What follows is a comparison of the basic types of Houston home loans. You’ll need a pre-approval letter from a lender to begin your search for a home. If you haven’t spoken to a lender, now is the time to do so.
Three Types of Home Loans
Conventional Mortgage (Fannie Mae )
Maximum loan amount is $417,000, subject to change. (Loans exceeding
this limit are referred to as a Jumbo or non-Conforming conventional loans.)
- Eligible borrowers are U.S. citizens, resident aliens (green card), or non-resident aliens working under an acceptable work visa, L1 or H1, and meet all the necessary credit, employment, and asset requirements. A TN visa for Canadian and Mexican Nationals may be acceptable as well. Even with an acceptable visa, it is critical to have U.S. based credit scores.
Maximum loan amount is (subject to change): $271,050 Harris, Galveston, Brazoria, Chambers, and Montgomery Counties
- Eligible borrowers are U.S. citizens, resident aliens (green card), non-resident aliens who possess an acceptable L1 or H 1 Visa and meet all the necessary credit, employment, and asset requirements. A TN visa for Canadian and Mexican Nationals may be acceptable as well. Even with an acceptable visa, it is critical to have U.S. based credit scores.
Maximum loan amount is $417,000 with no down payment. To determine your eligibility, you will need form DD 214. This is true whether you were Active Duty, Reservist, or a member of the National Guard. If you can’t locate this form, you can go online to the National Personnel Records Center and request a copy of your DD 214.
- Eligible borrowers are active duty and discharged veterans. An un-remarried surviving spouse, National Guard, and Reservist may also be eligible. For all eligibility criteria such as period of service, length of service, etc., please visit the VA Eligibility Guidelines.
A homebuyer will find a variety of down payment programs with a conventional loan.
0% down payment – FNMA has suspended this program with an exception currently for USDA loans in specific areas
3% down payment – Check availability
5%, 10%, 15%, 20% down payment – At 20% down payment, mortgage insurance is eliminated.
3.5% Down Payment
No down payment is required if the eligible veteran has full guaranty benefits and his loan amount does not exceed $417,000.
Closing & Pre-Paid Costs
There are more costs to buying a home than your down payment. In addition, a borrower is expected to pay their closing and pre-paid costs. It is important that you compare these costs between lenders. Pre-Paid costs should not be confused with closing costs and they are fairly uniform between lenders. Pre-paid costs involve the prepayment of 14 months home owner insurance, 3 to 4 months property taxes, and interim interest from the date you close the purchase to the last day of that month. One other area to be aware of is the cash reserve requirements. Cash reserve simply refers to the amount of cash or cash equivalent assets you have left over in your accounts after closing. It can play an important role in your loan approval.
Seller Contributions – Conventional Mortgage guidelines allow the seller to contribute or pay all or a portion of borrower’s closing and pre-paid costs. The percentage allowed is usually determined by the borrower down payment (subject to change). The seller can pay up to 3% of sales price toward the borrower costs when the down payment is 3% or 5%. The seller can pay up to 6% of sales price when the down payment is 10% or greater. One special note, FNMA limits seller contributions to 2% if the mortgage is for an investor purchaser.
Gifts – Gifts for funds to close are allowed provided the borrower demonstrates that 5% of funds needed are from their own resources. The use of gift funds can affect the maximum allowed total debt ratio
Second Liens – Second liens may be used to lower the amount of the first mortgage. This may be desirable because of mortgage insurance considerations. If you are able to reduce the first lien to 80% or less through a combination of down payment and a second lien, you may eliminate the need for PMI.
Seller Contributions – The seller can contribute up to 6% of sales price towards buyers closing and prepaid cost.
Gifts – FHA allows “all” of the borrower’s down payment, closing, and pre-paid costs to be from a gift. Manner and amount of gift funds may affect maximum total debt ratio allowed by some lenders.
Seller Contributions – All closing and pre-paid costs may be paid by the seller up to 4% of sales price. The veteran with no down payment may virtually move in with no expense. Consult your realtor when you consider asking for seller contributions.
Gifts – Same as FHA mortgage
Loans Against Borrower Assets – A borrower may borrow all funds needed for down payment, closing, and pre-paid costs on conventional, FHA, and VA loans provided they are borrowed against an asset of the borrower such as 401K, stock or bond accounts, other real estate, etc. If funds are borrowed from a 401K, the resulting repayment terms might not be counted as a debt in the debt ratios (subject to change).
Qualifying Income/Debt Ratios
Homebuyers are constantly reminded that in order to qualify for a home loan the mortgage payment must not exceed a percentage of their gross monthly income and their combined debt (mortgage payment, installment payments, and revolving payments) must not exceed a percentage of their gross income.
PLEASE NOTE THAT THE DEBT RATIOS ARE SUBJECT TO CHANGE. DEBT RATIO GUIDELINES ARE FREQUENTLY EXCEEDED WHEN ANALYSIS OF DOWN PAYMENT, ASSETS, INCOME, AND CREDIT SCORES ARE COMPUTED IN THE AUTOMATED UNDERWRITING SYSTEM (AUS).
In addition to debt ratios, VA uses Residual Income. VA computes residual income by subtracting PITI, Installment and Revolving payments, Social Security withheld, Federal Income Tax withheld, and estimated utilities and home maintenance costs from the veteran’s gross monthly income. The income remaining after this process is referred to as the Residual Income and is compared to VA requirements are a sliding scale based upon the number of persons in a family. The larger the family the more residual income is required. From a qualifying standpoint, the VA places more weight on the Residual Income guideline.
