Mortgage lending is arguably one of the most powerful financial instruments available to consumers today. For many individuals, mortgage financing can make the difference between becoming a homeowner or not. Mortgages allow individuals to obtain the funds they need to buy a property while simultaneously offering repayment terms that take into account the borrowers financial history and credit score.
TL;DR (Too Long; Didn't Read)
If you are hoping to apply for a mortgage, your eligibility requirements will be determined in large part by the specific type of lending you are seeking. Government and private conventional loans carry unique approval standards and borrowing limits.
The Basics of Mortgages
There are two primary forms of mortgage lending available today, those being private mortgage lending offered through retail banks (sometimes in conjunction with the government-sponsored Fannie Me and Freddie Mac enterprises) as well as full government-sponsored mortgage loans.
Currently, individuals can choose to apply for both private and government-backed mortgages. Depending upon your specific financial credentials, you may discover that one of these options is more ideal than the other. It is important to research how eligibility for a mortgage is determined and how much funding you can expect to receive toward your home's sale price.
Government-sponsored mortgage loans have gained a reputation as being a "last resort" form of lending for individuals with poor credit history. Although it is true that mortgage loans insured by the Federal Housing Administration do offer financing opportunities to individuals who otherwise may not qualify, there are also a variety of government loan programs targeting specific groups of borrowers based on a variety of other parameters. These include Veterans Affairs loans, FHA loans for first-time buyers and U.S. Department of Agriculture loans, among others.
FHA Loans in Depth
Currently, the FHA offers multiple formats of loan assistance. Depending upon your specific needs, one of these programs may be more effective for your current financial situation than others. Through the FHA, individuals can apply for fixed-rate loans, adjustable rate loans, reverse mortgages, graduated payment mortgages (also referred to as growing equity mortgages) as well as the energy-efficient mortgage program. A careful review of each program will help applicants ensure that they are applying for the correct form of assistance based on their financial circumstances.
It should be mentioned that many first-time buyers will apply for FHA government loan assistance due to the fact that it allows for a significantly reduced down payment requirement compared to private conventional loans. In exchange for these convenient loan terms, however, applicants will be required to pay a mortgage insurance premium on top of their monthly installment. MIPs are often valued at less than 1 percent of the total mortgage amount, calculated on a yearly basis.
An FHA loan will account for no more than 31 percent of your monthly income. With that in mind, you can determine exactly how much funding you will likely qualify for if accepted into the FHA lending program.
Exploring VA Loans
VA loans can be particularly beneficial to current and former members of the armed services. One of the distinct perks of a VA loan is that it allows individuals to purchase a home without requiring a down payment. Typically, a reduced down payment as part of a conventional loan would require the applicant to purchase private mortgage insurance. With a VA loan, however, PMI is also waived, meaning that veterans can walk into a loan without having to wait years while they save up for a down payment.
The VA currently offers a variety of loan and mortgage assistance programs. Some of these opportunities, such as the Native American Direct Loan, provide additional support for veterans who also can demonstrate tribal heritage. Therefore, any veteran of the armed forces should explore all VA offerings before committing to a mortgage to ensure that they receive the best possible financing opportunities.
Considerations About Government Mortgage Loans
One important fact that all mortgage applicants should realize is that government-backed loans, such as VA and FHA loans, are not actually issued by the government. Instead, these loans are insured by government funds, meaning that the risk of default is passed on and away from the private lender.
When you apply for a VA or FHA loan, you are essentially applying for eligibility rather than the funds themselves. Once you have been approved for one of these loan programs, you will still be required to work with a private lender and complete all of the necessary paperwork they require.
Conventional Private Loan Eligibility
For those who choose not to seek out government loan assistance, private mortgages offered through retail banks and other financial institutions are the principal funding outlet. Although the specific eligibility requirements for loans will vary from one lending institution to another, there are certain general trends that prospective applicants can use to gauge whether or not they stand a good chance of receiving funding.
Conventional Loan Credit Score Requirements
Perhaps one of the most fundamental aspects of your mortgage application that will directly influence your eligibility for funding is your credit score. The vast majority of mortgage lenders expect their applicants to have a credit score above 620. A score lower than this may lead to immediate rejection for funding. Ideally, individuals applying for a mortgage will have a credit score above 700. The higher your credit score is, the more likely that you will receive reduced interest rates as part of your borrowing costs.
Conventional Loan Employment History Requirements
Many lenders will also look closely at an applicant's employment history. This is because stable employment is often a good sign that the borrower will be able to maintain their mortgage payments over the length of repayment. In the event that a borrower is self-employed, they will typically have to provide additional information demonstrating that they earn enough money on a regular basis to pay their mortgage obligations. This can be demonstrated by providing tax records, bank account statements and other relevant financial information documents.
Once you have been approved for a conventional loan, you will likely receive the full purchase price of the home less your down payment.
Private Loans and Down Payments
Whereas government-backed loans will often feature a reduced down payment requirement, conventional private loan lenders will typically require that applicants pay a minimum of 5 percent of the total purchase price upfront.
That being said, borrowers will often be required to pay for PMI if they pay less than 20 percent of the home's purchase price for their down payment. PMI premiums will be incorporated as a monthly add-on to your general mortgage payment. Once a certain amount of equity has been generated in your property, you will be eligible to end your PMI payments.
Up until 2017, PMI was considered a deductible expense on your tax return. This tax break helped soften the blow of this additional expense. However, this particular deduction is no longer available to homebuyers, making PMI an even more costly endeavor. Because of this, mortgage applicants should strive to save up enough money to meet or exceed the 20 percent down payment benchmark. While this could create a short-term financial burden, it could help save a significant amount of money over the long term.
- A pre-qualification for a mortgage by a lender is based upon credit, employment, income, debt, and asset information provided by the potential borrower. With a pre-approval, however, the same information is requested, but unlike a pre-qualification, the information is verified.
Ryan Cockerham is a nationally recognized author specializing in all things innovation, business and creativity. His work has served the business, nonprofit and political community.