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Information and insights on home buying, refinancing, loan types and more.
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Minimum down payment
FHA loans have a minimum down payment of 3.5% for borrowers with credit scores of 580 or higher. Some conventional mortgages allow a 3% minimum down payment, but it’s reserved for borrowers with credit scores in the high 600s and ample savings.
Credit scores
FHA loans are usually easier to qualify for, with a minimum credit score of 580 to be eligible to make a 3.5% down payment. If your credit score is 500 to 579, you may qualify for an FHA loan with a 10% down payment. Conventional loans typically require a credit score of 620 or higher. With either type of loan, the credit score to get a mortgage will come down to the lender. Even though the FHA sets minimum scores, lenders can require a higher minimum. And with both conventional loans and FHA loans, you'll be offered a better interest rate with a higher credit score.
Debt-to-income ratios
Your debt-to-income ratio, or DTI, is the percentage of your monthly pretax income that you spend to pay your debts, including your mortgage, student loans, auto loans, child support and minimum credit card payments. The higher your DTI, the more likely you are to struggle with paying your bills. Your debt-to-income ratio must be 50% or less to qualify for an FHA loan. Conventional loans allow debt-to-income ratios up to 50% in some cases, too. Even though lenders sometimes allow debt-to-income ratios that high, approval is more likely for mortgage borrowers with DTIs of 43% or less.
Mortgage insurance
Mortgage insurance protects the lender in case of default. Conventional loans require borrowers to pay for mortgage insurance if their down payment is less than 20%. FHA loans require mortgage insurance regardless of down payment amount. Other differences are: FHA mortgage insurance premiums cost the same no matter your credit score. Private mortgage insurance on conventional loans costs more if you have a low credit score, but it may cost less than FHA mortgage insurance if your credit score is above 720. FHA mortgage insurance premiums last for the life of the loan if you make a down payment of less than 10%. If you make a down payment of 10% or more on an FHA loan, you'll pay FHA mortgage insurance for 11 years. You can get rid of FHA mortgage insurance only by refinancing to a conventional loan. In contrast, private mortgage insurance is automatically canceled on conventional loans after your equity reaches 22% of the purchase price. Both FHA and private mortgage insurance costs vary according to the size of the down payment.
Property standards
The property’s condition and intended use are important factors when comparing FHA vs. conventional loans. FHA appraisals are more stringent than conventional appraisals. Not only is the property's value assessed, but it is also thoroughly vetted for safety, soundness of construction and adherence to local code restrictions. When you get an FHA loan, you have to live in the house as your primary home. Investment properties and homes that are being flipped (sold within 90 days of a prior sale) aren’t eligible for FHA loans. You can use a conventional loan to buy a vacation home or an investment property, as well as a primary residence.
Refinancing
As far as mortgage refinancing goes, the edge goes to FHA “streamline” refinancing. With no credit check, no income verification and likely no home appraisal, it’s about as easy a refi as you can get. But there are strict requirements for an FHA streamline refinance. There's another reason to refinance an FHA loan: to get rid of the monthly mortgage insurance payments. FHA mortgage insurance can't be canceled if you made a down payment of less than 10%. To get rid of the monthly FHA premiums after accumulating 20% equity, you have to refinance into a conventional mortgage.
Frequently Asked Questions About FHA
FHA guidance allows lower credit scores, which is one reason first-time home buyers are often attracted to FHA loans. The FHA lets borrowers with credit scores as low as 500 be considered for home loans.
However, it’s important to bear in mind that while the FHA sets out guidelines for credit score minimums, FHA lenders may require higher minimum scores. FHA loans don’t come directly from the government; the FHA insures them on behalf of the lender. Despite having that as backup, lenders often choose to minimize their risk by mandating higher credit minimums. This is one of the reasons why it’s smart to shop and compare FHA lenders. Not only might they have different qualifications, but you can also weigh different lenders’ rates and fees.
It’s worth noting that even with a lender who’s following FHA guidelines to the letter, you’ll get better terms (like a lower down payment and more allowance for existing debt) if you have a higher credit score. A stronger credit score should also help you get a better FHA mortgage rate.
With an FHA loan, the minimum down payment depends on your credit score. If you have a credit score that’s 580 or higher, the minimum down payment is 3.5%.
If your score falls between 500 to 579, the minimum down payment required is 10%. FHA guidelines sometimes refer to this as the Minimum Required Investment (or simply the MRI, which can be confusing) — it just means the down payment.
On a $300,000 home, a 3.5% down payment would cost $10,500. Compare that with the traditional 20% down payment, which would come out to $60,000 on the same home. Big difference. And that’s before closing costs and other buying-a-home expenses.
To get the minimum 3.5% FHA down payment deal, you’ll need a credit score of 580 or higher. If you fall in the range of 500 to 579, you will be required to put at least 10% down.
But the low down payments on FHA loans come at a cost: mortgage insurance premiums. You’ll pay an upfront fee and ongoing monthly premiums that can last the life of the loan. The upfront mortgage insurance premium is one of the closing costs you’ll pay with an FHA loan, though it can be rolled into the total amount of the loan.
Lenders pay attention to your debt-to-income ratio regardless of the type of mortgage you get, but the FHA actually looks at two different ratios.
The first is simply the ratio of your proposed monthly mortgage payments to your monthly income. The FHA calls this your Total Mortgage Payment to Effective Income Ratio, abbreviated as PTI for payment-to-income; you might also see this referred to as your front-end debt ratio. Your PTI can be as high as 40% if your credit score is at least 580.
The debt-to-income ratio, known as DTI, measures the percentage of your pretax income that you spend on monthly debt payments, including your mortgage or rent, credit cards, student loans and other obligations. You can use a debt-to-income ratio calculator to figure out where you stand.
