Purchase Loans
When in the market for a home purchase, whether it’s for a primary residence, second home, or an investment property, there are many different types of loans you can get. Here, you’ll be able to get a better idea of what mortgage solution might be the best option for you.
For more information about loan products, or if you would like to know what may be best for you, I’m here to help. Feel free to contact me and I’ll be available to answer any questions you may have.
Conventional & FHA
The most common types of purchase loans are Conventional & FHA loans. But what exactly are they?
For starters, Conventional loans are loans provided by government-sponsored enterprises, such as Fannie Mae & Freddie Mac, while FHA loans are provided by the government itself, through the Federal Housing Administration. There are many key differences between the two that make each type a viable option, depending on the circumstance.
With Conventional loans, you are able to put as low as 3% down on a single-family primary residence if you are a first time homebuyer, and 5% if you aren’t, or are purchasing a multi-family property (up to 4 units) and plan to live in one of the units. An advantage of Conventional loans is that you don’t need mortgage insurance once you have attained 20% equity in your home (80% loan-to-value).
As far as FHA loans go, you are only able to get one if it’s a primary residence; no investments/second homes can be done with FHA. However, an advantage is that you are able to put a minimum of 3.5% down, regardless of whether you’re a first time homebuyer or not, and that isn’t just for single-family residences; you can purchase a 4 unit property with a 3.5% down payment, but as mentioned before, this must be your primary residence, so you’ll have to live in one of the units. However, unlike Conventional loans, you must retain mortgage insurance over the entire life of the loan.
FHA loans tend to have lower interest rates than Conventional loans, but you pay slightly more for mortgage insurance which can make your monthly payment even more than a Conventional loan in some cases. FHA loans, however, are much more accessible for those with lower income and/or bad credit; FHA loans require a minimum credit score of 580, while Conventional loans require a minimum of 620. FHA loans also have a higher debt-to-income (DTI) limit, which is the sum of all your debts, mortgage included, divided by your monthly income. In the case of FHA loans, the maximum is 55%, while Conventional loans will only tolerate up to 50%.
VA
A VA loan is a loan offered by the Department of Veterans Affairs to help servicemembers, veterans, and their families purchase a home. The VA will set the rules and guarantees any loans made under the program. VA loans are a great option for those who are eligible, as you don’t need to provide a down payment; the maximum financing for a VA loan is 100%. To find out whether you are eligible or not, you can access your eligibility certification here. This certification will be used by the private lenders who will service/write/fund the loan. Just like any other standard purchase loan, borrowers will have to prove income/repayment ability.
Non-QM
When borrowers either do not qualify for a Conventional or FHA mortgage, whether it’s because their credit score is too low/don’t have credit at all, don’t declare enough income when filing taxes (if at all) so they can’t use regular income documentation, or if they simply don’t have a Social Security Number and need to use an Individual Taxpayer Identification Number (ITIN) due to their immigration status, then there are many Non-Qualified Mortgage (Non-QM) options that will still enable them to potentially obtain a loan. The catch is, of course, that Non-QM loans are going to be more costly, as they are considered high-risk; minimum down payments and interest rates will be higher.
If a borrower is looking to purchase an investment property, it is possible to do so without proving any income at all; instead, the projected rental income of the property will be used to qualify for the loan. This is the absolute best solution for borrowers looking to grow their real estate portfolio, since it’s possible to purchase a multi-family property of up to 8 units that their own income might have not been able to qualify for on its own.
Bank Statement Income
Borrowers are able to prove income by way of showing the last 12-24 months of bank statements from either their personal checking/savings accounts, business accounts, or both. This is an option for self employed borrowers (or borrowers that earn their income in cash and don’t receive a W2) that either haven’t been self employed for at least 2 years, or only declare a portion of their income when filing taxes, as it shows to lenders that they are, in fact, making enough income monthly to qualify for a loan, despite what their tax returns might say.
Profit & Loss Statements
Many business owners will find their way around declaring their actual income when filing taxes, in order to avoid the burden that comes during tax season; this is a great strategy normally, but it can come back to bite when you decide to apply for a mortgage. However, there is a solution that is found in P&L loans. Borrowers can have a Certified Public Accountant (CPA) prepare a Profit & Loss Statement (P&L) that will document a business’ net profit over a 12 or 24 month period; this P&L is what will be used to verify the borrower’s income, rather than using only the taxable portion of their income.
Asset Utilization
Asset Utilization is a form of income verification that we can use to either supplement a borrower’s primary source of income in order to get them below the maximum DTI requirements, or as a borrower’s only income if they happen to not have another primary source of income, either because they’re investors, entrepreneurs, retired, or simply living off of their investments. Qualifying assets include things like checking/savings accounts, stocks, bonds, certain retirement accounts like 401(k)s and IRAs, money market accounts, CDs, and so on.
DSCR
A DSCR loan is a type of loan a borrower can qualify for using nothing but the projected rental income of a property; they don’t need to verify any income or employment. Whether they’ll qualify or not with depend on if the subject property meets the minimum DSCR (Debt Service Coverage Ratio), which is the property’s projected rental income divided by monthly mortgage payment. As you could have already guessed, this type of loan is only possible for investment properties. Across all the lenders I work with, the absolute minimum down payment would be 20%, but only if the property has a DSCR higher than 1 (the rental income has to be equal to or higher than the mortgage payment), and the borrower has a minimum FICO of 700.
Hard Money
Hard money loans are typically funded by individuals or companies, rather than a bank; these types of loans can be arranged much more quickly than the typical purchase loan, and have terms that are generally far shorter than regular purchase loans. Hard money loans are a good option for those looking to make a short-term investment in a property that they plan to sell in a year or less, as the private investors that back the loan can make decisions faster since they’re primarily looking at the property being used as collateral rather than a borrower’s own financial position. As you may have guessed, however, these types of loans do come at a cost; rates for hard money loans will be much higher on average, thus making the loan more expensive. This is why hard money loans are typically only used by real estate investors, developers, house flippers, and people looking to do new construction projects, as the borrower will be able to pay off the loan quickly upon the sale of the property.