Congratulations! Making the decision to buy a home is a large investment, and most likely, the biggest investment you’ll make. However, it’s important to understand the home buying loan process and learn what you’ll need to do before you begin seeing houses.

 

The good news is the process is very straightforward. As a potential homebuyer, you will meet with your licensed mortgage advisor to complete a loan application and determine what you qualify for. 

 

Once your financial information has been verified, you and your licensed mortgage advisor will review the loan programs available to help you purchase your dream home. 

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Mortgage Loan Programs

In general, all home mortgages fall into one of the following two categories based on how the mortgage payments are calculated: ARM and Fixed rates are not loan programs - loan programs include conforming or non-conforming loan types - for instance, FHA, Conventional, Jumbo, USDA, VA, and hard money 

 

Types of Loans

 

 

 1. Conventional 

A conventional mortgage is not guaranteed or insured by the federal government, which means some form of private insurance will have to be provided. It also “conforms” to certain limits so that they may be sold to Fannie Mae or Freddie Mac.  A conventional home loan or mortgage consists of:

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• Down Payment - A down payment may be as low as 3%.

• PMI or Private Mortgage Insurance - This is required if your down payment is less than 20% as protection for the lender in case of a loss.

• Credit Score - Ideally around 700 but there are options for lower scores.

• DTI or Debt-To-Income ratio - This should be less than 50%, and in some cases less than 45%.

• Amount of Loan - Your loan must conform with the limits set by the county and state where you plan to buy your home. For example, the 2021 loan limit in California’s Bay Area $822,375; and in Arizona’s Maricopa County it is $548,250 (Source: Conforming Loan Limits Map).

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 2. Government Insured

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• VA Loan 

A VA Loan is a home loan that is guaranteed by the U.S. Department of Veterans Affairs (VA). This loan can only be used by military personnel and veterans who meet certain conditions. VA loans are also only done by a select group of lenders, which happens to be Jennifer Lampe’s specialty. A VA home loan or mortgage consists of:

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• Down Payment - There is usually no down payment required, so 0%. 

• PMI or Private Mortgage Insurance - There is no mortgage insurance required, adding instant savings to VA homebuyers. 

• DTI or Debt-To-Income ratio - While there is no specific requirement most VA lenders like to see a DTI of 41%. 

• Amount of Loan - Since the recent passage of the Blue Water Navy Vietnam Veterans Act in 2019, there are no longer loan limits for VA mortgages if you have full entitlement Therefore, if you qualify for a $800,000 home, that will be the maximum loan amount. This is a huge advantage for homebuyers using a VA loan in certain high cost areas in California and Arizona. If you’re using remaining entitlement due to a previous VA loan, you will need to stay within the conforming loan limits for the county you are purchasing in.

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• FHA

An FHA home loan is a mortgage guaranteed by the Federal Housing Administration. Because these loans are insured, FHA lenders are able to offer affordable home financing options, and streamline refinancing is also available. An FHA home loan or mortgage consists of:

• Down Payment - The down payment can be as low as 3.5%  

• MIP or Mortgage Insurance Premium - FHA requires the purchase of mortgage insurance or MIP which is paid monthly with the mortgage payment. 

• Up Front Mortgage Premium - FHA requires an upfront premium, or fee that can be paid as a premium in your closing costs or rolled into the loan amount.  

• Credit Score - Can be as low as 580. 

• DTI or Debt-To-Income ratio -  The standard DTI for FHA loans is 43% but can go up to 55%.. 

• Amount of Loan - The amount of your FHA loan must conform with specific limits depending on the state and county where you want to buy your first home. For example in Arizona’s Maricopa County, the FHA loan limit is $368,000, and in California’s San Diego County it’s $753,250. (Source: FHA Mortgage Limits)

 

• USDA

A USDA home loan is a mortgage guaranteed by the United States Department of Agriculture (USDA). The program is designed to help low-income applicants obtain decent and sensible housing in eligible rural and suburban areas. A USDA home loan or mortgage consists of:

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• Down Payment -  The USDA has a 0% down payment requirement 

• MIP or Mortgage Insurance Premium -  There is no mortgage insurance required. 

• Credit Score -  Most USDA lenders require a minimum 640 credit score. 

• DTI or Debt-To-Income ratio -  The standard DTI is 41%. 

• Amount of Loan -  Similar to the VA program, USDA loans do not have a loan limit. This means the loan amount you are pre-approved for based on your debt and income will set the maximum amount that you can borrow. 

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3. Jumbo

Jumbo loans (aka jumbo mortgages) are loans that exceed the limits set by the Federal Housing Finance Agency (FHFA) and are considered ‘nonconforming’. These loans are not secured by the government-sponsored entities, Fannie Mae or Freddie Mac, which make these loans riskier for lenders. There are, however,  loan options for fixed and adjustable-rate loans available to enable homebuyers to get this type of high-balance home financing without paying high-interest rates. A Jumbo loan or mortgage consists of:

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• Down Payment - The down payment required will vary by the lender, but will usually range from 10% to 20% down. 

• PMI or Private Mortgage Insurance - If the down payment used is less than 20%, then private mortgage insurance will be required or the option to waive it is built into the interest rate. 

• Credit Score - The ideal credit score is 700. 

• DTI or Debt-To-Income ratio - The DTI ratio is usually 43 - 45%.  

• Amount of Loan -  The loan amount for a jumbo loan will be be at least $1 higher than the conforming loan limit in the area you are purchasing 

 

After picking the best loan program for you, you will receive a loan pre-approval letter that your real estate agent will use to make offers on different properties. 

 

Because California and Arizona are two popular and very competitive real estate markets, completing these steps ahead of time is critical and sometimes mandatory to view a home.  Having your pre-qualification letter also assures sellers that you are serious and can afford the home.  

 

Loan Programs for Self Employed Business Owners

Pre-qualification and approval is often more challenging for self-employed business owners, depending on how your business is formed. Often, lenders will want to see the Profit & Loss, Balance Sheet, and Tax Returns for both the business and the borrowers to get a complete picture. Jennifer Lampe is a licensed mortgage advisor who has experience working with business owners and this is vital to helping you navigate the process.