When you finally decide to buy a house instead of wasting money on rent, you will soon discover a variety of mortgage options. It may seem overwhelming, but a mortgage professional at Southwest Funding can make the process easier once he or she has a clear picture of your finances. The first thing you should do is contact a mortgage professional to get pre-qualified. If you do this before you even start looking, you’ll know what your budget is, and you won’t fall in love with a house that is too far out of your price range.
Different types of loans have different rates and loan requirements. FHA and VA loans are government-backed loans. The government does not lend you the money — it just insures the loan. These typically have lower down payment options and lower credit score requirements. Many types of loan programs are available, and your loan professional will choose the best option for you based on your circumstances.
Types of Loan Programs and Loan Requirements
Loans follow certain rules set out by the federal government and by banks. In some cases, such as FHA or VA loans, the broker’s hands are tied as to the requirements. In other cases, such as “in-house” loans that are unique to a mortgage company, the regulations are not as stiff.
A conventional loan is one that is not backed by the government. The down payments are generally higher than those on government-backed loans. A conventional loan could be easier or harder to qualify for, depending on your situation. If you defaulted on a government loan, you will need to apply for a conventional loan.
FHA Loan Requirements
An FHA home loan is a loan that is insured by the Federal Housing Administration. FHA loan requirements include:
- A FICO score of at least 560;
- A down payment of at least 3.5 percent; and
- Mortgage insurance.
Having a lower credit score could sometimes mean having a higher interest rate. Also, the amount of your down payment will affect your interest rate. The more you put down, the better your loan terms usually are.
A VA home loan is backed by the Department of Veterans Affairs and is only available to service members, veterans and their immediate families. A VA loan is best for someone who is in the military who would like a lower interest rate. Benefits of VA loans include:
- No down payment is required;
- No mortgage insurance is charged on the loan; and
- The buyer has to pay an upfront VA funding fee.
A USDA home loan is backed by the U.S. Department of Agriculture and is for homes in suburban and rural areas. Benefits and requirements include:
- No down payment in most cases;
- Home improvement grants and loans are available;
- Property value caps apply; and
- Income limits apply.
A jumbo home loan is for a home that is above the cap as defined by government-backed loans. These loans:
- May have a fixed or adjustable rate;
- Usually require you to have a FICO score of at least 700;
- Generally require a down payment of at least 10 percent.
FHA 203k Loans
This type of loan is used for homes that need extensive renovations. Most lenders will not finance a home that requires improvements as the loan is risky. The FHA 203(k) loan is backed by the government, so a lender that wouldn’t touch a conventional construction/purchase loan with a 10-foot pole will gladly take an FHA 203(k) loan. FHA 203(k) requirements include:
- Money for temporary housing may be included in the loan;
- You must complete the project within six months;
- You cannot be an investor;
- The property must contain fewer than four units, but condo and townhome owners may be able to qualify if the repairs are for the interior only;
- You must have enough income to cover the payments — your debt-to-income ratio should be better than 31/43;
- You don’t need perfect credit;
- The minimum loan amount is $5,000, and the maximum is set by location;
- You can borrow up to 110 percent of the value of the home after improvements;
- Interest rates vary, may be fixed or adjustable, and are generally 1 percent higher than regular loans; and
- Down payments may be as low as 3.5 percent.
Other Types of Loans
If you are not buying a home but need money, you may consider an equity home loan. This loan is based on the equity in your house and is often used for refinancing home loans to consolidate debt. A home equity loan may also be used to cash out to make extensive repairs such as replacing a roof or revamping the inside of the home.
Southwest Funding 90 ITIN Program
This loan allows for up to 90 percent funding with a minimum credit score of 620 and no social security requirement. You could also have up to 6 percent gift funding for the down payment. Loan amounts under this program, which is unique to Southwest Funding, range from $50,000 to $453,100. Other requirements also include having an income that is below 80 percent of the median income for your location, and you must have an ITIN number. Citizenship is not required, but you must be in select counties in Texas or Colorado.
The Fannie Mae HomeStyle® Renovation Mortgage
This loan helps you purchase a home that needs work. The loan allows you to bundle the cost of the property with the cost for repairs in one loan. Use it on any type of renovation project as long as the improvement is to a permanent building. Requirements and qualifications include:
- Repairs must be completed in one year.
- The maximum loan-to-value is about 97 percent for a single-family permanent residence. It is lower for other types of real estate.
- You may be able to borrow up to 105 percent of the value of the home if you combine the HomeStyle loan with additional financing from Community Seconds, which is a program through federal agencies, or the local housing finance authority.
- The down payment needs to match the loan-to-value. For example, on a single-family primary residence with a 97 percent LTV, you would need to come up with a 3 percent down payment.
- You must have a minimum credit score of 620 and must show proof of income. Additionally, your debt-to-income (DTI) ratio should usually be below 43 percent.
- You get to choose your own contractor and must have a construction contract in place.
- Plans and specs must be completed by a registered, licensed and/or certified general contractor, architect or a renovation consultant.
- If the home is not a manufactured home, buyers may do up to 10 percent of the completed property value themselves if they wish.
- There is a limit of 75 percent on eligible renovation funds.
- The property does not have to be habitable at closing.
- Manufactured homes have a cap of 50 percent of the value of the finished project or $50,000 for repairs, whichever is lower.
When you are ready to buy a new home, contact a Southwest Funding home loan professional to discuss the different types of loans and assistance programs available and to get pre-qualified for a mortgage, so you can start shopping for your dream home.
Southwest Funding, Limited Partnership (NMLS #32139) is an equal housing lender. Loan product availability is subject to many factors including loan amount and qualification of borrower. Not every applicant qualifies or is eligible for every loan program. Rate and annual percentage rate (APR) calculated on a 360-day year with typical/normal closing costs. Rates and annual percentage rate (“APR”) are dependent on factors including, but not limited to: loan program selected, credit, collateral, income, assets and overall financial history. Not all applicants will be approved for a loan. All loan programs, terms, and interest rates are subject to change without notice.