So you're ready to start the home buying process. Congratulations!
Maybe you do some research to find yourself an agent, maybe you call a real estate office and talk to the agent on duty, maybe you wind up on a website, or pull up to a house you want to see and call the number on the sign...
The first question you're going to be asked by any Realtor worth their salt is, "Have you spoken with a lender yet/Are you pre-qualified?" Why? It's pretty normal for a buyer's idea of what they can afford to be more than what the lender says (and lender has ultimate say on this one). That can cause us to be viewing homes you won't be able to purchase (and giving sellers false hope of a possible offer). We don't want to waste our time or yours and we certainly don't want to start off your home buying process with disappointment. Besides that, having a pre-qualification letter in hand at the very beginning means as soon as you find "thee house," you are already prepared to write an offer and prove your buying power.
So you speak with a lender and do an application (which will ask questions like where you work, how long you’ve worked there, how much you make, if you have any if anyone else will be on the loan with you {and the same information from the co-borrower, if there is one}, etc). The lender then reviews the application and your credit (score and history) and determines if and for how much he can give you a pre-qualification. This if different from an approval because you haven't provided any documentation to support the information you’ve given up to this point. In some instances the lender may begin collecting supporting documents right away, other times they may wait for you to submit a contract for purchase. IF YOU WERE NOT HONEST DURING THE APPLICATION PROCESS, and yes, that does happen, YOUR PRE-QUALIFICATION MAY NOT BE GOOD! This is where people who were sometimes pre-qualified to purchase are told that they actually in fact cannot. And that’s because the truth of their income or debts throws the numbers off and they no longer qualify, or maybe don’t qualify for as much. So for everyone's sake, BE HONEST UP FRONT, the truth will come out anyway.
So lets get to the meat of this post- types of mortgages. There are 4-> VA, USDA, FHA, and Conventional.
VA LOANS:
Because of our proximity to Fort Stewart and Hunter Army Air Field, VA loans are quite common in our area and so I will start with them.
A VA loan is specifically for people who have served in the military (under certain guidelines. Dishonorably discharged members are not entitled to a VA loan). While people who fit in that category are entitled to use a VA loan, they do still have to QUALIFY for the loan, which requires a minimum credit score of 585. There are many lenders who will require a 620 or 640 for a VA loan, this is an additional restriction set by the lender! If you are between a 585 and 640, you CAN still qualify for a VA loan. If you are in this bubble and have been denied or haven’t tried yet, please call me to connect you with the right people to get your loan started!
A common misconception about the VA loan is that the VA is lending the money/ you have to “go to the VA” for the mortgage. That is not how they work. A VA loan is actually “VA guaranteed.” So you still use any lender you like, lets say LMNOP Mortgage as a made-up example, and they provide the loan to you through their company. The VA then guarantees the loan to that lender. If the buyer fails to make payments and LMNOP mortgage forecloses the property on them, the VA will pay LMNOP Mortgage for their loss on the loan and assume the ownership (and you will then find that property on the market as a VA foreclosure a few weeks or months later).
A VA loan has 0% down payment. You will still have to pay earnest money and an inspector, but there are no out-of-pocket expenses on the loan itself. Active-duty members and veterans with less than 60% disability will be subject to a “funding fee” on their loan of 2.15% for the first time use (2.4% for guard and reserve) and then 3.3% for all subsequent uses. So long as your Realtor selects the appropriate box on the VA exhibit for your contract, the funding fee is added to the total amount you are borrowing (ex- $100,000 loan, first time VA loan has a funding fee of $2,150. Total amount actually borrowed would be $102,150) If you have a disability rating of 60% or more, you are exempt from the funding fee. And since it is traditional in our area for sellers to pay closing costs and pre-paids for VA buyers (although this is negotiable so it will depend entirely on what you and your realtor work out with the seller), you should be able to buy the house for only the out-of-pocket expense of your home inspection (approx. $250-350).
A popular question I am asked with VA loans is about the renovation loan program. Yes, it does exist and it has great intentions, but the truth is its design makes it hard to obtain. Firstly, to qualify, you have to be active duty or served for a minimum amount of time. You are basically borrowing the money to renovate up front and as such have a burden to prove the cost and necessity of the renovations to the VA. If you manage to get past that, you then must meet all of the standard VA living condition requirements within 90 days of closing on the home. I honestly don't even know what the reprecussions are if you don't. The short and sweet is that most buyers decide they aren’t worth it and I have yet to close a house using one.
