equity lines of credit, but it is rare, and not many lenders offer multiple ones. You would need to have excellent credit and substantial equity in order to qualify for multiple home equity lines of credit or loan.
If you apply for two HELOCs at once but from two different lenders but do not disclose them it is considered to be mortgage fraud.
12. How Are The Best Banks To Get Home Equity Loans From?
Brokers, mortgage lenders, credit unions, and banks all provide home equity loans. A little shopping around and research will help you determine which of the banks are offering the best interest rates and home equity products for your situation.
Start with the credit unions and banks where you have a relationship already, but also ask for referrals from family and friends who have received loans recently and also make sure that you ask about fees. Insight can also be provided by real estate agents.
If you are not sure of where to get started, the following are a couple of options for you to consider:
-Lending Tree works along with qualified partners in order to the best interest rates and provides an easy way of comparing lending options.
-Discover provides home equity loans range from $35,000 up to $150,000 and they make it very easy to apply for loans online. At closing, there is no cash required or application fees.
-Bank of America on primary homes provides HELOCs of up to $1,000,000, makes it very easy to apply for online, and for existing bank customers offers fee reductions, but does have higher debt-to-income ratio requirements to many other lenders.
– Citibank has options for applying in person, over the phone, or online for both HELOCs and HELs. Citibank will also waive closing costs and application fees – but on HELOCS there is an annual fee that they charge.
– Wells Fargo currently only offers HELOCs with fixed rates, but discounts are offered to Wells Fargo customers, and reduce interest rates if the closing costs are covered.
13. How to Apply for a Home Equity Loan
Before you are able to apply for a home equity loan there are certain requirements that must b met. Follow the five steps below to improve your chances of getting approved for a home equity loan:
– Check your credit score. Having a good credit score makes it easier to qualify for a home equity loan. Before you apply for a loan, review your credit report first. If your credit score is less than 620, and you aren’t desperate to get a loan, you might want to take the necessary step to improve your credit before applying.
– Determine what your available equity is. The amount of your equity will determine how large of a loan you are able to qualify for. You can get a general sense of the amount of equity that your house has by checking websites like Zillow in order to determine what its current value is and then deducting the amount that you owe still. The lending institution’s appraiser will determine what the official value of your house is (and therefore what your equity is) when you apply for the loan, but you can get a pretty good sense of the amount of equity you might have by doing a bit of research first.
– Check your Debt – YOur likelihood of qualifying for a home equity loan will also be determined by your debt-to-income ratio. If you have lots of debt, you might want to work at paying it down first before applying to get a home equity loan.
– Research rates at various lending institutions and banks. NOt every lending institution and bank will require the same qualifications, fees, or rates on their loans. Do your search and before you start the application process, review multiple lenders.
– Collect the required information. It may be a lengthy process to apply for a home equity line of credit or home equity loan. You can speed up things by collecting the necessary information before you get started. Depending on the lending institution you work with, you might have to provide tax returns, pay stubs, a deed and more.
If you need to have a loan to help with covering your upcoming expense, be sure that you are prepared. Check our Loan Learning Center to review more resources on different kinds of loans that are available.
FAQs on Home Equity Loan
The following are a couple of the more commonly asked questions on home equity lines of credit or home equity loans:
Why is a home equity loan a good option for financing?
Usually, home equity loans come with a lower interest rate compared to another form of credit or traditional loan. Also, it is a secured loan and your house is the collateral. Therefore, the bank views the loan as less risky. Also, as previously mentioned, it is a tax-deductible form of financing.
Variable or Fixed Interest Rate?
Home equity loans have a fixed interest rate since it is considered to be an installment loan. But a home equity line of credit might have an interest rate.
Why does a home equity loan have closing costs?
Closing costs are necessary to set a home equity line of credit or home equity loan. These closing costs may cover the property appraisal fee for finding the value of the house, title and property insurance, mortgage filing and preparation fees, a title search on the property, attorney’s fees, and application fee. Overall, fees might total up to two to five percent of the total amount of your loan.
