Home buyers often start with a quick search for real estate in their desired location, and once a home piques their interest, they move into looking for mortgage loans. Navigating the mortgage options available to you should start before viewing your dream house.
A pre-approval allows you to provide minimal information to learn how much money you can spend on a home. If you’re placing a bid on a home, sellers will value a pre-approval for direct mortgage loans because there’s less risk that the mortgage will be denied.
5 Mortgage Loans for Home Buyers
Home buyers can choose 10, 15, 20 years, 30 years duration for their loan. Fixed rate and adjustable rate loans are also available. You’ll need to speak to a provider that offers mortgage loans in Bergen & Passaic counties or your surrounding area to find the best loan option for you.
1. Conventional Loan
A conventional loan is a loan that isn’t backed by the government. The lack of government backing makes lending requirements stricter. Home buyers will have to meet stringent:
- Down payment requirements
- Credit requirements
- Debt-to-income ratios
There are conforming and non-conforming loans. Conforming loans fall within the maximum loan amounts of Freddie Mac and Fannie Mae. These two agencies back the majority of loans in the United States.
These loans can have lower borrowing costs and may be able to have PMI insurance waived if the borrower has a 20% or higher down payment.
2. Jumbo Home Loan
Jumbo loans would fall under the non-conforming loans found in the conventional loan section. These loans are designed to finance higher home values and allow for home buying in high-cost areas. A jumbo loan carries a higher risk for the lender, so you can expect to provide more documentation.
Interest rates are competitive and similar to conventional loan rates.
The downsides of jumbo loans are:
- Debt-to-income ratios cap out at 45%
- Credit scores of 700 or higher are required, depending on lender
- Down payments must be 10% to 20% or higher
You may also be required to list your assets to qualify for your home.
3. FHA Loan
The Federal Housing Administration, or FHA, offers loans that are designed to help first-time home buyers get into a home. These can be small mortgage loans, or they can go up to $765,600 for high-cost areas. In lower-cost areas, a single unit loan maximum can go as high as $331,760.
Obtaining an FHA is easier than most conventional loans due to their more relaxed requirements:
- Credit scores as low as 580 are accepted
- Down payment requirements are as low as 3.5%
The downside of an FHA loan, aside from potential loan ceilings, is that you’ll be required to pay one year upfront PMI and PMI will remain on the loan for the life of the loan, no matter how much equity it gained.
4. VA Home Loan
The Department of Veteran Affairs backs loans for veterans or military service members. These loans are often a top choice for military members because they offer numerous perks that make them advantageous compared to other loan types:
- No mortgage insurance required
- No down payment requirements
- Low interest rates
Borrowers are required to pay what is known as a VA funding fee. The fee is rolled into your loan and is a one-time fee that’s paid upfront. The fee is 2.3% for a first VA purchase with no down payment. If you have a down payment of 5% to 9.9%, you’ll pay a 1.65% fee or as low as 1.4% if you have a down payment of 10% or higher.
5. USDA Home Loan
USDA loans are available in rural areas, and these loans are backed by the Department of Agriculture. You’ll find multiple options available, including direct home loans. Requirements may vary by state. Requirements include:
- Rural homes, with some exceptions in suburban areas
- Income limits
- Property value caps
Income-qualified buyers will benefit from low or zero down payment options. You may be able to secure grants and home improvement loans, too.
FAQs When Applying for Mortgage Loans
How Do I Improve My Chances of My Loan Being Approved?
Loan requirements vary from one loan type to the next. If you want to improve your chances of loan approval, you’ll want to:
- Gather income documents
- Reduce credit card and student loan debt
- Increase your down payment
A lot of mortgage lenders will be able to run a quick credit check, ask you a few questions and provide you with a pre-approval. The pre-approval is not a guarantee that the loan will go through underwriting without an issue, but it does increase your chances of getting a loan.
If you stay under the maximum loan amount that you’re approved for by the lender, this will also increase your chances of the loan being approved.
What Happens If I’m Not Approved for my Mortgage?
If you’re not approved, discuss your options with the loan agent working on your mortgage loans. The lender will be able to give you advice on how to be approved, which often includes:
- Building credit history
- Paying off debt
- Increasing income
- Buying a lower-priced home
- Greater Alliance has also partnered with GreenPath Financial Wellness who have caring and certified HUD counsellors who can guide you prior to you buying a home. Contact 877-337-3399 or schedule an appointment online.
What Documents Do I Need to be approved for Self-employed Mortgage Loans?
People who are self-employed can still receive a loan, but the process is more tedious and will require additional documentation. You should be prepared to provide a lot of documentation, including:
- Two years of personal and business tax returns
- 3 or more months of income statements
- Profit and loss statements
- Contracts or letters from clients or customers
The bank needs proof that you have the financials to get a loan. You will need to meet credit requirements and still need to provide a down payment. Be prepared to supply a variety of documents to the lender.
If you’ve just started working for yourself, it can be difficult to get a loan because you need to show that your business has been consistently profitable.
Home buyers should look into local loan programs, reduce their debt and consult with a lender in their area. Greater Alliance offers a lot of home buying options for first time home buyers. You may also schedule a Zoom or Phone appointments to see which options are best for you. With over 80 years of experience serving Bergen and Passaic counties we can guide you through the best options.