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4 Common Mortgage Loan Questions

Admin • Jun 19, 2020
Kids Playing With Bubble Wrap — in Costa Mesa, CA — Secure One Capital
If becoming a home owner is one of your dreams, you're in luck. While it may seem like buying a home is overwhelming, there are actually many mortgage options available. If you would like to know more about mortgage loans, check out these four frequently asked questions.

1. What Types of Home Loans Are Available?

There are many types of home mortgage loans from which you can choose. First, there are fixed-rate mortgages and adjustabl0rate mortgages. Fixed-rate mortgages have an interest rate that can't be changed during the time of the loan. Adjustable-rate mortgages may increase in interest, based on the current market.
You'll also have to consider mortgage terms. Most lenders provide 15-year and 30-year mortgages. With a 15-year mortgage, your monthly mortgage bill is higher, but you repay your house faster and pay less in interest overall.
Finally, you'll have to decide which type of loan is right for you, and three of the most common types of loans include conventional loans, FHA loans and VA loans. Conventional loans are provided by private lenders and are not backed by the government, but FHA and VA loans are backed by the government, which reduces the risk of lending to you.

2. Do You Need a Down Payment?

With conventional loans, you typically need a down payment of 20 percent of the total value of the home. Naturally, many Americans don't have this much money lying around. Luckily, there are alternative if you can't afford a 20 percent down payment.

With an FHA loan, for example, you may only need a down payment of 3.5 percent. Veterans who served in the armed forces may qualify for a VA loan. If you qualify, you may be able to get financing for 100 percent of the property, which means no down payment is required.

3. What Does Debt-to-Income Ratio Mean?
One of the most important factors lenders consider when you apply for a home loan is your debt-to-income ratio. This simply refers to how much income you have vs how much debt you are currently repaying. If your debt-to-income ratio is too high because you have lots of debt, lenders are less likely to offer you a mortgage loan. They see you as a higher risk, which may mean in total denial of a loan or a loan with a high interest rate.

Lenders prefer a debt-to-income ratio at 36 percent or more, but you should still be able to get a mortgage loan if your debt-to-income ratio is 43 percent. In most cases, FHA loans are a more lenient if you have a high debt-to-income ratio. However, it may be in your best interest to pay off some minor debt before you apply for a home loan.

4. What if Your Credit Score Is Low?
Another factor that affects your mortgage loan is your credit score. With a conventional loan, most lenders will want to see a credit score of 620 to 640. In many cases, your credit score directly affects the interest rate, so if your credit score is above 640, you may get an extremely low interest rate.

If your credit is less-than-perfect, an FHA loan may be the better option. For most FHA loans, you simply need a credit score of 580. Some lenders will even lend to people with a credit score as low as 500. If your credit score is below 580, however, you may need to pay a 10 percent down payment instead of the typical 3.5 percent associated with FHA loans.

With VA loans, there is actually no set minimum requirement for your FICO credit score, but lenders have their own requirements, so they tend to prefer borrowers with a credit score of 620 or higher.

If you are in the market for a new home, choosing the right loan may seem overwhelming. If you have a high credit score and a low debt-to-income ratio, you have more options, but even people with low credit scores can qualify for home loans. For more information, contact us at Secure One Capital Corporation today.

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