Buying a home is a Big Event; full of excitement and some caution. It is key to collaborate with your loan officer to make sure they understand your needs and goals, so you access to the best loan programs for your needs and so you have great information along the way.
What is a Conventional vs. Jumbo vs. Portfolio Loan – Conventional loans (or conforming loans), are mortgages that adhere to the guidelines set by Fannie Mae and Freddie Mac. They are not guaranteed by the Agencies, but because the loans follow strict guidance, the loans can be easily packaged and sold by mortgage lenders making them more liquid (making the rates very competitive). They can be fixed or adjustable rate. Conventional loans typically have to be under the $417,000 maximum loan amount, but the loan limit can be as high as $625,500 in certain high cost counties especially here in California. Beyond the loan limit, the guidelines are specific about how income is evaluated, down payments required, etc. With all the high cost California markets borrower will often use a Jumbo Loan that will be able to exceed the conventional limits going into the $million of dollars. These loan will typically require a larger percentage down payment, larger reserves and greater income and credit requirements. Another type of loan is a Portfolio Loan, where a particular lender has developed a loan product that caters to the needs of a niche of borrowers that would not qualify based on the conventional guidelines. For example, it could be to help people who are recently self employed, or have derogatory credit items such as a foreclosure or bankruptcy, that hasn’t seasoned to the satisfaction of conventional guidelines, or for a foreign national.
What about FHA Loans – FHA loans are a great option for borrowers, particularly new homeowners who may not have a large down payment, and need less stringent lending guidelines (allowing for lower credit scores, higher debt ratios, etc.). FHA loans have been around since the 1930s and have mortgage insurance provided by the Federal Housing Administration. Because of the low down payment, and other relaxed criteria, FHA loans carry mortgage insurance payments in addition to the principal and interest payment.
What size loan will I qualify for? Beyond the loan limits of each mortgage product, a borrower must have income sufficient to make the principal, interest, taxes and insurance payments. Lenders will evaluate a borrowers debt to income ratios (DTI) that measure a borrower’s monthly debt payments (principal, interest, taxes & insurance, as well as credit card, student debt and car payments) as a percentage of your income. Thus if you monthly debts = $5,000, and your monthly income is $12,000 your DTI ratio 41% ($5,000/$12,000 = 41%) Conventional loans can qualify up to 45%. It is important to note that Conventional, Jumbo and FHA loans all have different DTI requirements, but more than your ability to qualify, is to consider what you feel comfortable with.
What sort of Downpayment is required? Conventional and FHA loans provide down payment options as low as 3% and 3.5% respectively. Thus, a down payment a $12,510 would get you into a $429,989 home (with a $417,000 loan amount). However, the minimum down payment is determined by a number factors, such as: whether you a first time home buyer or not, the number of units, the loan amount, whether the property is your primary home ( vs. second home or investment), and so on. That said, their are many option to help you get into a home with as little as 3-10% down payment.
My Credit is Not Great ?! You certainly are not alone if it isn’t – and don’t fret, it’s not the end of the world. It’s just a matter of seeing where you are at, and finding the right program to fit your situation. Though better credit will help you qualify for more programs and get you better rates, if your credit is not stellar, we will guide you to optimal programs that are less focussed on credit score and more on other factors. In many cases we can help a borrower increase their FICO scores by evaluating their credit and recommending certain actions.
What are some of the costs associated with home purchase? Of course the down payment is the largest cost of buying a home/property. But, there are a number of costs related to the transaction such as recording the sale with the county, performing title search and getting an Owner’s Title Insurance, Transfer taxes, and things such as your Pest and Structural inspections. With respect to your mortgage, average closing costs will run from about $3,000 to $5,000 depending on the purchase price/loan amount. Many of your mortgage closing costs go to a third-party for services necessary to complete the transaction, such as fees for appraisal, credit, flood certification, lenders title, notary, wire, and escrow. Lenders typically have very little control over these fees, but they are usually fairly competitive but you will get a Loan Estimate that allows you to see all a breakdown of all the fees (and to compare) when you begin the loan process.