Conventional loans boast great rates, lower costs, and home buying flexibility. They are the loan option of choice for about 60% of all mortgage applicants. Conventional loans are also known as conforming loans, since they conform to a set of standards set by Fannie Mae and Freddie Mac. The following are highlights of this program.
Conventional Loan RequirementsDown PaymentA conventional loan requires as little as 3% down. Fannie Mae and Freddie Mac rolled out a new program in December 2014 allowing for smaller down payments.
Conventional financing is now a strong competitor to FHA. While most FHA mortgage insurance remains on the loan for life, conventional mortgage insurance is cancelable. Those who qualify for a conventional loan typically opt for this program over FHA due to lower fees.
Private Mortgage Insurance (PMI)PMI is required any time you put less than 20% down on a conventional loan. For those with good credit, private mortgage insurance on conventional loans can cost less than FHA mortgage insurance. This is because PMI is risk-based insurance, meaning that the better your credit history, the lower your premiums. PMI is much like auto insurance. You benefit if you have a clean history.
Some of the major private mortgage insurance providers are MGIC, Genworth Financial, RMIC, and Radian. Each company has varying rates for different down payment and credit score scenarios, so make sure your lender shops around for the best PMI cost.
2017 Conventional Loan LimitsGenerally the conventional loan limit for 2017 is $424,100. However, Fannie Mae and Freddie Mac have designated high-cost areas where limits are higher. For example, a single-family home in Seattle, Washington could have a maximum loan of $592,250. The same home located -in in Los Angeles, California would be eligible for a loan amount up to $636,150.
Increased loan amounts are also available for 2-, 3-, and 4-unit homes. Standard loan limits are as follows.
A common misconception with the VA loan program is the amount of ‘red tape” involved. However, this isn't the case. Many lenders can acquire your Certificate of Eligibility online, and in many cases eligible borrowers can also be processed without a manual underwrite or VA review.
Additionally, if the lender is approved under VA’s Lender Appraisal Processing Program (LAPP), the lender may review the appraisal completed by a VA-assigned appraiser and close the loan on the basis of that review. The LAPP can get borrowers to loan closing faster.
The bottom line is average closing times for VA loans rarely differ greatly from those for conventional loans.
Let’s take a closer look at the basic steps involved when using a VA loan to purchase a home.
Prequalifying for a VA Loan
To start the VA loan process, contact a VA-approved lender either online or via phone. A VA loan specialist will ask basic questions about the borrower’s financial history and homebuying goals to determine if a loan suits the borrower right now. Prequalification helps borrowers and lenders establish an immediate sense of eligibility and start building a foundation for the next stage, which is loan preapproval.
VA Loan Preapproval
The main difference between prequalification and preapproval is typically the verification of information. Preapproval shows lenders that a borrower is a capable homebuyer. The process requires effort from the borrower as paperwork collection and submission becomes important. Helpful VA lenders fill out chunks of the paperwork for you, as well as prepare and organize anything you need to complete. You may be able to do some or all of this process online.
When the lender receives the borrower’s documents, the borrower receives a preapproval letter that outlines anything the borrower must do to officially finish the VA loan paperwork. These conditions in the preapproval letter must be met in order for you to get to closing day and into your home.
Real Estate Agents and Home Hunting
Once a borrower has a preapproval letter, it’s time to find a real estate agent and look at homes. Some military buyers may want to seek out veteran-friendly real estate agents that better relate to military families’ particulars and understand the VA loan program thoroughly.
Make an Offer
It’s a thrill for military borrowers to pick their home, but there’s still some work to do: make an offer and agree on a contract with the seller. It’s imperative that borrowers work with real estate agents and loan officers who are knowledgeable about VA loans so the contract is properly drawn up to help veterans get the biggest bank for their buck.
VA Loan Closing and Processing
Before the loan closes, the VA lender orders an independent appraisal of the property. Along with assessing the property’s value, the VA appraisal helps assess whether the property meets the VA’s property condition standards. If there are problems (e.g. water damage, termites, leaky roof), they may need to be addressed before the loan process can move forward. Every situation is different.
An underwriter then closely combs through the entire VA loan package. The underwriter’s job is to confirm all information and make sure all documentation is in place. If anything is missing or is not on par with VA or lender guidelines, the underwriter requests what’s needed to make it right. When the underwriter approves a VA loan, there’s only a few things for the borrower to do: Prepare for your closing day, when you’ll sign a lot of final paperwork and get the keys to a new home.
Borrowers exploring their options with the VA loan program will learn that the Department of Veterans Affairs will not guaranty loans that restrict the borrower’s ability to sell or dispose of the property. Any condo, duplex, or other community-property arrangement must not have bylaws or association agreements that would prevent the VA borrower from freely selling that property.
Some condo projects have a clause in their association paperwork or other agreements, known as the “right of first refusal.” This clause can be trouble for those who want to get a condo project on the VA approved list. However, there are some cases where something may be viewed as a title restriction that may not necessarily interfere with the VA loan process.