Noteworthy facts-
· The VA qualifying member must be the primary borrower. Spouses are the only permitted co-borrowers.
· VA loans cannot be used on condominiums or townhouses/rowhouses that are less than 80% owner occupied
· VA loans CAN be used on mobile homes, but they home MUST be considered real property/attached to land with the appropriate
supporting documents from the county they are in. This means you cannot use VA loans to purchase a mobile home from a wholesaler
USDA:
A USDA loan is a government funded loan that is similar to the VA loan in that it is 0% down payment, however, USDA is accessible to everyone who meets the qualifying guidelines. The minimum credit score is 620, but again you will find many lenders who have an increased requirement anywhere from 640-680. There is also a household income cap in place for this loan. The cap is unique to the county and household size, so if you are considering a USDA loan, please reach out to me so I can help you determine what that amount is.
In addition to the buyer having to qualify for the loan, the home you’re purchasing also has to qualify. The USDA loan was designed to help increase sales in rural areas that have a slower turn-over by making mortgages more affordable/accessible. In our particular area, all of Hinesville and the portions of Allenhurst, Walthourville, and Ludowici that are close enough to be considered the “Hinesville area” do NOT qualify for USDA use. There is a formal map, if you are interested in the exact excluded zone, I am happy to send you a copy. Also noteworthy- USDA loans cannot be used to purchase a mobile home, even if it is already attached to land.
USDA loans do have a mortgage insurance fee involved. There is an up-front guarantee fee equal to 1% of the purchase price (typically added into the loan amount) as well as 0.35% fee applied annually (paid as 1/12 in each mortgage payment of the year). These are considered rather minimal expenses and makes the USDA loan appealing to those who it can work for.
FHA:
FHA loans are originated through the private sector (ie not government funded). They are widely used loans among home buyers as they keep the required down payment to a minimum. If you have no military affiliation and exceed the UDSA income cap or want to buy in an area USDA does not cover, FHA is the typical route. They have a minimum qualifying credit score of 580 (once again, its popular for lenders to add restriction and require a 640. There are lenders who will give you the loan at 580. Call me if you’re in the 580-640 credit score bubble!). FHA loans do require a minimum down payment of 3.5% of the purchase price of the home, so you will need to have some money saved. The down payment is equivalent to $3,500 for every $100,000 of purchase price (so if you buy a $200,000 home, you will need $7,000 cash).
Like the USDA loan, an FHA loan requires mortgage insurance both up front and annually. The up front MIP is 1.75% of the purchase price and is traditionally added into the loan. The annual % is buyer specific and depends on the down payment and loan terms. That would be information the lender would provide.
Conventional:
Last but certainly not least is the conventional loan. This is the other "private" mortgage. Conventional loans are the one that most people are familiar with and makes them think they can’t afford to purchase a home because they “need 20% down payment.” This is not particularly true (plus as we’ve covered- there are other loan options). Conventional loans DO require a down payment, but they can range anywhere from 5% up to 20%. There is a minimum qualifying credit score of 620, but the lower your credit score, the higher your down-payment and interest rate, which could make the FHA loan a better investment as it would cost less in the long run.
If your down-payment is less than 20%, you will be subject to paying mortgage insurance on the loan. However, unlike the FHA loan, the mortgage insurance is no longer required once you reach 20% equity.
Conventional loans can be used on a variety of home purchases, but is noteworthy as one of the few programs available that can be used to purchase investment/rental property. Typically investment purchases will require the full 20% down payment and will have a slightly inflated interest rate compared to if being used to buy a primary residence. I am reasonably well versed in investment purchases and can help you better understand that market if it is something you are considering!
Generic/Misc info:
-All loans require some "reserves" in your bank account. Basically you want to at least have the money to cover the first mortgage payment.
-If there is more than one person on the loan, the lowest credit score is the one used to qualify for the loan.
Thats it! I know it was a lot of information. I've done my best to keep it simple and avoid complicated language, but if I left you with questions I am more than happy to answer them and/or get you in touch with a lender who can answer them.
Please feel free to email, call, or text me anytime-
CarolDumaplin@CarolDumaplin.com CarolDumaplin@gmail.com (917) 704-1009
**Please keep in mind that I am not a lender and this information is provided on a “to the best of my knowledge” condition based on what I have learned in my experience as a Realtor. Some conditions are lender and/or buyer specific. Guidelines and restrictions can and do change and this information can become outdated. I have done my best to give accurate information as of the publishing date. I am more than happy to connect you with a lender to confirm or correct any information you’ve found herein.