A BRIEF OUTLINE OF VARIOUS LOAN PROGRAMS
HOW TO GET PRE-APPROVED FOR A MORTGAGE
What Details Are Required in the Pre-Approval Process?
A lender will generally start by asking for some basic information about you and your financial history. If you have a co-borrower, the lender will also need this information about them. Generally, a lender will then request your Social Security number and permission to pull your required credit report (and your co-borrower’s, if you have one). If the information you provide and the information obtained from your credit report satisfies the lender’s guidelines, the lender will make a preliminary determination in writing stating that you would qualify for a particular loan amount subject to the conditions outlined in your pre-approval letter. Please note that each lender has its own standards and processes for determining whether to grant a pre-approval letter.
A conventional mortgage is or home loan that is not guaranteed or insured by a government agency such as the Department of Veterans Affairs (VA), Federal Housing Administration (FHA), or the Farmers Home Administration (FmHA). A conventional mortgage also meets the funding criteria of Fannie Mae and Freddie Mac. The interest rate on a conventional mortgage can have a fixed rate or adjustable rate. Most conventional mortgages require PMI unless a 20% down payment is made.
Select VA Lender(s) and Get Pre-Approved
To apply for a VA loan the following steps are required for comfortable
Lenders must provide formal written rate and fee quotes to you within three days of application. Familiarize yourself with VA closing costs here.
After obtaining your COE (or reviewing the one you’ve already obtained), the lenders will ask you to provide detailed residence, employment, income, asset, and debt documentation.
It’s critical to provide all documentation your lender requests in a timely fashion. All lenders must follow the same VA loan approval guidelines, so if one lender is asking for less upfront, they may need to ask for it later.
At a minimum, you will need to provide:
- Full credit history, including scores from the three major credit bureaus (Equifax, Transunion, Experian), obtained when you authorize a lender to run your credit report
- Two years of residence history, including rental or ownership costs
- Two years of employment history (See notes below if you’re on active duty.)
- Two years of filed tax returns
- Two years of W2s for all jobs
- Most recent two months’ statements for all bank, investment, and retirement accounts
The VA says your total monthly housing cost plus all other monthly payments (car loans, student loans, etc.) cannot exceed 41 percent of your income. There are select exceptions to this rule, which you can discuss with your lender.
If you’re on active duty, you’ll need a Leave and Earnings Statement (LES) with an Expiration of Term of Service (ETS) date less than 12 months after loan closing to prove income, and a Statement of Service to prove ongoing service and income.
If your separation date is 12 months or less from your loan closing, you must document income in one of the following ways:
- Evidence of re-enlistment or extension showing new ETS date more than 12 months from date of loan closing.
- Statement that you intend to re-enlist, accompanied by a statement from your Commanding Officer that you’re eligible to re-enlist and that they believe your re-enlistment will be granted.
- Offer letter from private employer after release from active duty. Must include start date, rate of pay, and whether employment is full-time or part-time.
Federal Housing Administration (FHA)
An FHA loan is a mortgage that’s insured by the Federal Housing Administration (FHA). They are popular especially among first time home buyers because they allow down payments of 3.5% for credit scores of 580+. However, borrowers must pay mortgage insurance premiums, which protects the lender if a borrower defaults.
Borrowers can qualify for an FHA loan with a down payment as little as 3.5% for a credit score of 580 or higher. The borrower’s credit score can be between 500 – 579 if a 10% down payment is made. It’s important to remember though, that the lower the credit score, the higher the interest borrowers will receive.
The FHA program was created in response to the rash of foreclosures and defaults that happened in the 1930s; to provide mortgage lenders with adequate insurance, and to help stimulate the housing market by making loans accessible and affordable for people with less than stellar credit or a low down payment. Essentially, the federal government insures loans for FHA-approved lenders to reduce their risk of loss if a borrower defaults on their mortgage payments.
FHA Loan Requirements
For borrowers interested in buying a home with an FHA loan with the low down payment amount of 3.5%, applicants must have a minimum FICO score of 580 to qualify. However, having a credit score that’s under than 580 doesn’t necessarily exclude you from FHA loan eligibility, however, you will need to have a minimum down payment of 10%.
The credit score and down payment amounts are just two of the requirements of FHA loans. Email Luxury Real Estate Advisors for a complete list of FHA loan requirements, which are set by the Federal Housing Authority.
What Is an Adjustable-Rate Mortgage?
An adjustable-rate mortgage, or ARM, has an introductory interest rate that lasts a set period of time and adjusts annually thereafter for the remaining time period. After the set time period your interest rate will change and so will your monthly payment.
- 10/1 ARM: Your interest rate is set for 10 years then adjusts for 20 years.
- 7/1 ARM: Your interest rate is set for 7 years then adjusts for 23 years.
- 5/1 ARM: Your interest rate is set for 5 years then adjusts for 25 years.
- 3/1 ARM: Your interest rate is set for 3 years then adjusts for 27 years.
General Advantages and Disadvantages
The initial interest rates for adjustable rate mortgages are normally lower than a fixed rate mortgage, which in turn means your monthly payment is lower. If you only plan to stay in your home for a short period of time, an ARM loan might be advantageous to you because you plan on moving or selling your home before your initial mortgage rate adjusts. If you expect your income to increase in the future, you might feel comfortable with the idea of saving money now by having a lower monthly payment but be comfortable with having to make higher payments in the future when your income rises and your ARM adjusts.
ARMs are generally considered riskier because your interest rate will probably go up after the initial fixed-rate period ends.
Information deemed reliable but not guaranteed, contact your mortgage, tax and legal professionals more details.