According to Chapter Nine of VA Pamphlet 26-7, “VA may guarantee a loan on which a title restriction limits the sale, lease, or occupancy of the dwelling to persons based on age, including a prohibition against the permanent occupancy of the dwelling by children, provided such restriction complies with applicable Federal law.” The last portion of that sentence is key.
Also, “VA may refuse to approve a property with an age restriction if its operation would work an undue hardship upon the owner in the case of sudden, unforeseen events or be likely to result in an increased risk of loan default.”
Chapter Nine also mentions that title restrictions may not even require VA approval depending on what those restrictions might be. “Title to property involving reasonable encroachments, easements, servitude, and reservations for water, timber, or subsurface rights, generally do not require VA approval. However, they must be taken into consideration in determining reasonable value.”
Such restrictions may require additional review by the Department of Veterans Affairs. “If any of these restrictions impact the basic livability of the property, VA approval is required.”
And also, “Title conditions or limitations must be shown on the NOV and considered by the appraiser in determining the reasonable value of the property. If the lender discovers, prior to loan closing, title conditions or limitations not shown on the NOV, the lender must have VA review the conditions and determine whether the value assigned to the property is materially affected.”
If you are not sure about the effects of a specific title restriction or whether it is allowed or not, contact the VA directly for assistance.
May 12, 2017 - Do you know how your FICO scores can affect your FHA home loan application? Do you know the difference between the FHA loan program minimum scores for loan approval and your lender’s FICO score requirements? There IS a difference.
FHA loan rules in HUD 4000.1, referred to as the FHA Handbook, instruct the lender that a borrower is technically qualified for maximum financing at the required minimum 3.5% down payment when the applicant has FICO scores at 580 or higher.
Borrowers applying for FHA forward mortgages with FICO scores between 500 and 579 are technically eligible for FHA loans with a 10% minimum required down payment.
These are FHA loan program minimum requirements which do not reflect lender standards, which may be (and often are) higher than the FICO scores mentioned above. Furthermore, FHA loan rules state that a borrower’s FICO scores are not the only measure of a borrower's creditworthiness. Your record of payments, overall patterns of credit use, and employment history are also considered when the lender is in the process of approving or denying an FHA loan.
Those who apply for a mortgage with at least 12 months of on-time payments on ALL financial obligations leading up to the loan application stand a far better chance of loan approval. Time your FHA loan application so that when you fill out the forms, there are 12 months (minimum) of on-time payments on your credit history.
HUD 4000.1 tells the lender that all who are to be obligated on the mortgage are required to credit qualify. A lower FICO score is not always a barrier to loan approval depending on lender standards and whether there are "compensating factors" such as a larger down payment, or substantial cash reserves (just to name two examples) that could help a borrower who is borderline where the lender’s FICO score requirements are concerned.
Borrowers take note-these factors cannot offset derogatory credit information that shows consistent patterns of being a poor credit risk.
Your lender may be able to work with you if you have blemishes on your credit record if your other credit patterns indicate reliability. Much depends on your circumstances, your ability to document one-time financial difficulties or other issues that may not reflect who you really are as a responsible credit user.
July 1, 2017 - Because of changes in legislation, lending requirements and related issues, FHA regulations and underwriting requirements are subject to change from time to time. Some of the changes come as part of new laws that close legal loopholes, improve the fairness of the FHA mortgage loan process, or modernize the FHA loan program. Other alterations are made in response to current market conditions and economic issues.
Because of the changing nature of the FHA home loan program, the information new house hunters may have gathered a year or two ago when considering a new home may not be the same if they chose to wait to start the loan application process.
This is definitely the case for any potential borrower who investigated their FHA loan options recently. FHA issued new guidance in the last several years on the minimum credit scores needed for certain FHA guaranteed home loans.
Minimum credit score requirements for FHA home loans depend on which FHA loan product the applicant needs. Generally speaking, to get maximum financing on typical new home purchases, applicants should have a credit score of 580 or better. Those with credit scores between 500 and 579 are, according the the FHA guidelines, "limited to 90 percent LTV".
Applicants who have a minimum decision credit score of less than 500 are not eligible for FHA mortgages. Those with credit scores of 500 or better are eligible for 100% FHA loan financing with no down payment required when using the FHA 203(h), Mortgage Insurance for Disaster Victims.
The FHA does make allowances for loan applicants with a "non-traditional credit history or insufficient credit" may be able to be approved for an FHA loan if they meet FHA requirements for such circumstances.
The minimum credit scores listed here are in effect for most FHA home loans for single family residences with a few exceptions which include (but are not limited to) Title 1 HECM loans and HOPE For Homeowners loans. Always ask an FHA loan expert or your local FHA lender about your credit score and what you qualify for.
Don't assume you cannot be approved for an FHA insured home loan--do you have changes in your credit score since the last time the credit reports were run? You may have options that can improve a poor credit score over time. Some potential borrowers may need to spend a year or so repairing bad credit and establishing a reliable payment history.
Those with past credit problems can often improve their scores over time and become eligible even under the new updated FHA minimum credit score requirements. The first step is to request help from the FHA for credit counseling or first time homebuyer counseling. Help is available at FHA.gov.