New Home Loan Requirements

By Curt Fletcher

Home mortgage loans are broken into a few basic categories, Conventional, FHA, and VA. These are the three possible type of home loans available for a new home. The guidelines are different for each one as they all require different specifics such as income, credit rating and debt ratios.

Conventional loans are loans that are not insured by the government. They are the first traditional mortgage loan that came into existence.
These loans do require a larger down payment than loans insured by the government (FHA). Any conventional loan that is greater than 80 percent LTV (loan to value) will require private mortgage insurance (PMI). This means that if you put down less than a 20 percent down payment, you will be required to pay an additional insurance as part of your required payment.
The down payment that you put down will determine the factor (calculation) at which your PMI is determined. The calculations are as follows: .0078 for 5 percent down, .0052 for 10 percent down, and .0032 for 15 percent down. This is calculated by multiplying the sales price and the appropriate PMI factor together, then dividing by 12 (12 months). The resulting number will be the total amount per month of PMI that you will be required to pay.
Credit scores to qualify typically need to be 620 or higher. Actual credit scores can vary per bank, however, based on other factors and available programs.
Debt ratios typically need to be 28/36. This refers to a front end ratio and a back end ratio. These numbers also may be higher depending on bank programs.
Interest rates do fluctuate and will vary dependent on your combined credit scores and debt ratios. While it is nice to look at rates posted at various websites to get a ballpark idea, don't count on obtaining that number. This will only be determined by your personal banker after reviewing all of your provided details.

FHA (Federal Housing Administration) Loans are insured by the federal government. This is the easiest type of loan to qualify for and it is more cut and dried, whereas conventional loans are more vague and various in their terms. Basic requirements are as follows:
Two years of steady employment (preferred in the same field and the same or increasing income)
Typical minimum credit scores are 580; however, it is more common to have a higher credit score. You cannot have more than two 30-day late payments showing on your credit report. The minimum down payment required is 3.5 percent, which is why this is the most common first time buyer loan.
Debt Ratios are commonly expected to carry no more than 29/41, but in reality you can still be approved in the 42 to 45 percent range.
Mortgage insurance is also required for FHA. The factor is .0055. Using the same calculation as the conventional loan will give you your monthly requirement.
Interest rates are far more consistent for FHA Loans as they are not as dependent on credit scores.

VA (Veteran Affairs) loans are strictly for military veterans. For the most comprehensive VA loan qualifying details visit the VA website in References below. There are many caveats involved in obtaining a VA loan, and the best place to get this information is directly from the VA.

The purpose of mortgage insurance, (PMI for conventional, MIP for FHA) is to protect the lender from the borrower in case of default. It is not an insurance policy for the borrower in case the loan cannot be paid, which is a common misconception. The theory for lenders is that when people put less than 20 percent down, the risk for the bank is much higher.

The borrowing guidelines have tightened in recent years in an effort to have fewer loan defaults. In the mid 2000s requirements were very loose, which resulted in many borrowers obtaining home loans for homes they could not afford, which led to a very high foreclosure rate across the country. While these guidelines have tightened, loans are still very readily available for those that demonstrate a good credit rating, steady employment and respectable debt ratios.

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