The Loan-to-Value Ratio is one of the most important basics when it comes to applying for a mortgage.
If you are shopping for a new home or are already applying for a mortgage then you will have heard of the loan-to-value ratio before. The acronym LTV is used a lot in the news, as well, and cropped up frequently when people found themselves in negative equity when the housing market crashed over a decade ago.
No matter what the situation in the housing market, it is important that you understand LTV, and that when you apply for a home loan you get the best deal that you can. Having an LTV that is too high can mean that you have to pay a lot more for your mortgage and that your refinance options and loan eligibility become poorer.
The LTV ratio is easy to calculate:
Just divide the loan amount you are applying for by the appraised value of the property.
That gives you the ‘loan to value’.
The hard part is determining the true value of your home.
The LTV ratio is the amount of the mortgage loan, divided by the purchase price or the appraised value of the property (whichever is lower).
If you are refinancing a mortgage, then the LTV is the outstanding loan balance divided by the property’s appraised value.
Lower LTV figures are better when it comes to getting a good rate on your mortgage.
Let’s take a look at a few simple calculations
Let’s calculate a typical LTV ratio:
Property value: $600,000
Loan amount: $450,000
Loan-to-value ratio (LTV): 75%
In the above example, we would divide $450,000 by $600,000 which gives us a result of 0.75, or 75%
You can do calculations like that in your head, or using a standard calculator. There is no need to use an online “LTV Calculator”. The arithmetic is not complicated and it’s a one-step process. It’s something that anyone can do, and it will arm you with some useful information for getting ready to apply for a mortgage.
Once you know your loan to value, that gives you an idea of the equity you hold in the property. In this case, your loan is for 75% of the property, so the remaining 25% of the property is the ownership that you hold.
It is important to know your proposed (or current) LTV so that you can show to the lenders that you actually have some money to put into the property. Lenders like to know how much of a risk they are taking when they allow someone to borrow from them.
Lower LVR ratios mean you own more of the property and are likely to get a better mortgage rate. The more equity you have or the bigger the downpayment you can put in, the better. Low LTV means less risk and less interest.
If someone has more ownership then they are less likely to end up falling behind on their payments and the mortgage company is less likely to need to foreclose on them because the homeowner has more to lose.
If they do end up struggling with payments, they could sell the property and not be faced with a massive loss.
Mortgages are tiered, with the tiers based on the LTV ratio. Someone who has a lower LTV ratio will be able to get lower interest rates, and those who have a higher LTV will have to pay a bigger mortgage or more closing costs.
Let’s consider a situation where you have a less than perfect credit score, and lenders want to charge you more interest. The adjustment you are faced with will grow even more if you have a higher loan to value ratio because that means even greater risk.
If you have a loan to value ratio of 80 percent and a poor credit score then that could mean you are faced with a .25 percent higher mortgage rate. If your loan to value ratio was 90 percent then the hit could be 0.5 percent. That might not sound like a lot, but over the term of the mortgage, it could see you paying an awful lot more. It makes sense to find ways to make a bigger down payment and to bring your mortgage as low as possible.
If you can, try to repair your credit score over a few years as well so that you have more loan options open to you, regardless of your equity and downpayment.
The 80% LTV Threshold Matters
It is important to keep your LTV below 80% That will help you to secure a lower interest rate for your mortgage It will also help you to avoid Private Mortgage Insurance Most borrowers will elect to put down a deposit of at least 20%l so that they can avoid mortgage insurance and pricing adjustments
You don’t always need to put down 20% to get the benefits of having a lower LTV, though.
Looking at our first example once more, let’s raise the initial mortgage to $480,000 and add an additional mortgage of $60,000. This gives a combined loan-to-value ratio of 90% since the total amount borrowed is $540,000 on a $600,000 property.