As with PTI, the FHA’s guidelines for DTI vary depending on your credit score and other aspects of your financial picture, like how much cash you have on hand. The highest DTI the FHA allows is 50%; that’s if your credit score is at least 580 and you meet additional qualifications.
If you have previously lost a home to foreclosure, you’ll have to wait three years before applying for an FHA loan. There are some exceptions, however, for circumstances like a serious illness.
Those who have experienced bankruptcy can also qualify for an FHA loan, though you’ll have to demonstrate that you’re now on better financial footing. Some allowances may be made on an individual basis, but in general, you’ll need to wait two years after a Chapter 7 bankruptcy and at least a year after a Chapter 13 bankruptcy to apply for an FHA mortgage.
There is no minimum or maximum salary that will qualify you for or prevent you from getting an FHA-insured mortgage. However, you must:
Have at least two established credit accounts. For example, a credit card and a car loan.
Not have delinquent federal debt or judgments, tax-related or otherwise, or debt associated with past FHA-insured mortgages.
Account for cash gifts that help with the down payment. That can include money from a friend or family member, a charity, your employer or union, or from a government agency. These gifts must be verified in writing, signed and dated by the donor.
The property must meet FHA loan limits, which vary by county. In 2022, that’s generally $420,680 for single-family homes in low-cost areas and $970,800 in high-cost areas. (every year may vary due to change).
Here is some of the documentation you will need when applying for an FHA home loan:
Valid government-issued ID, like a driver’s license or passport.
Proof of a Social Security number.
Up to two years’ worth of original pay stubs, W-2 forms or valid tax returns.
Signed and dated letters that detail the source and amount of any gift funds and explicitly state that you don’t need to pay back the money.
An FHA-approved lender will walk you through the details of other documentation you might have to provide.
You don’t need to be a first-time home buyer to get an FHA loan. FHA loans are often attractive to borrowers with lower credit scores or smaller down payments, since these loans typically have more relaxed qualification requirements than conventional mortgages. Credit challenges and saving up for a down payment can be big hurdles for first-time home buyers.
If you are a first-time home buyer, you might be able to combine an FHA loan with down payment or closing cost assistance from state first-time homebuyer programs. Since the FHA allows gift funds to cover those costs, one of these programs might help you more comfortably afford a home.
But anyone, even a repeat buyer or a homeowner looking to refinance a mortgage, can use an FHA loan as long as they meet the eligibility requirements.
Frequently Asked Questions About Conventional
To qualify for a conventional loan, you’ll typically need a credit score of at least 620. Borrowers with credit scores of 740 or higher can make lower down payments and tend to get the most attractive conventional loan rates, however.
The minimum down payment required for a conventional mortgage is 3%, but borrowers with lower credit scores or higher debt-to-income ratios may be required to put down more. You’ll also likely need a larger down payment for a jumbo loan or a loan for a second home or investment property.
Low-down-payment conventional loan programs like HomeReady and Home Possible are designed to help prospective home buyers with good credit scores but limited savings. If you put down less than 20% on a conventional mortgage, you’ll probably be required to pay for private mortgage insurance, or PMI.
Mortgage lenders generally require a debt-to-income ratio (DTI) that’s below 36% for conventional loans, though in some cases a lender may accept a higher DTI. Your DTI represents the total amount of your existing monthly debts (like rent or a car payment) divided by your pre-tax monthly income. Use a debt-to-income calculator to see where you stand.
1. Conforming conventional loans
If a conventional loan is less than the maximum loan amount set by the Federal Housing Finance Agency and meets additional loan standards set by Fannie Mae or Freddie Mac, it’s called a conforming loan. Because Fannie and Freddie are government-sponsored enterprises, you may also hear conforming loans referred to as “GSE loans.”
2. Nonconforming conventional loans
If a conventional loan exceeds FHFA loan limits or uses underwriting standards that are different from those set by Fannie Mae and Freddie Mac, it’s called a nonconforming loan. A jumbo loan is a common type of nonconforming conventional loan. You may need a jumbo loan to finance more than $484,350 in most U.S. counties.
3. Fixed-rate conventional loans
Whether they’re conforming or nonconforming, all mortgages require you to pay interest. With a fixed-rate conventional loan, the interest rate stays the same for as long as you have the mortgage. Many buyers choose a 30-year fixed-rate conventional loan because it usually results in an affordable monthly payment, but shorter terms are also available.
4. Adjustable-rate conventional loans
The alternative to a fixed-rate mortgage is an adjustable-rate mortgage, or ARM. Conventional loans with adjustable rates, also known as hybrid ARMs, have rates that may go up or down over time. ARM rates usually adjust annually, after an initial fixed-rate period of three, five, seven or 10 years.
5. Low-down-payment conventional loans
There was a time when getting a conventional loan required a 20% down payment. Because borrowers who meet this requirement only have to finance 80% of the home’s value, it’s often referred to as an “80/20 conventional loan.” But conventional loan down payment requirements have since become more flexible.
3% down payment
HomeReady and Home Possible are conventional mortgage options that allow down payments as low as 3% — sometimes referred to as “3 down conventional loans.” If you qualify for a 3% down payment through one of these programs, you’ll need to finance the other 97%. That’s why you may hear them referred to as “conventional 97 loans.”
5% down payment
Borrowers with lower credit scores might be required to make a down payment of 5% or more to get a conventional loan, meaning they’d need to finance 95% of the home’s value. This is sometimes referred to as a “5 down conventional loan” or a “conventional 95 mortgage.”
Zero down payment?
