Fannie Mae and Freddie Mac
Fannie Mae and Freddie Mac both have a minimum credit score of 620. However, just because you have a 620 credit score that does not automatically make you eligible for this type of loan.
Fannie Mae and Freddie Mac have a minimum down payment on a conventional loan of 3% but there are additional requirements to qualify for this specific program. Freddie Mac calls this program Home Possible and Fannie Mae calls this program Home Ready. More information can be found at:
https://singlefamily.fanniemae.com/originating-underwriting/mortgage-products/homeready-mortgage
Separate from the above, the more commonly used conventional programs have a minimum down payment of 5% for a primary residence. They do offer financing on second homes and investment properties but the down payment requirements are higher.
Fannie Mae Eligibility - https://selling-guide.fanniemae.com/Selling-Guide/Origination-thru-Closing/Subpart-B2-Eligibility/
Freddie Mac Eligibility - https://sf.freddiemac.com/general/maximum-ltv-tltv-htltv-ratio-requirements-for-conforming-and-super-conforming-mortgages
PMI
Mortgage Insurance
PMI is a generic term many people use when referring to private mortgage insurance. It is also referred to as MI (mortgage insurance). For the sake of this article, we will refer to it as PMI. When you obtain a conventional loan and do not put a down payment of at least 20% down Fannie Mae and Freddie Mac require extra insurance on the loan called PMI. This is not insurance for you. It is insurance for the lender to protect them against any loan loss such as foreclosure. The key factor in this process is that the insurance is offered through private companies, not government agencies such as FHA, USDA, or VA etc. Since private companies are allowed to offer this insurance there is a lot of competition for it which of course drives the price down. The premiums for this type of insurance do vary a lot and are based on down payment, credit score, debt versus your income, and how many borrowers are obligated on the loan. When shopping for a mortgage you should always ask your lender how much the PMI insurance is. PMI is not a set amount but rather a factor based on the loan amount so your purchase price will affect the cost. It is also possible one lender has access to cheaper premiums than another. For example, maybe a local bank has a contract to use one or two PMI companies whereas a national lender might have a contract to use 5-7. The more options available to the lender the more shopping around they can do for you. PMI is not permanent on a conventional loan. Once you pay your loan down to 20% equity you can ask the lender to remove it. If you forget to ask the lender to remove it, they typically remove it for you when you hit 22% equity. It's important that you make your payments on time and stay in good standing with your lender, so you don't have issues getting the PMI removed.
Lenders typically require you get the 20% equity by paying the loan balance down to 20% equity based on the original purchase price, otherwise you would need to refinance to drop the PMI.
Automated Underwriting (AKA-AUS, DU, LP)
Regardless of the loan type lending and technology have made significant strides. When a lender determines if you are eligible for a conventional loan they typically run your application through a computer system to determine if you are eligible for that loan. This system is called AUS or automated underwriting system. Fannie Mae calls their program DU or Desktop Underwriter and Freddie Mac has LP which is Loan Prospector. For example, If a lender is offering you a Fannie Mae loan it's likely they are running your preapproval through DU to see if they will allow the loan to be done. If a lender is offering you a Freddie Mac loan it's likely they are running your preapproval through LP to see if they will allow the loan to be done. There are a few large companies that have a proprietary system but the majority of the industry uses these basic concepts and systems. This is important because even if you meet all of the program requirements that doesn't mean these systems will accept the loan which in turn means the lender probably can't offer that option to you.
DTI also known as Debt to Income
This is a concept that lenders use to determine if you make enough money to qualify for a specific mortgage amount. This concept factors in all your current monthly debt and the new house payment. Ask yourself, how much debt do I have in relation to how much income I make per month? For example, if I make $5,000 a month in gross income (before taxes) and my current bills plus the new house payment is $2500 a month then my debt to income (DTI) is $2,500/$5,000 which is 50%. Monthly bills are usually items found on your credit report but not always. Examples would be car payments, credit card minimum monthly payments, personal loans, co-signed loans, student loans, collections, child support, alimony, and any payment plans to the IRS. Keep in mind minimum monthly payments are used in this calculation so if you owe $50 on your credit card and the minimum monthly payment to the credit card company is $50 the lender would count the $50 minimum payment against your debt to income even though you only have one payment left. For this reason, you should always keep your credit card balances as low as possible leading up to a mortgage.
LTV also known as Loan To Value
LTV is an acronym for Loan to Value. For the sake of this discussion, we will reference LTV. LTV is the percentage of money that you have borrowed against your property in relation to the value of the property. For example, if I have a loan for $160,000 and the home is worth $200,000 then my loan to value is 80%. Another example is if I buy a home for $250,000 and put 3% down as a down payment then my loan amount would be $242,500 which is a loan to value of 97%.
