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Buying a home for the first time may be one of the most exciting experiences in life, and you can make it happen. Yet, a ton of people feel as if buying a home would be impossible, even if it’s not true. Ask a few questions first before you decide whether homeownership is in the cards for you. Here are a couple of things everyone should know before they apply for a mortgage.
The Difference Between Conventional and FHA Loans
Generally, you have two options when applying for a mortgage, even though there are more than that. They would be conventional loans backed by Frannie Mae or FHA loans. Both of them are perfectly useful options as long as you qualify for one, but they also differ in several ways.
First, your down payment may be lower if you can qualify for a conventional loan, as they require as little as 3% down. An FHA loan requires 3.5% down, so it’s a little more than what you’d pay on a conventional one, but not by much.
The main benefit of an FHA loan is how lenient their lending is when compared to conventional loans. To qualify for a 3.5% down, you only need a credit score of 580 or more. Conventional loans usually ask that you have at least a 620, although many banks won’t work with less than a 640.
What’s the APR and the Interest Rate of the Loan?
A loan’s APR and its interest rate are related to each other, but they represent different things. The interest rate is what applies to the loan’s principal, and it also comprises most of its APR. Yet, you’ll notice your loan’s APR is usually a bit higher than what’s charged for the interest rate, even if not by much.
The loan’s annual percentage rate is higher since it includes any fees charged by the lender. If the APR is way higher than the loan’s interest rate, that means the lender is charging you a ton of fees.
Will You Need to Pay Private Mortgage Insurance?
Whether you need to pay PMI often depends on how much you put down when applying for the loan, so put down more when you can. Private mortgage insurance lowers the risk taken on by the lender since you have more equity in the home. As a result, they’re taking on less risk when lending you the money, and they don’t charge PMI.
You need to put down at least 10% for an FHA loan if you’d like to avoid PMI. However, you must put down 20% to remove PMI on most conventional loans, and that’s hard for a first-time buyer.
If you’ve qualified for an FHA loan and don’t put down 10%, you’ll pay PMI for the life of the loan. That’s not the case if using a conventional loan since PMI drops once LTV reaches 80%.
What Are the Loan Limits in Your Area?
Both conventional and FHA loans have lending limits imposed on them. Generally, conventional loans allow you to borrow more than what you can borrow using an FHA loan. Yet, the limits vary by location, so it often depends on the zip code of where you’re buying.
As of 2022, FHA loan limits are $420,680 if you live in a low-cost area and up to $651,050 in high-cost areas. At the same time, a conventional loan has a limit of $647,200, regardless of the area.
Some states have higher average limits, especially if the property values are high, like in CA. You can check out what the limits would be in your area by looking up the zip code online and comparing it to HUD’s data.
Where Should Your Credit Score Be Before Applying?
Having a better credit score may lower what you pay each month after taking out a loan. Since banks will give you a better interest rate on what you borrow, the size of the monthly payment is smaller. Also, most banks require specific scores to qualify for a loan in the first place, depending on which type.
FHA loans have the most lenient credit guidelines of all mortgages, and you can get one with a score as low as 500. You must put down at least 10% to qualify for a mortgage if your score is under 580. Then, the down payment requirements drop to 3.5% once your score rises to at least 580.
Conventional loans have strict credit requirements, and you need at least a 620 to get one most of the time. If your score is lower than that, getting an FHA loan may be the easiest way to qualify for a mortgage.
What Is Your Debt-to-Income Ratio?
Another hurdle you must overcome to qualify for a loan is the income requirements. Banks determine how much you can borrow based on your income and debt levels, and you need proof of both.
If your DTI is more than 43%, it may be difficult to find a bank willing to lend them money to you. The only way to lower your DTI is by raising your income or lowering your debt, and either option is valid.
Can You Add Someone Else to the Loan?
Sometimes, you may not have the qualifications yourself, so asking for a co-borrower can help. A non occupant co borrower can make it much easier to qualify for a home loan, regardless of which type.
You can put a co-applicant on an FHA loan and do it on a conventional one. Plus, by adding them to the loan, you can use their income as part of your qualifications, raising your loan limit. If you want a 3.5% down FHA loan, the co-borrow must be a relative of yours, or they can’t be used.
What Everyone Should Know About Applying for a Mortgage
Applying for a mortgage can feel a little intimidating, but that doesn’t mean you shouldn’t do it. As long as you know what to expect, it’s actually a lot easier to qualify for a mortgage than most think. Ask these questions when you’re working with your lender, and they’ll help guide you through it.