The first mortgage is for 80%, and the second mortgage is for 10%.
Breaking up home loans into ‘combo mortgages’ allows you to keep the loan to value below the threshold, reducing the interest rate and also avoiding the need for private mortgage insurance. Many borrowers opt to do this.
Banks and mortgage companies do have limits on the LTV and CLTV that they allow, so you are not going to be able to borrow more than the property is worth. Many lenders set their thresholds at 80, 90 and 100 percent depending on the value of the property and the credit history of the borrower. These limits were introduced when the credit crunch hit, and they are gradually being relaxed, but it still makes sense to be cautious with borrowing.
If you are looking for a mortgage at the moment, then you are likely to have heard a lot about loan to value ratios. Hopefully, those figures will have cleared things up for you, and you will have some idea of what you should be aiming for. If you want to minimize the interest that you pay and improve your prospects of getting accepted by a good lender for the property of your dreams then you would do well to try to reduce your loan to value as much as you possibly can.
Out of all of the elements of working out mortgage eligibility and how much interest you might pay, figuring out the loan to value ratio is perhaps the easiest. Just divide the amount of the loan by the appraised value to get the LTV.
The hard part is often working out the value of the property.
The loan to value ratio, or LTV, is the value of the being applied for divided by the worth of the property (defined as the lower out of the appraised value and the purchase price).
In the case of an existing mortgage, this is the outstanding loan balance, divided by the most recent appraised value.
The lower the number that you get when you calculate the LTV, the better.
If you are lucky enough to be dealing in fairly round numbers, you should be able to calculate the LTV in your head, for example:
Property value: $1,000,000
Loan amount: $700,000
Loan-to-value ratio (LTV): 70%
All you have to do is divide the loan amount ($700,000) by the value of the property ($1,000,000). This gives us 0.7, or 70%.
You can do this on a calculator, or in your head. There is no need to use a specialist LTV calculator, although if you’re already on a mortgage website then you might want to try it just to use their other tools as well.
The result, 70% is good, because it means that the hypothetical borrower has 30% ownership of the property. This means that lenders will view them as fairly low risk and that they might get a good rate for their mortgage.
Lower LTV ratios mean that you own more of the property
Lenders see this as a good thing and offer better rates
A low LTV means more equity in the property or a bigger down payment
More equity means less risk for the lender
There are ‘breakpoints’ where if you get the LTV below that level you will be offered more favorable mortgage rates from the mainstream lenders
The lenders know that if someone has more ownership they are less likely to fall behind on their loan repayments and that in the event that they do fall on hard times they are more likely to be able to just sell the property without ending up facing a loss. This means that it is safer to lend to those people and that they will get better prices. In many cases, those with very low LTV ratios will not just see lower interest rates, but also lower closing costs. Keeping the LTV below 80% is valuable too because it helps to avoid private mortgage insurance.
Someone who has a poor credit score should look to avoid a high LTV because they will already be getting charged more for their mortgage. By reducing their overall risk they can reduce the negative impact that their poor credit score is having on them, although improving the score as well will go a long way.
Someone who has a poor credit rating and pays 0.25% more than average for an LTV or 80% would likely end up paying 0.5% more for an LTV that is above 90%. It makes sense, then, for those who have poor credit histories to look for ways to reduce their LTV to below the 80% threshold. The lower the loan to value ratio is, the better, for any borrower but especially for those who have a poor credit rating.
In the long term, building a good credit history is the best option for anyone, whatever their situation. Those who are planning to apply for a mortgage should definitely investigate their credit history.
The Crucial 80% LTV Threshold
You should always aim to have an LTV of below 80%
This will save you a lot of money
Lower LTV ratios mean lower interest rates
An LTV below 80% will allow you to avoid private mortgage insurance (PMI) too
The traditional way of avoiding higher LTVs is to put down a deposit of 20% when you buy a home so that you can reduce the total amount you pay over the term of the mortgage
You don’t have to do that though, there are other ways to save money on your mortgage and reduce the LTV.
