A conventional mortgage or conventional loan is any type of home buyer’s loan that is not offered or secured by a government entity. Instead, conventional mortgages are available through private lenders, such as banks, credit unions, and mortgage companies. However, some conventional mortgages can be guaranteed by two government-sponsored enterprises; the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).
No property is ever 100% financed. In checking your assets and liabilities, a lender is looking to see not only if you can afford your monthly mortgage payments, which usually shouldn't exceed 28% of your gross income. The lender is also looking to see if you can handle a down payment on the property (and if so, how much), along with other up-front costs, such as loan origination or underwriting fees, broker fees, and settlement or closing costs, all of which can significantly drive up the cost of a mortgage. Among the items required are:
These documents will include but may not be limited to:
Borrowers also need to be prepared with proof of any additional income, such as alimony or bonuses.
You will need to present bank statements and investment account statements to prove that you have funds for the down payment and closing costs on the residence, as well as cash reserves. If you receive money from a friend or relative to assist with the down payment, you will need gift letters, which certify that these are not loans and have no required or obligatory repayment. These letters will often need to be notarized.
Lenders today want to make sure they are loaning only to borrowers with a stable work history. Your lender will not only want to see your pay stubs but may also call your employer to verify that you are still employed and to check your salary. If you have recently changed jobs, a lender may want to contact your previous employer. Self-employed borrowers will need to provide significant additional paperwork concerning their business and income.
Your lender will need to copy your driver’s license or state ID card and will need your Social Security number and your signature, allowing the lender to pull your credit report.
A FHA loan is a loan insured by the Federal Housing Administration (FHA). If you default on the loan and your house isn't worth enough to fully repay the debt through a foreclosure sale, the FHA will compensate the lender for the loss.
Because the loan is insured, the lender can offer you good terms including a low down payment—as low as 3.5% of the purchase price. This type of loan is often easier to qualify for than a conventional mortgage and anyone can apply. Borrowers with a FICO credit score as low as around 500 might be eligible for a FHA loan. However, FHA loans have a maximum loan limit that varies depending on the average cost of housing in a given region. To learn more about FHA loan limits, visit the U.S. Department of Housing and Urban Development (HUD) website.
Stricter FHA Standards as of 2019
Most FHA loans get approved by an automated system while a few are referred to the lenders, who manually review borrowers' applications based on FHA guidelines. In 2016, HUD eliminated a rule that required manual reviews for all mortgage applications from borrowers with credit scores under 620 and debt-to-income ratios above 43%. As of March 2019, however, the agency informed lenders that it's tightening the underwriting requirements for FHA-insured loans because too many risky loans are being made. Now, around 40,000-50,000 loans per year—four to five percent of the total mortgages that the FHA insures on an annual basis—which would have previously been approved automatically will now be put through a more rigorous manual underwriting review, according to FHA officials.
You'll Have to Pay a Mortgage Insurance Premium or "MIP"
Also, you’ll have to pay a mortgage insurance premium or "MIP" as part of an FHA loan. (Conventional mortgages have PMI and FHA loans have MIP.) The premiums that borrowers pay contribute to the Mutual Mortgage Insurance Fund. FHA draws from this fund to pay lenders' claims when borrowers default.
A VA loan is a loan guaranteed by the Veterans Administration (VA). This type of loan is only available to certain borrowers through VA-approved lenders. The guarantee means that the lender is protected against loss if the borrower fails to repay the loan. To get a VA loan, you must be a current member of the U.S. armed forces a veteran a reservist/national guard member, or an eligible surviving spouse.
VA mortgage loans can be guaranteed with no money down and there is no private mortgage insurance requirement. Borrowers do, however, usually have to pay a funding fee—a one-time charge between 1.25% and 3.3% of the loan amount.