What we’re gonna talk about on the Mortgage Minute is loan types and requirements. I know there’s a lot of questions out there when it comes to whether it’s conventional, it’s FHA, it’s a renovation product. I mean, I don’t know all the terms and types. So, why don’t we start out simple? Let’s do straight conventional.
Conventional loan, yeah. I mean, a lot of people still call me in today’s day and age and say, “Oh, I can’t go conventional. I have to have 20% down.” That is far from the truth anymore. That’s what mortgage insurance companies offer. Mortgage insurance companies offer those that don’t have 20% down the ability to put as little as 3% down on a conventional loan. So, 3% down, 5% down, there’s several different loan amounts that you can go on conventional.
Okay. So, conventional, we can go as low as 3% or 5%, or if they want to do 20%, I’m assuming there’s a better rate if they get a higher percentage down.
Okay. What are some of the basic requirements around a conventional loan? What would be the credit score?
Generally, if your credit score’s below a 660, financially it’s gonna make more sense to go with a government loan, which is the FHA loan. The biggest thing with conventional financing is there is a restriction on debt-to-income ratios. You don’t generally want to see your debt-to-income ratios be 45% or more, which means that your monthly debt is soaking up 45% of your gross income. They have a pretty tight restriction on that for most files.
Okay, and requirements for the house type, if I have a conventional loan, does the house condition matter? Can I buy a house that needs a lot of work?
To answer your question, yes. In order to have just a normal conventional loan, and not talking about a renovation loan, the house has to be at least in average condition in order to get a loan on it. If it is in less-than-average condition, then that’s where a renovation loan would come in, to where you could finance some of the items that would be needed to renovate the home and to update the home.
So, let’s dive in a little bit on the condition of the property. You said average condition, so I’m assuming it can be dated, but it has to be livable.
Yeah. There’s many homes, as I’ve seen in some of your Friday funnies and pictures, where it’s livable, and it would be considered average condition in some of those cases, but literally, when I say … If it’s not in average condition, that means there’s not running water, there’s some safety issues that could be present within the house.
That is correct. It would have to be in pretty bad shape for it to not be in average condition.
Okay, great. Well, that’s easy on conventional. Let’s move on to FHA or government-backed mortgages. What do those look like?
FHA, appraisers … First of all, when I’m talking about the appraisal process, they’re looking for a few more things that conventional appraisals would not look for, such as peeling paint. That seems to be a big one. If there’s peeling paint on the house, it needs to be scraped, painted and fixed.
So, peeling paint?
Window seals, windows. If there’s cracks in windows, they’ll call that out. It could even be peeling paint on a shed in the backyard. FHA could potentially call that out. But as it goes with the actual loan process itself, FHA financing is very, very flexible for those that don’t have as good of credit that might take them the conventional route of financing. Debt-to-income ratio is a little bit more flexible with FHA financing. So, it opens up the door for a lot more buyers than what conventional may at times.
To kind of compare the two, conventional is more on the borrower, less on the house. FHA is gonna be more of a balance between the house and the borrow. They want to make sure the match is a good fit. The borrower is buying a house that is in good quality, good condition, better condition than a conventional.
FHA’s gonna be more designed at making sure the house is in a little bit better shape, if you will.
Gotcha, but maybe a little bit more flexible on the borrower?
Quite a bit more flexible on the borrower. With debt-to-income ratios, where conventional you’re stuck at keeping it at a 45% debt-to-income ratio, I’ve seen some on FHA with compensating factors. Maybe they have some money in the bank. Maybe their debt-to-income ratios are low. I’ve seen some where they’d go up to 55%, 56% in order to stay approved.
You’re gonna help the borrower when they go through the pre-approval. You’re gonna help them understand which product is gonna be the best fit for them.
That is correct. I give them a side-by-side comparison, then I let the numbers speak for themselves and I point out the pros and cons of each options, and we go from there.
Then the other loan types I wanted to kind of talk about is renovation products. I know there’s a government side. There’s also a conventional side. We’ve all watched HGTV, and I know I’ve got some clients that would love to do some of those flips, but they just don’t have the cash readily available. So, tell me about these renovation products.
Yes. Two different types of products, FHA streamline, or there’s an FHA renovation product called 203k. There is a conventional home style renovation product that Fanny May offers that we have the ability to do in our office. Really, both types of renovation loans allow us to go up to 97% financing, conventional 97% & FHA 96.5%, but they’re both very easy. A perfect situation where somebody may utilize this product is if the house is outdated, the kitchen needs to be done, maybe there’s some big ticket items that need to be fixed in the property as you go through inspects. Some of those things are able to be financed into renovating a property and put it into a loan.
Okay. So, Mr. Buyer goes out, looks at a property. It definitely needs work. It’s a foreclosure of some sort. No clue how to get started. I mean, they don’t have a budget on this. Is there any type of requirements that the loan requires that we could make sure the borrowers are prepared for so we can start helping them get the bids and things done?
When it comes to them getting approved for the type of loan, it’s the same process as getting approved for a conventional FHA loan. Really, the only difference is from the start of it, you want to get a general contractor in order to have them go out and prepare a scope of work so that we have an idea as to how much work needs to be done to the property, and then that’s something we give to the appraiser so he can give us a value. Assuming that work’s done, he gives us a value as to what that house is gonna be worth after the fact.
Gotcha. So, we need a scope of work and a contractor?
Scope of work’s important and yes you need a General Contractor
What about somebody who’s pretty handy and wants to do some of the work themselves?
There is some self-help that can be done. There are certain restrictions on how much they can do, but yes, there is some ability for self-help to be done.
Is there a condition that they have to get the property to, meaning does it have to get up to that normal FHA livable condition, or is there just maybe some big ticket stuff they can take care of, like maybe siding, foundation and a roof, but the inside’s still dated?
It has to effect the value. It can’t be just repairs, because repairs aren’t gonna effect value of a property. You want to make sure that the value is also going up as you’re financing things into your time. So, if the fixes that you’re doing to the property aren’t gonna effect the value, then it’s gonna be tough to finance those into the loan.
So, what I hear you saying is it can’t be just deferred maintenance program, or deferred maintenance pieces. It has to be improvements to the property.
That will effect value. Correct.
So, maybe we are doing some deferred maintenance, like replacing HVAC, but also renovating the kitchen, things like that.
Conventional and FHA I would say make up the bulk of our business. VA loans are fantastic loans for veterans. We do a lot of them. Fairway in 2017 was the number 6 retail lender that did VA loans in 2017, so we’re very, very accustomed to them. We love to help out veterans. It’s a fantastic loan. USDA loans are another one. USDA loans is another government-backed loan that offers 100% financing, but you are restricted to that loan in rural type areas. There are income restrictions to that particular loan. I usually don’t see that loan very often unless you’re down in the southern parts of the Johnson County, Franklin County.
Then on those requirements for USDA, it’s on a case-by-case basis, right?
First thing and the most important thing is to get the address of the subject property, to make sure it is a USDA-eligible property. From there, we go to qualifying the borrower, if they can get qualified for a USDA loan.
All right. So there, you guys have heard it, all the different loan types that Matt and his company do. If you guys have questions on which type works for you, I think the best way to start, with an app.
Yes. Best way to start, with an app. If you don’t want to fill out an app, you can call me any time and I can simply be a resource to help answer questions for you.