If you’re wondering “Can I get 100% conventional loan financing?,” the answer is yes, but it may be hard to find. Some lenders — often credit unions — offer in-house, nonconforming conventional mortgage programs that feature 100% financing, but special qualification requirements often apply. Be aware that zero-down-payment mortgages are risky: It will take you longer to build equity than someone who makes a down payment, and you’ll pay more interest as a result.
6. Conventional renovation loans
It can be hard to find the perfect house in your budget. Buying a fixer-upper is one way to achieve home ownership when prices are high or move-in-ready inventory is low.
The CHOICERenovation loan and HomeStyle loan are two types of conventional mortgages that allow you to finance a home purchase, as well as the necessary renovations, at the same time.
In general, any borrower with solid credit and some money for a down payment will satisfy conventional loan qualification requirements.
However, because conventional loans aren’t insured or guaranteed by the government, their eligibility requirements for borrowers are usually tougher to meet than the requirements for government-backed mortgages. These include FHA loans, which are insured by the Federal Housing Administration; VA loans, guaranteed in part by the Department of Veterans Affairs; and USDA loans, the program run by the U.S. Department of Agriculture.
Also keep in mind that conventional lenders are free to enforce requirements that are stricter than the guidelines set by the FHFA, Fannie and Freddie. If you’re applying for a conventional mortgage after foreclosure or bankruptcy, for example, you might have more trouble qualifying.
The maximum amount you can borrow with a conventional mortgage depends on the type of conventional mortgage you choose — conforming or nonconforming.
Conforming conventional loan: Loan limits for conforming conventional loans are set by the FHFA. The current maximum is $647,200 in most U.S. counties, $970,800 in high-cost areas and even more in some cities in California and Hawaii.
Nonconforming conventional loan: Lenders are free to set their own limits for nonconforming conventional loans, which include jumbo loans. In most cases, jumbo loans are capped around $1 million to $2 million, depending on the borrower’s financial situation.
While there isn’t a conventional loan limit per se, conventional mortgages must comply with the local FHFA limit to be considered conforming. It’s generally easier to qualify for a conventional loan that falls below the conforming loan limit for your area.
Here is some of the documentation you will need when applying for an FHA home loan:
Valid government-issued ID, like a driver’s license or passport.
Proof of a Social Security number.
Up to two years’ worth of original pay stubs, W-2 forms or valid tax returns.
Signed and dated letters that detail the source and amount of any gift funds and explicitly state that you don’t need to pay back the money.
An FHA-approved lender will walk you through the details of other documentation you might have to provide.
10 Types of Mortgage Loans for Buyers and Refinancers
The 30-year fixed-rate mortgage is a home loan with an interest rate that’s set for the entire 30-year term.
Most popular home loan; see the pros and cons of the 30-year fixed-rate mortgage.
Your interest rate never changes; see the basics of fixed-rate mortgages.
Lower monthly payment than with shorter-term loans.
Best for: Home buyers who want the lower monthly payment that comes from stretching out repayment over a long time. The fixed rate makes the payment predictable. A 30-year fixed offers flexibility to repay the loan faster by adding to monthly payments.
Defining a 30-year fixed-rate mortgage
A 30-year mortgage is a home loan that will be paid off completely in 30 years if you make every payment as scheduled.
Most 30-year mortgages have a fixed rate, meaning that the interest rate and the payments stay the same for as long as you keep the mortgage.
The pros of a 30-year fixed-rate mortgage
Lower payment: A 30-year term allows a more affordable monthly payment by stretching out the repayment of the loan over a long period
Flexibility: You can pay off the loan faster by adding to your monthly payment or making extra payments, but you can always fall back on the smaller payment as needed
“A 30-year mortgage is a home loan that will be paid off completely in 30 years if you make every payment as scheduled. ”
Predictability: It’s nice to count on your mortgage payment staying the same, no matter how stormy the economy gets or how high the interest rates climb
More house for the mortgage: Lower payments mean you could qualify for a more expensive home
Bigger tax deduction: Current tax laws let home buyers deduct mortgage interest from their taxes. In the early years of a loan, most of your mortgage payments go toward paying off interest, making for a meaty tax deduction.
Easier to qualify: With smaller payments, more borrowers are eligible to get a 30-year mortgage
Lets you fund other goals: After mortgage payments are made each month, there’s more money left for other goals
The cons of a 30-year fixed-rate mortgage
Higher rates: Because lenders’ risk of not getting repaid is spread over a longer time, they charge higher interest rates
More interest paid: Paying interest for 30 years adds up to a much higher total cost compared with a shorter loan
Slow growth in equity: It takes longer to build an equity share in a home
Danger of overborrowing: Qualifying for a bigger mortgage can tempt some people to get a bigger, better home that’s harder to afford. Remember to leave a cushion for life’s inevitable surprises.
Higher upkeep costs: If you go for a pricier home, you’ll face steeper costs for property tax, upkeep and maybe even utility bills. “A $100,000 home might require $2,000 in annual maintenance while a $600,000 house would require $12,000 per year,” says Adam Funk, a certified financial planner in Troy, Michigan. He budgets 1% to 2% of the purchase price for upkeep.
The 15-year fixed-rate mortgage has an interest rate that remains the same over its 15-year term.
Often used for refinancing; see the pros and cons of the 15-year fixed-rate mortgage.
Interest rate is set for the life of the loan.
Lower interest rate than with longer-term loans.
Higher monthly payment than with 30-year loans, with less total interest paid.
Best for: Refinancers and home buyers who want to build equity and pay off the loan faster. Payments are predictable because the interest rate doesn’t change. Because the borrower pays interest for fewer years, total interest payments are less.
Benefits of a 15-year mortgage
Build equity faster
A 15-year fixed-rate mortgage, with its lower interest rate and higher payment amount, builds home equity faster because you pay down the principal balance quicker.