One option is to take out a first and a second mortgage. The total (or ‘combined loan to value ratio’) of the two mortgages may be above 80%, but each mortgage will have a lower loan to value.
For example, you could borrow $800,000 on one mortgage and $100,000 on another, for a combined loan to value of 90% on a $1,000,000 property. The bigger of the two mortgages, however, would still be just 80%. The CLTV would be 90% because the other mortgage has an LTV of 10%.
Combo mortgages can help to keep the LTV on each mortgage below key thresholds, and this will help you to avoid higher interest rates and the misuse of private mortgage insurance. There are limits on the size of the total loan that you can take out and you will not usually be able to borrow more than the total value of the property. Many lenders prefer people to not borrow more than 90 percent of the property value, depending on your credit history.
There are different limits depending on the type of home that you want to buy.
FHA loans can often be as much as 96.5%
Conforming loans may reach 87%
VA and USDA loans are often allowed to be zero deposit/100% LTV
If you are buying an investment property, jumbo or cash-out refi then you are likely to see more restrictions on the total amount that you can borrow. Non-government loans are likely to be more restrictive than a government one as well. Refinances can sometimes be less flexible than loans to purchase a house in the first place.
Loan amounts are increasing. It wasn’t all that long ago that the limit for an FHA loan was 95%, but now Fannie Mae and Freddie Mac are in competition against the FHA which is driving loan amounts up.
Veterans and those who live in rural areas may be able to borrow more than those who are in bigger cities. It is a good idea to shop around, wherever you are buying a property because there are a number of options to buy properties from private lenders that may be willing to offer more flexible financing. There is no need to head straight to the lenders that are advertising on TV. A little legwork could save you a lot of money.
If you have a higher LTV than you would prefer, the good news is that there are a number of ways that you could potentially reduce it.
Borrowers Have Options to Lower Their LTV
For a home purchase loan, use a larger downpayment. Ask for gift funds as a way of making your downpayment greater. Break your mortgage up into a combo loan. Make additional payments or put in a lump sum payment and refinance so that the LTV is lower when you apply. Wait for amortization and appreciation of the home to reduce your LTV over time.
If you’re purchasing a new property, then the main option is to save and have a bigger downpayment. Yes, that’s not always easy, but it is often possible.
Ask if someone is willing to act as a co-borrower for you or to gift you the money.
Alternatively, look into ways of breaking up the financing into separate loans, and having a first and second mortgage.
With refinancing, you have the option of paying the balance down more aggressively before you apply. Make extra mortgage payments, or wait a bit longer before refinancing.
This could help you if you are close to the LTV threshold, or you need to get below a conforming loan limit.
It’s important to pay close attention to the LTV, because if it is above 80% then you may be paying more than you need to. There are other thresholds, too, where if you can reduce the LTV you may pay less interest.
If you aren’t under urgent need to refinance, then why not take the zero effort approach to reduce your LTV. Just sit back and watch as your house value increases over time. This will lower the LTV in the process. Of course, that isn’t guaranteed to happen. Home values can fall as well as rise.
In general, real estate prices rise over the long term, so your best bet is to be willing to ride out the changes, and to refinance at a time when it is financially suitable for you.
With people who are looking for a cash-out refinance, a jumbo loan, or to acquire some investment property, there are far more restrictions. The Loan to Value is likely to be limited to 70 or 80% at most.
Be aware that if you borrow a lot of money you are taking a big risk. There are borrowers who are now in negative equity because they owe more on their current mortgage than the value of the property today. This can happen for many reasons, and since the housing market is cyclical, you can never be sure that your ‘expensive’ house today will still be in demand in ten year’s time.
Having negative equity (an LTV ratio that is over 100%) is not a problem if you can meet the repayments on your mortgage and you are not planning on moving. It is a problem if you need to move home or if you need to refinance your mortgage. It’s also a problem if you are on a mortgage that is not fixed rate, and the lender charges you more because your LTV is so high.