LENDER OVERLAYS
This is one of the most important topics when shopping for a home loan. Just because Fannie Mae and Freddie Mac offer home loans with a down payment starting at 3% or 5% doesn't mean a lender has to. They can always make the requirements stricter. For example, a credit union or community bank might want a minimum down payment of 20% even though they could offer a lower down payment option. The same concept applies to credit scores and debt to income. Just because the minimum credit score on one program is 620 doesn't mean a bank cant require a 680 credit score to offer you the same loan. This is where the challenge is for a consumer. If one lender tells you no that doesn't mean it isn't possible. There are a few lenders in the marketplace that really do follow the bare minimum guidelines or close to.
Student Loans
Just because you have student loans doesn't mean you can't get a mortgage.
Fannie Mae
https://selling-guide.fanniemae.com/#Student.20Loans
If a monthly student loan payment is provided on the credit report, the lender may use that amount for qualifying purposes. If the credit report does not reflect the correct monthly payment, the lender may use the monthly payment that is on the student loan documentation (the most recent student loan statement) to qualify the borrower.
If the credit report does not provide a monthly payment for the student loan, or if the credit report shows $0 as the monthly payment, the lender must determine the qualifying monthly payment using one of the options below.
- If the borrower is on an income-driven payment plan, the lender may obtain student loan documentation to verify the actual monthly payment is $0. The lender may then qualify the borrower with a $0 payment.
- For deferred loans or loans in forbearance, the lender may calculate a payment equal to 1% of the outstanding student loan balance (even if this amount is lower than the actual fully amortizing payment), or
- a fully amortizing payment using the documented loan repayment terms.
Freddie Mac
https://guide.freddiemac.com/app/guide/section/5401.2
Student loans in repayment, deferment or forbearance
- If the monthly payment amount is greater than zero, use the monthly payment amount reported on the credit report or other file documentation, or
- If the monthly payment amount reported on the credit report is zero, use 0.5% of the outstanding loan balance, as reported on the credit report
Student loan forgiveness, cancelation, discharge and employment-contingent repayment programs-The student loan payment may be excluded from the monthly debt payment-to-income ratio provided the Mortgage file contains documentation that indicates the following:
- The student loan has 10 or less monthly payments remaining until the full balance of the student loan is forgiven, canceled, discharged or in the case of an employment-contingent repayment program, paid, or
- The monthly payment on a student loan is deferred or is in forbearance and the full balance of the student loan will be forgiven, canceled, discharged or in the case of an employment-contingent repayment program, paid, at the end of the deferment or forbearance period
- AND
- The Borrower is eligible or approved, as applicable, for the student loan forgiveness, cancelation, discharge or employment-contingent repayment program, and the Seller is not aware of any circumstances that will make the Borrower ineligible in the future. Evidence of eligibility or approval must come from the student loan program or the employer, as applicable.
Gifts
Gift Funds
A borrower of a mortgage loan secured by a principal residence may use funds received as a personal gift from an acceptable donor. Gift funds may fund all or part of the down payment and closing costs. Gifts are not allowed on an investment property.
Acceptable Donors
A gift can be provided by a relative, defined as the borrower’s spouse, child, or other dependent, or by any other individual who is related to the borrower by blood, marriage, adoption, or legal guardianship; or a non-relative that shares a familial relationship with the borrower defined as a domestic partner (or relative of the domestic partner), an individual engaged to marry the borrower, former relative, or godparent. The donor may not be or have any affiliation with, the builder, the developer, the real estate agent, or any other interested party to the transaction.
It is strongly recommended that you do not move any money around at least 90 days before a transaction and especially during a transaction without your lender’s assistance. Doing this step incorrectly can cause issues or at minimum headaches and additional steps. We have seen different requirements from different lenders so your specific lender's guidance is key...
Bank Deposits
A very common problem that buyers have in the lending process is non-payroll deposits to your bank account. Of course, most employers have direct deposit which is easy to see on your bank statement but all the deposits other than a direct deposit for payroll can be scrutinized. A lender may require a copy of the deposit and a letter of explanation stating where the money came from and why. In most cases, cash deposits are a problem so stay away from cash as much as possible. If the money has a paper trail and can be sourced then it should be fine. For example, if you sell a car and deposit the money that might be ok provided you can provide a copy of the bill of sale, Kelly Blue Book evaluation, and a copy of the deposit that matches your sale price. However, if you were to sell let's say clothes or furniture there would not be a proper paper trail to prove the source of the money. We strongly recommend that you do not make any non-payroll deposits for the 90 days leading up to your preapproval. In most cases, lenders do a 30-60 day look back on your bank accounts.
Seller Credits / Seller Closing Cost Assistance
With closing costs being so expensive its very common for buyers to need some help. Seller's can assit a buyer with closing costs. It is typically referenced by your lender and realtor as Closing Cost Credits or Closing Cost Assistance.The amount of assistance you can get is based on the property use and down payment and should never exceed the actual closing costs. Below is a generic cheat sheet.
Occupancy Loan To Value (LTV) Maximum Seller Closing Cost Credits
Primary & 2nd Home Greater than 90% 3%
Primary & 2nd Home 75.01%-90.00% 6%
Primary & 2nd Home 75% or less 9%
Investment Property All LTVs 2%