Shorter path to full homeownership
Owning a home free and clear is a goal that burns bright for many people. What matters most to them is a feeling of safety from knowing that their home is fully paid off.
Long-term savings
Lenders are exposed to fewer years of risk on a 15-year mortgage, so they charge a lower interest rate. Half as many years of payment also means you pay half as many years of interest. Let’s compare the principal and interest — not including homeowners insurance, property tax or private mortgage insurance — for a $250,000 mortgage with a 10% down payment:
A 30-year fixed-rate mortgage at 3.61% has monthly payments of $1,024 and a total interest cost of $143,719.
A 15-year fixed-rate mortgage at 3.13% has monthly payments of $1,568 and a total interest cost of $57,226.
That’s a savings of $86,493 if you kept the loans for their entire term.
Disadvantages of a 15-year mortgage
Larger monthly payments
Monthly principal and interest payments for a 15-year fixed-rate mortgage run about 50% higher than on a 30-year home loan. You also have to pay property taxes, insurance and, if you put less than 20% down, mortgage insurance. This could make it hard to respond to emergencies and other needs. Even if numbers seem doable now, a mortgage is a commitment. Getting out means selling, refinancing or foreclosure.
Opportunity cost
Using more money for monthly mortgage payments means it’s not available for other investments such as home improvements or capturing an employer’s matching contribution to a retirement account.
An adjustable-rate mortgage is a home loan with an initial rate that’s fixed for a specified period, then adjusts periodically. For example, a 5/1 ARM has an interest rate that is set for the first five years and then adjusts annually. See the pros and cons of adjustable-rate mortgages.
Initial “teaser rate” is lower than on most other loans, giving comparatively lower monthly payments at first.
Initial rates can often be locked for one, five, seven or 10 years.
Best for: Home buyers who don’t plan on having the mortgage for a long time, or who believe interest rates will be lower in the future.
Adjustable-rate mortgage pros
Low payments in the fixed-rate phase
A hybrid ARM offers potential savings in the initial, fixed-rate period. Common ARM terms are 3 years, 5 years, 7 years and 10 years. With a 5-year ARM, for example, your introductory interest rate is locked in for five years before it can change. That gives you five years of predictable, low payments.
Flexibility
An ARM can be a good idea if your life is likely to change in the next few years — for instance, if you plan to move or sell the house. You can enjoy the ARM’s fixed-rate period and sell before it ends and the less-predictable adjustable phase starts.
Rate and payment caps
ARMs have caps that limit how much the mortgage rate and your payment can increase. These include caps on how much the rate can change each time it adjusts and the total rate change over the loan’s lifetime.
Your payments could decrease
If interest rates fall and drive down the index against which your ARM is benchmarked, your monthly payment could drop.
Adjustable-rate mortgage cons
Your payments could increase
If interest rates rise, your payments will increase after the adjustable period begins; some borrowers might have trouble making the larger payments.
Things don’t always go as planned
ARMs require borrowers to plan for when the interest rate starts changing and monthly payments grow. Even with careful planning, though, you might be unable to sell or refinance when you want to. If you can’t make the payments after the fixed-rate phase of the loan, you could lose the home.
ARMs are complex
ARMs can have complicated rules, fees and structures. These complexities can pose risks for borrowers who don’t fully understand what they’re getting into.
Is an ARM right for you?
Whether an ARM is a good choice depends on your goals and comfort level with unpredictability. If you sell the home or pay off the mortgage before the adjustable rate goes up, you’ll save money.
But an ARM probably isn’t the right option if you plan to settle in for many years and want the certainty of a constant mortgage rate and monthly payment. In that case, a fixed-rate mortgage is the way to go.
An FHA mortgage is a home loan insured by the Federal Housing Administration. FHA loans are backed by the government and designed to help borrowers of more modest means buy a home. See how FHA loans differ from conventional mortgages.
Allows down payments as low as 3.5%.
Credit scores as low as 500 can qualify. Learn more about the credit score needed to buy a house.
Mortgage insurance premium payments are required.
Best for: Borrowers with lower credit scores and a down payment less than 20%
If you can’t find the right home to buy, you might be thinking about how much it will cost to build a new house or renovate the one you currently call home. The process of borrowing the money to pay for this project is different from getting a mortgage to move into an existing property. Here’s everything you need to know about getting a construction loan.
What is a construction loan?
A home construction loan is a short-term, higher-interest loan that provides the funds required to build a residential property.
Construction loans typically are one year in duration. During this time, the property must be built and a certificate of occupancy should be issued.
How do construction loans work?
Construction loans usually have variable rates that move up and down with the prime rate. Construction loan rates are typically higher than traditional mortgage loan rates. With a traditional mortgage, your home acts as collateral — if you default on your payments, the lender can seize your home. With a home construction loan, the lender doesn’t have that option, so they tend to view these loans as bigger risks.
Because construction loans are on such a short timetable and they’re dependent on the completion of the project, you need to provide the lender with a construction timeline, detailed plans and a realistic budget.
Once approved, the borrower will be put on a draft or draw schedule that follows the project’s construction stages, and will typically be expected to make only interest payments during the construction stage. Unlike personal loans that make a lump-sum payment, the lender pays out the money in stages as work on the new home progresses.
These draws tend to happen when major milestones are completed — for example, when the foundation is laid or the framing of the house begins. Borrowers are typically only obligated to repay interest on any funds drawn to date until construction is completed.
While the home is being built, the lender has an appraiser or inspector check the house during the various stages of construction. If approved by the appraiser, the lender makes additional payments to the contractor, known as draws. Expect to have between four and six inspections to monitor the progress.