The Home Affordable Refinance Program has helped a lot of ‘underwater’ homeowners to get back into the black by refinancing on a lower rate without a limit to their LTV. You will need to have a loan that is under Fannie Mae or Freddie Mac if you want to take advantage of that refinance option. There are similar options such as FHA streamline refinance for FHA loans or the VA IRRRL for VA mortgages.
Underwater borrowers can recover. It may take them some time to get back to the same financial standing as someone who bought when the property market was low, but it is possible for them to build equity if they are patient and think long term.
Home buying should not be a hasty decision. It is something that you should work on steadily.
Remember the following:
Lower LTV ratios mean bigger savings
You will usually get lower interest rates with bigger deposits
Long term, you will pay less to repay the mortgage
Put more of your money towards paying off the principle by having a low LTV
Keep your LTV under 80% to avoid PMI
You will have access to more lenders if you have a lower LTV
Even people who have a poor credit rating can save money by using a bigger deposit
You are more likely to get approved for a mortgage if the lender sees you as being lower risk.
Before making a decision, let one of the experts at The Texas Mortgage Pros help you find out exactly what loan is best for you. Contact us today Or Call Us @ (866) 772-3802
Finding That Perfect Price For A First-Time Homeowner
There is something that we must all consider and that is known as payment shock, which is basically a large increase in monthly liabilities.
An example of this would be if your housing payment went up 200%, that would be a shocking experience! Imagine paying $1,000 per month for a rental only to have to pay $3,000 per month the next.
You more than likely are beginning to understand what type of situation you are getting into.
It is always going to be better to stay under budget as it is going to take time to deal with the larger costs of owning a home.
This is true once you begin to see all of the other bills associated with owning a home such as that much larger electric bill.
Many times when looking at a home, we tend to over exceed our budgets, which means you have to have a budget ready to go.
Starter Or Forever Home?
Most home buyers usually look for a starter home to begin with.
Typically with time, they will move up to a larger home.
However, one must understand that there are many transaction costs involved in the purchase of a home.
You may consider that buying your forever home right from the get go is a more sensible solution.
Taking the budget out of the equation, it is still not that simple of a process. Home purchases are not only an expensive transaction they are highly time-consuming.
While the cost to close a home is rather expensive, you can expect the process to be rather lengthy.
In addition, it can be just as expensive to sell a home, one must consider repair costs, closing costs, real estate costs, and other associated fees.
In the simplest terms, buying and selling a home is an expensive process, so limiting the experience may be a good one.
If you have the funds, you may just want to look for a forever home and bypass the whole starter home process.
Many millennials have started with this trend and feel as though it is working out for them.
However, statistics have shown that few people stay in the same location for extended periods of time. For many people, they tend to stay in one home for ten years or less.
This just may ruin the fixed mortgage vs. ARM, however, that is a discussion for another day!
You will just have to weight the proc and cons of a starter home vs. forever home to decide what is best for you.
A starter home is going to be your cheaper option in the beginning, however, a forever home may be the cheaper alternative in the long run.
One must simply take the time to decide what is going to work the best for their finances and options at the time being.
In many cases, starting with a starter home is the only way people are able to save up and generate a down payment for their larger home in the future.
However, what do you do if you want to bypass all that and simply buy one home? It helps you avoid a lot of excess costs and headaches.
Plus it gives you a home that you can grow into as a family. In addition, you are not going to find the same level of competition with a forever home as you would with a starter home, so no bidding wars to contend with.
It seems as though that is the best way to go, doesn’t it?
However, this is one of those cases, where it is easier said than done. In all reality, you more than likely will get tired of that home and end up moving down the line.
You are going to find that it can be hard to find a home that is going to match all the various stages of your life at one time.
The Price Depends On Your Needs
There is not one price that is going to fit everyone for their first home.
