Applying for a home for loan
There are many factors that lenders consider in determining how much, and what type of loan you may qualify for. Before taking a look at the types loans, it’s good to understand a few key principles that lenders look at.
Credit scores depend on which company is providing the scores (FICO up to 850, VantageScore up to 990). First knowing where your score comes from is important because banks are usually going to use the FICO score as the determining factor for the loan amount and interest rate. Generally, a great FICO score is considered 720-850, 680-719 is good, 620-679 fair, and anything below is 619 is considered poor credit.
The debt-to-income ratio looks at your required debt payments (auto loans, credit cards, mortgage, etc) and your gross monthly income. Dividing the debt by the income gives you the ratio lenders are looking at. The amount you’ll be able to borrow is directly affected by your debt-to-income ratio. Some loans allow for higher debt-to-income ratios than others.
Employment history is extremely important to lenders. Typically, they want to see that you have been in a certain career field with some longevity. If you are salaried, they don’t require much income history. However, if you are self-employed they will want to see that you have consistently made x amount of money and are on track to continue to do so. Self-employed often need to show 2 years of tax return history in their current field.
Types of Loans
The credit score, debt-to-income ratio, and employment history are 3 of the main factors in determining how much you qualify for and what type of loan best suit you. There are many different types of loans, but the most commonly used in the Boise area are Conventional, FHA, and VA loans.
Each of these loans have different cost structures, interest rates, and down payment requirements. The exact requirements for these loans are constantly changing, so the information below is meant to give you a high-level overview. For the most up-to-date and comprehensive information, please call Idaho Central Credit Union at (208) 846-7109.
The first thing to know about conventional loans is they are not backed (insured/guaranteed) by any government agencies (unlike VA, FHA, and RD loans). Conventional loans are directly from the lender (Citi Bank, Idaho Central Credit Union, etc.) or through a mortgage broker. Usually with this type of loan there is a minimum 5% down payment and options for 15, 30 year fixed rates or 1,3,5,10 year adjustable rate mortgages (ARM).
Something to be aware of on conventional loans is that anytime you put less than a 20% down payment, you pay what’s called “Private Mortgage Insurance” (“PMI” or “MI”). PMI is a larger percentage at a 5% down payment, less at 10% down, and even smaller at 15% down.
Federal Housing Administration (FHA) loans are backed by the government and are great options if you have little money for a down payment. With as low as a 3.5% down payment, potentially less lender fees, as well as usually less restrictive in the way down payments can be acquired, FHA loans are usually more flexible and allow more people to qualify. One downside is that FHA loans come with a “funding fee” that is applied when closing on the home (which can be rolled into the loan amount). There is also monthly Mortgage Insurance Premiums (PMI) that typically has to remain on the property for 5 years and the loan-to-value becomes less than 78%.
A Veterans Affairs loan is for veterans, members of an active military branch & National Guard members (case to case basis for National Guard). The draw for this type of loan is that is can be fully financed (no down payment) as well as sometimes without mortgage insurance. Both VA and FHA loans have stricter standards for the condition of the property, and in some cases, may be less attractive to sellers if the property needs substantial repair. Both VA & FHA loans are only allowed for owner-occupied properties used a primary residence.
Rural Development loans are government backed and can finance up to 100% of the purchase. RD loans are restricted to specific “rural” areas. For the Boise area, it is parts of Star, Middleton, Kuna, Nampa & Caldwell qualify to mention a few. To find the exact locations, and currently eligibility, check out the RD website. RD loans typically offer a lower rate on PMI which would be another benefit to this type of loan.
Disclaimer – The information is the article is not guaranteed or warranted in any way. It is also subject to change without notice.