High cost of living, low wage growth, student debt, and rent increases. With so many financial burdens to carry, millennials often feel that their money issues will stand in the way of their chance of qualifying for a mortgage. A 2017 survey by ApartmentList found that 80% of millennial renters want to buy a home, yet 70% of that same group believe that, based on their current financial circumstances, it would be difficult for them to become homeowners.
At Stem Lending, we've sorted through hundreds of loan options and dozens of lenders to help you find the right mortgage for you. We know you might think you can't qualify, but that could be untrue. By researching how best to qualify for a mortgage, you can help yourself avoid several of the mistakes made by first-time homebuyers. Here are several tips from the Stem Lending team that every home buyer should know before submitting an application for a pre-approval or pre-qualification.
Qualifying as a first-time home buyer opens you up to a range of programs, some of which we'll outline below. In order to qualify for many of these programs however, there are items you should have covered before attempting to qualify.
Avoid These Things When Attempting to Qualifying For a Mortgage:
- Taking out other loans right before applying for a mortgage.
- Racking up credit card debt just before, or just after applying for a mortgage.
- Missing credit card payments, car payments, or being delinquent on any debt accounts.
- Changing jobs just before you apply for a mortgage.
Things That Might Affect Your Ability to Qualify For a Mortgage:
Know Your Debt-to-Income (DTI) Ratio
Right now is a great time to become a homeowner, but it all starts with managing your total debt vs. total income. Lenders have to document your Ability-to-Repay (ATR). They do this by tallying all your information regarding your debts and obligations as listed on credit bureaus. The rule of thumb on the max DTI percentage that you should have before applying is 43%. However, now both Fannie Mae and Freddie Mac have given guidance that there is flexibility on this DTI % to (in some cases) up to 50%. All of your credit card debts, student loan debts, personal loans, or other obligations you have will be calculated vs. your total sources of income.
Asset, Employment & Income Verification
Lenders need to confirm your current and historical employment, in order to feel comfortable that the income you've made consistent with that employment will continue once you become a homeowner. You should aggregate your tax returns for the last two years, scan-in and upload your most recent two to three pay stub statements, and bank statements for the past three months. For the most part today, lenders will allow you to connect your bank accounts, brokerage accounts, and upload your W-2's for verification. If you receive child support or alimony by court order, you should scan-in and upload those orders to the lender specifically.
Down Payment Options
The majority of borrowers in today’s market still select a conventional mortgage when buying a home. In fact, the most recent studies we've seen from Ellie Mae noted that 67% of all closed loans by Millennial borrowers were conventional, the highest percentage in two years. Typically, when a borrower is looking to obtain a conventional loan, the borrower is required to have a credit score of at least 640, and expected to put anywhere from 3 to 20% down. For those borrowers who have saved enough to put down 20% down payment, they then are able to avoid the PMI (private mortgage insurance) fee that would otherwise occur.
Potential Loan Programs For Qualifying Homebuyers
FHA Loans
What is FHA?
The Federal Housing Administration or FHA is an agency within the U.S. Department of Housing and Urban Development (HUD), created in part by the National Housing Act of 1934. The FHA sets standards for the construction, underwriting of loans made by private banks. the FHA's goals are to improve housing standards and conditions, provide an adequate home financing system, and to stabilize the mortgage market.
1 tidbit of information: The FHA doesn't actually create “FHA Loans.” What the FHA does is to offer insurance on loans originated by bank & non-bank lenders, whose loans meet the FHA's set of standards. Because the FHA is an insurer and not a lender, borrowers get their home loans from FHA-approved lenders, as opposed to directly from the FHA.
How Do I Qualify?
Borrowers who have a credit score of 580 or higher may be eligible for this loan option, and your down payment might be as low as 3.5%. If your credit score is lower than 580 (minimum is 500), you still might qualify for an FHA mortgage, but the down payment would be at least 10% of the purchase amount. Unfortunately, the downside to only putting down 3.5% is that you'll have to pay Private Mortgage Insurance (PMI). For individuals who are working on their credit an FHA loan is a smart way to turn expenditures like rent into equity.
Down payment guidelines to be aware of: 3.5% down with a 580 credit score (10% down with a score between 500-579)
Conventional Loans
What is a conventional loan anyway?
The most commonly closed mortgage thus far in 2018 is a ‘conventional' home loan. You can get a conventional loan at a fixed or adjustable rate (ARM). These loans are not backed by the US Federal Government like FHA, VA or USDA loans — conventional mortgages are offered by privately owned or publicly traded banks, wholesale lenders, or credit unions. Borrowers who go this route typically have a sound financial standing, can put down between 15-20% or more as a down payment, and have strong enough credit to qualify. Conventional mortgage loans can have a duration of 15, 20 or 30 years. Conventional mortgages are also generally broken into two categories: (1) conforming vs. (2) non-conforming.