It is going to vary depending upn your needs and affordability.
However, it is always wise to look into your future before you make that initial purchase.
Be sure you try to negotiate on the price of the home when you find the right one.
Keep in mind, depending upon your needs and wants is going to have an impact on what you pay.
For every location and number of bedrooms and bathrooms that are required will impact your bottom line.
There are going to be times where your price point and what you need and want are not going to add up and you are going to have to find a way to make things right so you can afford something.
If you do have the extra savings and some wiggle room, you very well may be able to afford your forever home today as opposed to ten years from today.
However, you will still be limited by the amount of homes that are in the market.
Price is always going to be determined by square footage, number of bedrooms, desirability, and of course the location.
Every individual is going to have various needs and find out what they are able to afford is quite different.
Basically, there is not one right number to this equation. It is simply a matter of what you can afford and what is available. As well as how many times you are willing to go through this process.
Before making a decision, let one of the experts at The Texas Mortgage Pros help you find out exactly what loan is best for you. Contact us today Or Call Us @ (866) 772-3802 click here to go to the first article in this series.
Those who are buying for the first time might want to aim for prices close to these levels, since starter homes are usually cheaper than others. Having said that, it’s always so simple.
Individual housing markets across the country have a variety of home prices, and a lot of cities fall over the median.
Another thing that is a limiting factor is the homebuyer’s finances because there’s no way to buy more than you can afford to borrow.
The mortgage lenders and banks will go through your income, your assets, and your down payment, and they’ll tell you that you can only borrow so many dollars.
You can’t exceed your upper bound, but you can find out what it is by going in to get a pre-qualification or even a pre-approval.
You might dream of buying a home that’s worth $1,000,000, but your finances might ground you to something that’s $400,000 at most.
It’s still a good starting point, given that you’ll have established what your affordability and personal price ceiling are like. It also means that when you spend time on Redfin or Zillow, you can just set the maximum filters at $400,000 so that you don’t see anything above that.
If you find yourself not wanting to deal with anyone personally, you could choose to put your financial numbers through some mortgage calculators, but you need to be mindful of the fact that these aren’t nearly as accurate.
In either case, you need to look at things other than money, given how there are other factors in play. They include but aren’t limited to the features you’ll require, how long you intend to live in the home, why you want to buy to start with, and so forth.
Do You Hope To Live Above, Below, Or Just At Your Means?
Do you have fun making do with less? Or do you spend until you’re broke? There’s no law that says you must spend the full maximum that you can afford.
Many find it sensible to stay under their maximum so they walk away with a safety net for things that they can’t anticipate.
Let’s go back to our previous example, where you qualified for a maximum buying power of $400,000. It’s useful, certainly, although that doesn’t mean it’s mandatory to spend all that.
You have credit cards, right? Some issuers will give you credit lines up to $25,000. Did you run out and spend all of that? Unlikely. I doubt you even got close.
That number is just what they’ve figured out from your employment, income, and credit history.
Mortgage lenders also do this, using things like proposed down payments and debt-to-income ratio in order to determine your maximum purchase price.
Again, is spending that much even a good idea? Chances are good, particularly if it’s your first time, that you might be smart to aim somewhat lower.
Consider that homeownership typically comes with a lot of unexpected costs, although seasoned homeowners might not think of them as unexpected at all. However, if you’re a first-time homebuyer, they might just shock you.
Even your monthly bills for home maintenance can keep you up at night. If you weren’t already paying for trash, gardening, water, insurance, and other utilities, and now you suddenly are, it can be a jolt to you, and your bank account.
Also, don’t forget that property tax bill or your monthly mortgage payment. There’s also that new furniture you need to buy. You might even have a baby coming into the picture. It’s a lot to deal with!
Before making a decision, let one of the experts at The Texas Mortgage Pros help you find out exactly what loan is best for you. Contact us today Or Call Us @ (866) 772-3802 click here to go to the next article in this series.