Depending on the type of construction loan, the borrower might be able to convert the construction loan to a traditional mortgage once the home is built. This is known as a construction-to-permanent loan. If the loan is solely for the construction phase, the borrower might be required to get a separate mortgage designed to pay off the construction loan.
What does a construction loan cover?
Some things a construction loan can be used to cover include:
- The cost of the land
- Contractor labor
- Building materials
- Permits
While items like home furnishings generally are not covered within a construction loan, permanent fixtures like appliances and landscaping can be included.
Types of construction loans
Construction-to-permanent loan
With a construction-to-permanent loan, you borrow money to pay for the cost of building your home, and once the house is complete and you move in, the loan is converted to a permanent mortgage.
The benefit of the construction-to-permanent approach is that you have only one set of closing costs to pay, reducing your overall fees.
“There’s a one-time closing so you don’t pay duplicate settlement fees,” says Janet Bossi, senior vice president at OceanFirst Bank in New Jersey.
Once the construction-to-permanent shift happens, the loan becomes a traditional mortgage, typically with a loan term of 15 to 30 years. Then, you make payments that cover both interest and the principal. At that time, you can opt for a fixed-rate or adjustable-rate mortgage. Your other options include an FHA construction-to-permanent loan — with less-stringent approval standards that can be especially helpful for some borrowers — or a VA construction loan if you’re an eligible veteran.
Construction-only loan
A construction-only loan provides the funds necessary to complete the building of the home, but the borrower is responsible for either paying the loan in full at maturity (typically one year or less) or obtaining a mortgage to secure permanent financing.
The funds from these construction loans are disbursed based upon the percentage of the project completed, and the borrower is only responsible for interest payments on the money drawn.
Construction-only loans can ultimately be costlier if you will need a permanent mortgage because you complete two separate loan transactions and pay two sets of fees. Closing costs tend to equal thousands of dollars, so it helps to avoid another set.
Another consideration is that your financial situation might worsen during the construction process. If you lose your job or face some other hardship, you might not be able to qualify for a mortgage later on — and might not be able to move into your new house.
Renovation loan
If you want to upgrade an existing home rather than build one, you can compare home renovation loan options. These come in a variety of forms depending on the amount of money you’re spending on the project.
“If a homeowner is looking to spend less than $20,000, they could consider getting a personal loan or using a credit card to finance the renovation,” Kaminski says. “For renovations starting at $25,000 or so, a home equity loan or line of credit may be appropriate, if the homeowner has built up equity in their home.”
Another viable option in the current low mortgage rate environment is a cash-out refinance, whereby a homeowner would take out a new mortgage at a higher amount than their current loan and receive that overage in a lump sum.
With any of these options, the lender generally does not require disclosure of how the homeowner will use the funds. The homeowner manages the budget, the plan and the payments. With other forms of financing, the lender will evaluate the builder, review the budget and oversee the draw schedule.
Owner-builder construction loan
Owner-builder loans are construction-to-permanent or construction-only loans where the borrower also acts in the capacity of the home builder.
Most lenders won’t allow the borrower to act as their own builder because of the complexity of constructing a home and experience required to comply with building codes. Lenders that do typically only allow it if the borrower is a licensed builder by trade.
End loan
An end loan simply refers to the homeowner’s mortgage once the property is built, Kaminski explains. A construction loan is used during the building phase and is repaid once the construction is completed. A borrower will then have their regular mortgage to pay off, also known as the end loan.
“Not all lenders offer a construction-to-permanent loan, which involves a single loan closing. Some require a second closing to move into the permanent mortgage, or an end loan,” Kaminski says.
Construction loan requirements
To get a construction loan, you’ll need a good credit score, low debt-to-income ratio and a way to prove sufficient income to repay the loan.
You also need to make a down payment when you apply for the loan. The amount will depend on the lender you choose and the amount you’re trying to borrow to pay for construction.
Many lenders also want to make sure you have a plan. If you have a detailed plan, especially if it was put together by the construction company you’re going to work with, it can help lenders feel more confident you’ll be able to repay the loan.
Adding an appraisal estimating how much the finished home will be worth is also helpful. The home will serve as collateral for the loan, so lenders want to make sure the collateral will be sufficient to secure the loan.
How to get a construction loan
Getting approval for a construction loan might seem similar to the process of obtaining a mortgage, but getting approved to break ground on a brand-new home is a bit more complicated.
Steps to get a construction loan
- Find a licensed builder: Any lender is going to want to know that the builder in charge of the project has the expertise to complete the home. If you have friends who have built their own homes, ask for recommendations. You can also turn to the NAHB’s directory of local home builders’ associations to find contractors in your area. Just as you would compare multiple existing homes before buying one, it’s wise to compare different builders to find the combination of price and expertise that fits your needs.
- Get your documents together: A lender will likely ask for a contract with your builder that includes detailed pricing and plans for the project. Be sure to have references for your builder and any necessary proof of their business credentials.
- Get preapproved: Getting preapproved for a construction loan can provide a helpful understanding of how much you will be able to borrow for the project. This can be an important step to avoid paying for plans from an architect or drawing up blueprints for a home that you will not be able to afford.
Factors to consider about construction loans
Before you apply for a construction loan, ask yourself these key questions.
Could your project face significant timeline issues?
Talk to your contractor and discuss the timeline of building the home and if other factors could slow down the job. One of the biggest challenges facing construction projects right now is a shortage of materials. According to a May 2021 survey by the National Association of Home Builders, more than 90 percent of builders have encountered shortages of appliances, lumber and oriented strand board, a type of engineered wood used in flooring, walls and more. Other essential materials have been hard to find: 87 percent of builders had issues getting windows and doors.
Do you want to simplify the borrowing experience?
