Understanding the types of home loans that are on the market and how to qualify is imperative before thinking about buying a home.
With today’s incredibly low interest rates, many people want to discover how much home you can afford and what kind of downpayment will be required. It’s likely that buying a home will be the biggest purchase you make in your lifetime and it’s critical you know you are getting the best possible interest rate and conditions.
Although it’s easy to go online and fill out a loan application, Nicole Rueth, producing branch manager of Fairway Independent Mortgage Corp., suggests a one-on-one meeting or, at the least, a phone interview with a couple of potential lenders. Typically, you’ll spend about an hour with the lender, discussing your personal situation; if you do it over the phone, it will take about 30-40 minutes.
“We like to develop a relationship with the borrower(s) and assess the goals of what they are trying to achieve in homeownership,” she explained. “It goes beyond just collecting data; it’s so much more than that. It’s important to know what the borrower wants, what they are afraid of, what are their goals, are they long term investors, are they going to move in five years or are they going to raise their kids in this house for 15 years? Depending on the situation, there are many different options. A one-on-one relationship makes a difference; this is a big financial decision and not just a transaction.”
After that initial meeting, you’ll get an idea of whether you will qualify for a loan. If you discover you don’t have the necessary funds, you can at least establish a plan and a timeline that will put you in a position to own a home in the future. A trusted lender will be able to set you on the right track.
Here are some of Rueth’s observations on home loans and how to prepare yourself when applying for a loan:
What are some of the documents needed to apply for a loan?
“First of all, you’ll need all the information on your assets: bank statements, money in the form of gifts, investments, etc. Next, all of your income: W2s, pay stubs, tax returns, social security income, trust money, pensions, alimony, etc. You’ll also need to disclose if you have suffered foreclosure or bankruptcy, and what your monthly expenditures are: credit card payment, student loans, child support, etc. Finally, you’ll need your driver’s license or other approved picture ID.”
What is the difference between pre-qualified and pre-approved?
“About 95 percent of people who apply for a loan fall into the pre-qualified category. It means that the appropriate information has been presented, but has yet to be verified, and indicates the person can afford X amount of a loan.
Pre-approved means the person has submitted all documentation, there has been an income analysis, the documents have been verified and someone has viewed the paperwork, much like the underwriter will. Pre-approval carries more weight. Once you are under contract and formally apply for the loan, you may need a few updated documents before submitting to underwriting but overall, everything is in order and you have better results. It makes for a smoother loan application process.”
What about the down payment?
“Bottom line, you don’t need 20 percent. The average down payment in Colorado is 10 percent of the home price. There are many opportunities to qualify for a loan and buy today — it doesn’t always make sense to wait. You have to talk to a lender who is forward-thinking and creative to help you buy now or put a plan in place to buy in the future.”
How do you determine which loan is best for your clients?
“This usually takes care of itself depending on factors like credit score, income vs. debt ratio, monthly budget, length of time you plan to be in the home, down payment, etc. These will all be considered to determine which loan is appropriate.”
What types of loans have the lowest interest rates?
“FHA, VA, and USDA generally have the lowest interest rates. USDA has the lowest but they are hard to get because of the criteria of having to buy a home in a rural area. Depending on your credit score and the term of the loan, conventional loans still offer low interest rates. And jumbo loans (over $597,000) run lower than conventional loan rates.”
What are the typical time periods of the loans?
“Loans can be for 10, 15, 20 or 30 years typically. The borrower can look at an amortization table to help figure out what would be best. Obviously, the shorter the time period the better the interest rate because the lender is getting their money back faster.”
What are the most common types of loans?
A conventional loan is any type of loan that is not offered or secured by a government entity but available through or guaranteed by a private lender (banks, credit unions, mortgage companies). Conventional loans represent about two-thirds of the home loans issued in the United States. People usually choose this type of loan if their credit score is over 620 and they have a low debt-income ratio. The down payment for conventional loans is usually at least three percent of the home price.
An FHA loan is a mortgage issued by federally qualified lenders and insured by the Federal Housing Administration (FHA). FHA loans are designed for low-to-moderate income borrowers who are unable to make a large down payment. This type of loan is a better solution for borrowers who needs help due to a lower credit score, higher debt-income ratio or credit issues.
The VA Loan is a mortgage loan issued by approved lenders and guaranteed by the U.S. Department of Veterans Affairs (VA). The program was created in 1944 by the United States government to help returning service members purchase homes without needing a down payment or excellent credit. This historic benefit program has guaranteed more than 22 million VA loans to help veterans, active-duty military members and their families purchase homes or refinance their mortgages. You may be eligible for a VA Home Loan if you meet one or more of the following conditions:
- You have served 90 consecutive days of active service during wartime or
- You have served 181 days of active service during peacetime or
- You have more than 6 years of service in the National Guard or Reserves or
- You are the spouse of a service member who has died in the line of duty or as a result of a service-related disability.
A jumbo loan, also known as a jumbo mortgage, is a form of home financing for people who need to borrow money that exceeds the conforming loan limits set by the Federal Housing Finance Agency (FHFA). Designed to finance luxury properties and homes in highly competitive local real estate markets, jumbo mortgages come with unique underwriting requirements and tax implications. If you are looking to borrow over $597,000 in the Denver metro area, you’ll need a jumbo loan. That amount may change each year and it is set by the FHFA.
These types of loans are coming back in popularity and provide excellent interest rates if you meet some specific criteria. They are only good for certain situations. If the person knows they will be in the house for a short period of time, for example, if they are anticipating a job transfer or will be selling after their kids get through high school, this is a good option. It’s more or less a stopgap for people who know their financial situation is going to change and need a low monthly payment. Also, if you are refinancing, adjustable-rate mortgages can lower your monthly payment and give you time to figure out your future housing needs.
Typically, these types of loans can be for 3, 5, or 7 years. Initially, there is a fixed interest rate but after the designated amount of time passes, the interest rate will adjust with the market.
The Colorado Housing and Finance Authority (CHFA) offers financial resources to help first-time homebuyers to achieve homeownership, according to CHFA. Often lenders can be found that will offer reduced closing costs and no mortgage insurance, even with a low down payment.
How has the tight housing market in Denver affected your business?
“It has forced us to get more competitive. There are often multiple bids on homes and it’s made us bring our “A” game to the table. Realtors, lenders, and borrowers need to work strategically together to get clients under contract. It’s almost like a talent show or beauty contest. You have to prove you can get to the closing table.”
First-time buyers seem to be competing for the same homes as older buyers. What is your take?
“They are competing for the same homes. The latest data for September 2021 shows the median home price in Denver (attached and detached) at $530,000; it’s hard to think of that being in the category of what a first-time homebuyer is looking to buy but it is. Then there are Baby Boomers looking to downsize so the two generations are fighting for the same homes. There is another group of millennials and Generation X buying larger homes for growing families that may have a mother-in-law suite or granny apartment.
“The bottom line is that Denver is still a sellers’ market across the board, regardless of the type of home. We continue to see appreciation levels go up. People who have been waiting for the ‘right time’ to buy are losing out.”