All income from a qualified occupant co-signer/co-borrower may be counted towards the approval process. Their installment and revolving debts must be included as well.
Income from a non-occupant co-signer/co-borrower is of limited value in the approval process. Their installment, revolving, and present mortgage or rental debt must be included as well.
All income from a qualified occupant or non-occupant co-mortgagor may be counted towards the approval process (subject to change)
Their installment, revolving, and mortgage or rental debt must be included as well.
All income from a qualified occupant co-signer/co-borrower may be counted towards the approval process provided they are the spouse of the veteran or another veteran. A veteran purchasing with their VA benefits must owner occupy the property.
Non-occupant co-borrower may not be used to qualify for the VA mortgage.
Credit Scores play a major role in the approval process of your mortgage application. Each individual typically has three credit scores obtained from three major credit agencies, Transunion, Equifax, and Experian. You can pull your own scores on line to review but keep in mind the lender making your home loan will have to pull one as well and the scores on theirs are often different from the ones you obtained on line.
FNMA sets the industry standard and individual lenders often have in-house standards. The credit score used is often referred to as the primary middle or critical score. The primary middle credit score will be the lowest middle score of all applicants applying for the home loan. For a FNMA conventional loan, you will normally need 2 scores.
For FNMA type loans, Chapter 13 bankruptcies must be two years from date of discharge and Chapter 7 must be 3 years from date of discharge. Credit history since discharge must be paid as agreed.
FHA has no stated minimum credit score. However, experience indicates once your credit scores drop below 620, your approval may be more difficult to obtain (subject to change). Most mortgage investors require a minimum primary middle credit score to be no less than 620 regardless as to the outcome of the automated approval process.
Chapter 13 bankruptcies must be paid as agreed for 12 months and a letter from trustee permitting your mortgage application obtained to apply for a FHA home loan. Chapter 7 must be discharged two years. Credit histories since discharge date should be paid as agreed.
VA has no stated minimum credit score. However, experience indicates once your credit scores drop below 620, your approval may be more difficult to obtain. Most mortgage investors require a minimum primary middle credit score to be no less than 620 (subject to change) regardless as to the outcome of the automated approval process.
Note Conventional, FHA, VA - If one of the borrowers participating in the purchase has low credit scores, you can exclude them from the approval process provided you are not trying to include their income to qualify. Any monthly installment or revolving debt they have” will be counted” in the Debt Ratios on FHA and VA loans but will not be counted on conventional loans.
Please note credit scores may also affect the interest rate offered to the buyer on their home loan. This is referred to as Risk Based Pricing.
Lenders reduce their exposure to loan defaults by obtaining mortgage insurance or guaranty. The amount and cost depend on the type of loan chosen.
If the borrower is making less than a 20% down payment, the lender requires the loan to be insured by a private mortgage insurance company (hence the term “PMI”). The amount of mortgage insurance is usually added to the monthly payment. Insurance costs are determined by the borrower’s down payment, length of the loan, fixed vs. adjustable, and most recently your credit scores. The purpose of the loan (owner occupied, second home, investor, refi) may also influence the availability and cost of the conventional mortgage insurance premium.
You may be able to eliminate PMI entirely with the use of second lien financing. For example, making a 5% down payment and combining it with a 15% second lien, your first lien is now 80% of the sales price and mortgage insurance is not needed.
The Federal Government insures loans against default through the Federal Housing Administration. FHA insured loans have an Up-Front insurance premium which is usually added to the loan amount. A Monthly premium is also added to the borrowers total payment (FHA hits the borrower twice). The monthly mortgage insurance included in their payment may be dropped when the loan to value reaches 78%.
FHA now uses an insurance premium based on the borrower’s loan to value (LTV), term of the loan, and loan type (purchase, refi, etc.)
Contact a lender for current FHA Upfront and Annual Premiums
The Dept. of Veteran’s Affairs guarantees a veteran’s loan against default. Although they do not have an insurance premium, it charges the veteran a Funding Fee of 2.15% X Loan Amount if it is the first use of housing benefits by the vet. The Funding Fee is 3.3% if the veteran is using their benefits for the second or more time. The Funding Fee may be added and financed in the VA loan. For eligible reservists and national guardsmen the first time use funding fee is 2.4% of the loan amount with 0% down.
Automated vs. Traditional Approval
The mortgage approval or underwriting process has evolved into two methods:
Automated Underwriting – This method employs a computer to analyze the borrower’s income, assets, liabilities, and credit scores.
Traditional Underwriting – If no credit scores are available, lenders may use alternative sources of credit to underwrite/approve a loan (Few Lenders currently offer Traditional Underwriting)
First Time Homebuyer Programs
First Time Homebuyer Programs fall into three categories:
Mortgage Credit Certificates (MCC) which allow the borrower to deduct a portion of their annual mortgage interest payments as a credit against income taxes owed on your tax return. The benefits of this are much greater than simply taking an itemized deduction for the annual interest paid. Any portion of the annual interest paid which cannot be taken as a credit may still be shown in itemized deduction section of your tax return.
Mortgage Bond Programs refer to loan programs that offer mortgage funds obtained from the sale of tax exempt bonds. The proceeds from the bond sale are used to provide the borrower with below market rates of interest loans and/or down payment and closing cost assistance.
Grant Funds are just as their name implies outright grants from non-profit entities that may be used for down payment and/or closing costs. A portion of the grant may have to be repaid if the property is sold within a stated period of time.
First Time Homebuyers are defined as those individuals who have not had an ownership interest in a home within the last three years (subject to change) These programs may be sensitive to the borrower’s gross annual income and are available only in specific geographic areas.