Decide if you want to go through the loan process once with a construction-to-permanent loan or twice with a construction-only loan. Consider how much the closing costs and other fees of obtaining more than one loan will add to the project. When getting a construction loan, you’re not just accounting for building the house; you also need to purchase the land and figure out how to handle the total cost later, perhaps with a permanent mortgage when the home is finished. In that case, a construction-to-permanent loan can make sense in order to avoid multiple closings. If you already have a home, though, you might be able to use the proceeds to pay down the loan. In that case, a construction-only loan might be a better choice.
Do you have homeowners insurance in place?
Even though you don’t live in the home yet, your lender will likely require a prepaid homeowners insurance policy that includes builder’s risk coverage. This way, if something happens during the construction process — the halfway-built property catches on fire, or someone vandalizes it, for example — you are protected.
How to find a construction loan lender
Check with several experienced construction loan lenders to obtain details about their specific programs and procedures, and compare construction loan rates, terms and down payment requirements to ensure you’re getting the best possible deal for your situation.
“Because construction loans are more complex transactions than a standard mortgage, it is best to find a lender who specializes in construction lending and isn’t new to the process,” Bossi says.
If you have trouble finding a lender willing to work with you, check out smaller regional banks or credit unions. They might be more flexible in their underwriting if you can show that you’re a good risk, or, at the very least, have a connection they can refer you to.
How to buy land
1. Decide how you’ll pay
Before you begin your search for undeveloped land for sale, give your finances a hard look to make sure you’re able to afford it, as well as determine how you’ll pay.
One of the best strategies is to pay cash, because lenders consider vacant land a riskier investment than a house that’s already built, and charge more to finance it as a result.
If you plan to pay in cash, you’ll want to budget for both the land and additional expenses like property taxes and utility installation.
If you’re looking for a loan instead, it’s important to get your finances in good shape ahead of time by paying down debts to lower your debt-to-income ratio, and starting to save for a hefty down payment.
“Lenders typically require 20 to 25 percent down on raw land and farms, though there are some agriculture-oriented credit unions that sometimes only require a 15 percent down payment,” according to Brandon Garrett, president and chief investment officer of BentOak Capital in Weatherford, Texas.
2. Compare your financing options
If you’re going the financing route, know that buying land can be a complex process. Land loans aren’t the same as conventional mortgages, and their higher costs tend to reflect the amount of risk assumed by the financial institution dealing with an undeveloped property. Your financing options might include:
Bank or credit union land loan
A local bank or credit union is more likely to be familiar with the land in the area, and could offer a loan with better terms.
“If you do not have a strong existing banking relationship and are looking to finance a land purchase, a consumer-owned credit cooperative that specializes in rural and agricultural lending is a great place to start,” says Garrett.
USDA loan
If the land is in an eligible rural area and you plan to build your primary residence on it, you might qualify for a USDA loan backed by the U.S. Department of Agriculture. These loans typically have affordable interest rates and down payment requirements. Options include Section 523 loans for those who plan to build the home themselves and Section 524 loans for those who will hire a contractor.
SBA 504 loan
The Small Business Administration (SBA) partners with financial institutions to provide financing for business owners who purchase land for business use in the form of an SBA 504 loan. You could qualify for this kind of loan with a 10 percent down payment.
Home equity loan
If you already own a home, you could consider tapping your existing home equity with a home equity loan. This approach will likely be much less expensive than a land loan, but proceed carefully when using your house as collateral.
Seller financing
If the owner of the land is eager to complete the sale, you might be able to negotiate seller financing. It’s best to hire an attorney to assist with negotiating the terms of the deal, including the down payment, interest rate and repayment terms.
After you’ve been approved for a land loan, there are several steps in the closing process:
- Appraisal – A professional appraiser will measure and appraise the property, taking into account the size and location. This typically takes two to four weeks.
- Property documentation investigation – The lender will order a title search to ensure there aren’t any outstanding liens or judgments on the property.
- Insurance verification – You’ll be asked to provide proof of all necessary coverage, such as general insurance, liability insurance, hazard insurance or flood insurance.
- Document preparation – The loan officer will create the loan paperwork showing the terms that have been approved.
- Fee calculation – The fees that you have to pay at closing can include title fees, a recording fee, property taxes, real estate commission or other costs charged by the lender, title company, appraiser or real estate agent.
3. Consider every expense
Depending on how you plan to use the property, owning land can come with many hidden costs, such as permit fees or paying to build a septic system.
“In addition to purchasing and financing, there are added carrying costs on land that people tend to not factor in — especially first-time landowners,” says Garrett.
Also, “even if you have vacant land, there are active management requirements and costs,” says Hank Mulvihill, director and senior wealth advisor at Smith Anglin Financial in Dallas, Texas. “Be aware that land does not just sit there.”
4. Find land for sale
There are several ways to find land for sale:
Online listings
If you have an idea of where you’d like to purchase land, you can start searching online for parcels offered via auction or properties up for sale. A few websites include:
- LandAndFarm.com
- LandWatch.com
- Land.com
- LandCentury.com
You can also try searching for land for sale on general real estate listing sites, such as Zillow or realtor.com. You can even try browsing listings on Craigslist.
Via a real estate agent
Depending on where you live, there could be a real estate agent (or several) in the area who specialize in land sales, or at least have an ear to the ground about unlisted plots of vacant land.
Your local paper
The classifieds section in your local newspaper could advertise listings from land owners selling parcels independently, and you might be able to save money by connecting with the owner directly. There might also be niche publications with listings for land specific to your interests, such as land for hunting, recreation or farming.
Take a drive
Another way to find land for sale is to simply drive around your desired area and look for for-sale signs, or drive over to a local real estate office to check the listings in the window. You might be able to uncover land that isn’t listed online this way.
