Qualifying For A Loan

How Do You Qualify For A Real Estate Loan?

Many things affect your ultimate rate and your ability to get a loan that makes sense. Here we are going to go over the basics and just touch on other aspects.
There are a few different initial parameters that lenders look at; LTV, DTI and the middle FICO score of the lowest qualifying borrower.

  • LTV (loan to value) – Depending on your qualifications and goals, the amount of equity you need to purchase a property or refinance an existing loan will vary. Below are maximums and recommended amounts.
    • Conforming – The most common way to lend against a property. You can put as little as 3% down, but it is recommended, when you can, to keep your LTV at 80% or better. If you have at least 20% equity you avoid paying PMI (private mortgage insurance). The government ensures 80% of the value of a conforming property. If your LTV is above 80%, lenders require PMI to cover the overage. The PMI charge can cost hundreds per month. Still worth owning a property and paying on your mortgage vs. a rental. Once you reach 80% LTV you can request that the bank remove the PMI.
    • FHA – If you have an FHA loan now, doing an FHA to FHA streamline loan is easy and not very expensive. If not, FHAs work well for purchase, first time, if you are cash and FICO score challenge. The down payment is 3.5% and it doesn’t matter how much equity you have at the start, these loans always require PMI. If you start one with less than 80% equity you will have PMI on the loan forever. The only way to remove it is to refinance out of an FHA loan. If you start with more than 80% equity, the Federal Housing Administration requires the PMI remain on your loan for 11 years! A bit crazy as the government covers up to 80% of the loan amount anyway.
    • VA – If you have been honorably discharged or are serving in the military currently, you are eligible to get a VA Loan for a purchase or refinance. On a purchase, you can go all the way up to 100% LTV (no down payment at all) and there is no PMI. On a refinance, VA rates generally trend lower than conventional rates so it may be worth moving to a VA. And VA to VA refinances (VA IRRRLs) are very easy and require little documentation.
      The only wild card to consider is the VA Funding Fee. The Veteran’s Administration charges a funding fee on all VA loans. Here is the breakdown:
    • The only exception to the funding fee is, if you are 10% or more disabled per the VA or if you have received a Purple Heart for your service, the funding fee is waived. Also, a few years ago they removed the limits on the size of a VA loan. As long as you can afford the payments, you can do a 100% loan into the millions without PMI. Lastly, as all VA Refinances are considered cash out, if you choose to refinance and take cash from your equity with a VA loan, there should not be a rate increase.
    • USDA – sometimes called Rural Housing Loan is a loan program guaranteed by United States Department of Agriculture. The home buyer must select a home as their primary residence in a qualified USDA area and must meet USDA income eligibility requirements. Main advantages:
      • No down payment is required, you may finance up to 100% of the property value
      • The 2% guarantee fee and all other costs may be added to the loan
      • USDA home loans do not have a specific loan size limitation
      • Refinance your present USDA home loan via USDA Streamline Pilot Refinance Program that requires no appraisal and all closing costs can be financed
  • DTI (debt to income ratio) – this is how a lender determines if you make enough money, that we can document, to cover the payment on our loan and your other expenses that show up on a credit report. We aren’t concerned about the amount you owe on a credit card for instance, we use the minimum payment they are asking for, even if you pay more when you get their bill.
    • Example – If you make $10,000 per month before taxes, and your expenses including the housing costs and whatever shows on a credit report are $5,000 per month, you would be at a 50% DTI. The magic number today is 43% or lower. If your DTI is 43% or below you would qualify for the best rate offered, from a DTI standpoint. Max percentages vary with loan type:
      • Conventional – 50% DTI is the maximum
      • FHA, VA, USDA – 55% DTI is the maximum
  • FICO score – First of all, credit reports run by a lender generally will show lower scores than a consumer credit pull. The reason is size and risk. Buying electronics or white good you might spend a few thousand dollars. Buying an automobile you might pay $20k to $80k or a bit more depending on the vehicle. Mortgage lenders are offering you hundreds of thousands to millions of dollars so we tend to be stricter in our interpretation of your score.
    The rule of thumb is, we use the middle FICO score of the lowest qualifying borrower, and so if we have a husband and wife on a loan, the lowest middle score of the two is used. Same with multiple unrelated borrowers. The best you can do is a 780 middle FICO. A 780 FICO or higher will get you the best rate based on that factor. Minimum FICOs needed for different types of loans are below (however there are some specialty programs that require lower FICOs and some types of loans that don’t take FICO into consideration at all.

    • Conventional – minimum FICO 620
    • FHA – minimum FICO 620
    • VA – minimum FICO 640
    • USDA – no minimum FICO required

    The above information is for standard financing. If you don’t qualify for a standard loan there are other options:

  • Stated Income – Uses 12 months or 24 months of bank statements or a business Profit & Loss. FICO considered but no tax returns, W2s or 1099s are needed.
  • Depletion of Assets – If you have enough cash in the bank to cover the payments on a loan throughout the set loan period, we can use that account to qualify you. We do not attach the capital. We just need to confirm that it is yours and is seasoned.
  • HECM or Reverse Mortgages – FICO and income are not a consideration. You qualify for a reverse via your age (must be a minimum of 62 years old) and the equity (generally a minimum of 50% LTV). Nice option to purchase or refinance, pull cash out and never make payments on the loan or cash out. Payments are made by taking them from the property’s equity.
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