Understanding Different Kinds of Home Loans
Mortgages help individuals realize their dream of becoming a homeowner and provide the funds to purchase the property. Securing a home loan is not a simple task, and the borrower must meet all specifications for the loan program. Lenders review applications according to the customer’s credit scores, income, debt ratio, and how responsible the person is with their finances.
Many lenders may also prefer borrowers who have money in savings accounts. By having savings, the person appears more responsible and makes a better impression on the lender. Some banks prefer individuals who have at least the first six months of the loan payments in the savings account. A borrower with an emergency fund is more appealing to lenders and could get faster access to a mortgage.
Required Credit Scores
As a general rule of thumb, most lenders want applicants to have at least a 620 credit score. However, each home loan has different requirements. A conventional mortgage requires no less than a 620, but an FHA could be secured with a score as low as 580. USDA mortgages and VA loans don’t require perfect credit, and a borrower could get a loan with the lowest credit score of 580. To review the current credit score requirements, contact local mortgage services for further details.
Debt to Income Ratios
When approaching a lender to get a mortgage, all applicants must undergo a credit assessment. During the review of the application, the loan officer calculates the person’s debt to income ratio. The purpose of the assessment is to ensure that the person can afford a mortgage with the current monthly expenses.
Any borrower with a ratio of more than 43% will not get approved for a loan. These reviews are required to prevent predatory lending practices that allow consumers to get a mortgage that is not affordable and leads to foreclosure.
The Down Payment Requirements
When reviewing down payments for each home loan, prospective buyers can look at each loan individually. Conventional loans require the borrower to pay at least 10% down for the first home, and if the person is buying a second or vacation home, the down payment increases to 20%.
VA and USDA loans are backed by the government and applicants must meet specific criteria for approval. Neither of the loans requires a down payment. However, to get a VA mortgage, the applicant must have a certificate of eligibility from Veterans Affairs or their command post. To get a USDA, the applicant must meet specific income restrictions.
Understanding Property Tax Requirements at Closing
At the closing, tax service is necessary. The seller must pay prorated property taxes according to how long the person has lived in the property for the current year. The buyer pays taxes according to the portion of the year the new owner lives in the property. All tax payments must be accurate and recorded in the closing documents.
A Review Of Insurance Requirements
All buyers must purchase homeowner’s insurance for the property. If the home is in a flood or earthquake zone, additional peril coverage is required by the lender. Conventional mortgages require borrowers to purchase and maintain mortgage insurance until the buyer pays at least 20% of the total loan amount.
The mortgage insurance covers the loan and if the buyer defaults on the loan, the insurance pays off the loan. The customer can extend the mortgage coverage throughout the term of the loan.
Where to Get Adequate Insurance Coverage
At Academy West Insurance Services, Inc., we provide a variety of services for clients, including mortgage approvals and coverage for the new property. Our service representatives can help buyers get the right loan for buying a home and find a payment structure that is affordable. To learn more about our services, contact us today!
Mortgage programs offer effective ways to purchase a home and get affordable payments. When processing a home loan, the loan officer must review specific factors about the borrower including the current credit scores, income, debt ratio, and credit history.
Updated lending laws require all lenders to calculate a debt-to-income ratio to establish affordability. If the borrower cannot afford the loan with current monthly expenses, the person cannot be approved for the loan.
Each loan program requires different credit scores, down payments, and mortgage insurance. When reviewing the requirements, the borrower must choose a loan that meets their needs and for which the person is eligible. By reviewing different kinds of home loans and requirements, home buyers can make the right choice and avoid common mistakes.