Government land listings
Sometimes, the government has land up for grabs, such as repossessed parcels. You can search for what’s available on sites such as:
- Disposal.gsa.gov
- Realestatesales.gov
Land sold by the government usually gets offloaded through an auction, so if this is your strategy, be prepared to go through the auction bidding process.
If you haven’t owned land before, it’s a good idea to consult a professional, such as a real estate agent who specializes in land sales or a land planner whose job is to evaluate whether it’s feasible to build or develop a piece of land. A land planner evaluates the slope of the land, the water table, type of soil and vegetation and other factors to determine what structures the land can sustain.
5. Research the property
When you find land to purchase, do your homework before making an offer. Here are some key issues to investigate:
- Utilities – Are there hook-ups for water, sewer and electricity on the property? If not, you’ll need to install them. “Getting electricity to a remote parcel can be stunningly expensive,” says Mulvihill. “Sewer service is unlikely in remote areas, so be ready to spend up to $40,000 for a septic system.”
- Road access – Is there access to the property from a public road? If not, you may need to get an easement to build a road.
- Zoning and land-use restrictions – Is your idyllic country property actually zoned for industrial, agricultural or retail use instead of residential? Will a county road or retail mall be built near the property someday? Check your local zoning authority’s website or visit town hall in person to learn about regulations in the area, and any construction plans that could impact your parcel. “You really do not want to build your dream home next to a beautiful open area which is zoned to become a gravel quarry,” Mulvihill says.
- Property taxes – “Property taxes on a piece of land can be costly and make holding the property long-term economically unfeasible, which is why most raw landowners try to ensure that their parcels fall under agricultural exemptions,” says Garrett.
6. Make your offer
Once you’ve done your homework on the property and know how you plan to finance the purchase, you’re ready to present the owner with an offer. This written document contains the details of the property, your contact information, the price you’re willing to pay and other terms.
You’ll also want to include contingencies in your offer to protect yourself from factors that might make you want to walk away from the deal. Common contingencies with land purchases include:
- Environmental tests
- Septic system permits
- Land survey showing property lines, parcel size and easements
- Zoning regulations
There are templates available online of sample purchase agreements, but unless you’re an experienced buyer, you’ll want to get a real estate lawyer or real estate agent to prepare the offer for you.
Bottom line
Buying land can be more costly than buying a home, and there are different requirements for getting a land loan compared to a home purchase mortgage. If you intend on building a house on your land, you’ll also need to factor in construction costs. A construction loan can help.
VA loans are mortgages backed by the Department of Veterans Affairs and are available to military service members and veterans. See how VA loans work and who qualifies.
No down payment required.
Upfront VA funding fee required. See this year’s VA funding fee chart.
No mortgage insurance.
Best for: Military-qualified borrowers who appreciate a low interest rate and no down payment minimum.
VA loan eligibility
You are likely eligible for a VA mortgage if:
You’re an active-duty military member or veteran who meets length-of-service requirements.
You’re the surviving spouse of a service member who died while on active duty or from a service-connected disability and you have not remarried or remarried after age 57 or Dec. 16, 2003. Spouses of prisoners of war or service members missing in action are also eligible.
You meet the lender’s requirements for credit and income. The VA doesn’t set a minimum credit score for VA loans, but lenders can set their own minimum standards. The lender will also consider your income and debts to evaluate your ability to repay the mortgage.
The property you want to buy meets safety standards and building codes and will be your primary residence.
What is the VA loan limit?
The VA loan limit is the maximum amount you can borrow without having to make a down payment. In 2020, limits were eliminated for current members of the military and veterans who have access to their full VA loan entitlement. However, loan limits still apply to borrowers who already have a VA loan or have defaulted on a VA loan.
In 2022, the standard VA loan limit is $647,200 for a single-family home in a typical U.S. county, but can run as high as $970,800 in high-cost areas. It’s possible to get a VA loan even if the home price exceeds the county limit, but you’ll be required to make a down payment.
Types of VA loans
The VA loan program offers a variety of options, including purchase and refinance mortgages, rehab and renovation loans and the Native American Direct Loan. Here’s an overview:
VA loan type | Features |
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VA purchase mortgage |
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VA streamline refinance (also called a VA Interest Rate Reduction Refinance Loan, or IRRRL) |
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Native American Direct Loan (NADL) |
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» MORE: VA loans vs. conventional loans
VA loan benefits
Here are the biggest advantages of VA loans compared with conventional and FHA loans:
No down payment or mortgage insurance required: Other loan types require down payments and can include an extra cost for mortgage insurance. FHA loans require mortgage insurance regardless of the down payment amount and conventional loans usually require mortgage insurance if the down payment is less than 20%.
Competitive interest rates: Average 30-year mortgage rates were lower for VA home loans than for FHA and conventional mortgages in December 2021, according to mortgage data provider ICE Mortgage Technology.
Limited closing costs: Closing costs are the various fees and expenses you pay to get a mortgage. The Department of Veterans Affairs limits the lender’s origination fee to no more than 1% of the loan amount and prohibits lenders from charging some other closing costs.
Disadvantages of VA loans
Every type of loan has drawbacks for some borrowers. Here are potential disadvantages of a VA loan.
VA loan funding fee: Although VA loans don’t require mortgage insurance, they come with an extra cost called a funding fee. The fee is set by the federal government and covers the cost of foreclosing if a borrower defaults. The fee ranges from 1.4% to 3.6% of the loan, depending on your down payment and whether it’s your first VA loan. You can pay the fee upfront or fold it into the loan.
Purchase loans only for primary homes: You can’t use a VA loan to buy an investment property or a vacation home.