Things that might affect your ability to qualify for a mortgage: Debt-to-Income (DTI) ratio, assets, employment, income and downpayment requirements. Click To TweetConforming loans have to follow the rules set by Fannie Mae and Freddie Mac, the two government sponsored enterprises (GSEs) who back 3/4 mortgage that's originated in the US. The most common break-point for conforming vs. non-conforming is the size of the mortgage loan.
Conforming loan limits for 2020 single-family homes in the US are held to $510,400. In certain “high-cost areas” as stated by Fannie Mae and Freddie Mac (ex. New York City, areas of Hawaii, New Jersey, and Alaska) have higher limits up to $765,600 for single-family homes.
Non-conforming loan limits would be anything in excess of that number, depending on the county or metro-area.
Down payment guidelines to be aware of: 5%-20% down with a 640 credit score or higher
Conventional-97 and HomeReady Loans
In case you're looking for something other than the FHA, Fannie Mae has two options for low down-payment mortgage loans: The “HomeReady” mortgage and the Conventional 97.
With the Conventional 97 loan option, borrowers need to come up with just 3% down, which then creates an unpaid mortgage balance (UPB) of 97% Loan-to-Value (LTV), hence the “97” in the title.
HomeReady by Fannie Mae is limited to certain low-income census tracts; and areas with high minority concentrations. By contrast, Conventional 97 is available for use everywhere.
Conventional 97 loans require the borrower to have a credit score around 620. The higher the required credit score, the less of a risk you are to your lender. Conventional 97 loans can only be applied to single-family homes. The Conventional 97 program is meant to help home buyers who might other qualify for a loan but lack the resources to make a 5% down payment or more.
Down payment guidelines to be aware of: 3% down
The 97% LTV program launched in December 2014. It remains in high demand as a loan program for many borrowers.
You've likely also heard about recent plans from Fannie Mae to help borrowers even further by coming up with ways that lenders can help you with that remaining 3%. Fannie Mae recently sent lenders a set of guidelines stating that they could provide the assistance to borrowers as a gift that is not subject to repayment, according to a report from HousingWire.
Under the programs, lenders would “grant” 2% of the down payment to the borrower. Add that to the borrower’s 1% contribution, and you would have the 3% needed to qualify for the Fannie and Freddie programs.
FHA 203-K Loans
Also insured by the FHA, a 203k mortgage is for buyers who want to customize a home in need of repairs instead of simply buying a house. The catch? If you were only expecting to borrow 100 thousand dollars, a lender may require another 15 thousand as cushion funding incase repairs are more costly than originally foreseen. These fees are known as contingency reserves and may be loaned from the lender or provided by the buyer.
An FHA 203-k loan is a loan backed by the federal government and given to buyers who want to buy a damaged or older home and do repairs on it.
How Do I Qualify? If you want to buy a home that needs a brand-new roof, or bathroom, or kitchen, an FHA 203-k lender allows you to have the money to buy (or refinance) the house plus the money to do those renovations. FHA loan limits for the area where the property is located dictate how much you can borrow with a 203-k loan. You must also qualify based upon current and future debt to income (DTI) ratios.
An FHA 203-k loan does allow up for to 6 months of house payments (mortgage, property tax escrow, home insurance, FHA mortgage insurance) to be added to the loan for the months the property cannot be safely lived in as determined by the FHA Consultant.
The FHA 203-k loan will generally include up to 20% “contingency reserve” so that you will have the funds to complete the remodel in the event it ends up costing more than the estimates suggested and/or.
Down payment guidelines to be aware of: 3.5% down
VA Loans
Any active duty military members, veterans, or National Guard members can apply. Spouses of military members who died while on active duty are also eligible to apply for a VA (Veterans Affairs) Loan. VA loans typically boast no down payment for the buyer, lower interest rates, early payoffs without penalties, limitations on closing costs and no PMI fees.
Nice Features:
- A VA loan doesn’t require mortgage insurance (“MI”), as do Federal Housing Administration (FHA) and conventional loans with less than a 20% down payment. This feature of VA loans can translate into significant monthly savings for VA borrowers.
- VA loans limit the amount you can be charged for closing costs
- You don’t have to be a first-time home buyer
No maximum amount on a VA loan. You can get as much as the lender is willing to give you. But the VA only extends its guaranty so far. Most people are familiar with the VA's willingness to guarantee up to 25% of the loan amount, but there are nuances to be aware of. In cases where the home is in a high-cost county, the VA limits its guaranty to whichever is less:
- 25% of the loan amount
- 25% of the VA loan limit for that county
That being said, VA mortgages do come with a one-time VA funding fee. This fee is charged by the US Department of Veteran Affairs and goes towards funding the program for future veterans. Second, VA Loans require the veteran buying the home resides there.
Down payment guidelines to be aware of: no down payment
(loans guaranteed by the VA can be obtained without any down payment)
If you have any additional questions, please give us a call at (833) 600-0490, or email us at [email protected]. We'll give you all the information necessary for you to decide if owning a home is the right move. You might be more qualified than you think.