Not all properties eligible: A VA-approved appraiser will evaluate the home you want to buy to estimate the value and make sure it meets the VA’s minimum property requirements. Some fixer-uppers may not meet the VA’s minimum standards.
How many times can you use a VA loan?
Getting a VA loan isn’t a one-time deal. After using a VA mortgage to purchase a home, you can get another VA loan if:
You sell the house and pay off the VA loan.
You sell the house, and a qualified veteran buyer agrees to assume the VA loan.
You repay the VA loan in full and keep the house. For one time only, you can get another VA loan to purchase an additional home as your primary residence.
Obtain a certificate of eligibility: A VA certificate of eligibility shows a mortgage lender that your military service meets the requirements for a VA loan. A VA-approved lender can obtain the document for you, which is needed before the loan can close. You can also request the certificate from the VA online or by mail.
Find the right lender: Some VA lenders are tailored for borrowers with weaker credit, while others offer a larger variety of VA loan types. Get preapproved with more than one VA mortgage lender to compare their qualification requirements and mortgage rates.
Find a home: To purchase a primary residence with a VA loan, it must also meet minimum property requirements to ensure it’s clean, safe and structurally sound. Once you put in an offer on the house you want, the mortgage lender will evaluate your finances and order a VA appraisal to make sure the home meets all the requirements. Once your application and appraisal are approved, the final steps are to close on the loan and move into the house.
USDA home loans are mortgages backed or issued by the U.S. Department of Agriculture. See more about USDA loans and eligibility requirements.
No down payment is required on most properties.
Home improvement loans and grants are also available.
Income limits and property value caps apply.
Best for: Income-qualified buyers in rural and some suburban areas who want a low or zero down payment.
How USDA loan programs work
There are three USDA home loan programs:
Loan guarantees: The USDA guarantees a mortgage issued by a participating local lender — similar to an FHA loan and VA-backed loans — allowing you to get low mortgage interest rates, even without a down payment. If you put little or no money down, you will have to pay a mortgage insurance premium, though.
Direct loans: Issued by the USDA, these mortgages are for low- and very low-income applicants. Income thresholds vary by region. With subsidies, interest rates can be as low as 1%.
Home improvement loans and grants: These loans or outright financial awards permit homeowners to repair or upgrade their homes. Packages can also combine a loan and a grant, providing up to $27,500 in assistance.
Qualifying for a USDA-backed mortgage guarantee
Income limits to qualify for a home loan guarantee vary by location and depend on household size. To find the loan guarantee income limit for the county where you live, consult this USDA map and table.
USDA guaranteed home loans can fund only owner-occupied primary residences. Other eligibility requirements include:
U.S. citizenship (or permanent residency)
A monthly payment — including principal, interest, insurance and taxes — that’s 29% or less of your monthly income. Other monthly debt payments you make cannot exceed 41% of your income. However, the USDA will consider higher debt ratios if you have a credit score above 680.
Dependable income, typically for a minimum of 24 months
An acceptable credit history, with no accounts converted to collections within the last 12 months, among other criteria. If you can prove that your credit was affected by circumstances that were temporary or outside of your control, including a medical emergency, you may still qualify.
“Applicants with credit scores of 640 or higher receive streamlined processing. Below that, you must meet more stringent underwriting standards. You can also qualify with a nontraditional credit history.”
Applicants with credit scores of 640 or higher receive streamlined processing. Those with scores below that must meet more stringent underwriting standards. And those without a credit score, or a limited credit history, can qualify with “nontraditional” credit references, such as rental and utility payment histories.
How USDA-issued home loans work
Going one step further in helping prospective homebuyers, the USDA issues mortgages to applicants deemed to have the greatest need. That means an individual or family that:
Is without “decent, safe and sanitary housing”
Is unable to secure a home loan from traditional sources
Has an adjusted income at or below the low-income limit for the area where they live
The USDA usually issues direct loans for homes of 2,000 square feet or less, with a market value below the area loan limit. Again, that’s a moving target depending on where you live. Home loans can be as high as $500,000 or more in pricey real estate markets like California and Hawaii, and as low as just over $100,000 in parts of rural America.
Eligible home locations
Metropolitan areas are generally excluded from USDA programs, but pockets of opportunity can exist in suburbs. Rural locations are always eligible.
Next steps
To apply for a USDA-backed loan, talk to a participating lender. If you’re interested in a USDA direct mortgage or home improvement loan or grant, contact your state’s USDA office.
A program sponsored by the USDA might seem to be targeted to farmers and ranchers, but your occupation has nothing to do with the qualification process. Eligibility is simply a matter of income and location. And no, you don’t need to know sorghum from a soybean.
Jumbo home loans are mortgages above a certain dollar amount. Jumbo loan limits vary by county and are adjusted periodically. See this year’s loan limits.
Can have fixed or adjustable rates.
Often require a credit score of 700 or higher.
Usually require a down payment of 10% or more.
Best for: Buyers of expensive homes and owners who want to refinance jumbo-size mortgages.
When is a loan considered ‘jumbo’ in your area?
A jumbo loan is a type of mortgage that is too high to be guaranteed by Fannie Mae or Freddie Mac, which are government-sponsored enterprises that set mortgage underwriting standards and purchase qualified loans from lenders. Loans that can be purchased by Fannie Mae or Freddie Mac — also called “conforming loans” — are considered safer investments for lenders than jumbo loans, and it can be easier for borrowers to meet their requirements.
With home prices rising in most areas of the United States, the FHFA has increased conforming loan limits for 2022. How large a loan you can get before it’s considered “jumbo” depends on where you live, as certain more expensive areas — like Hawaii or San Francisco — have higher limits. If you’re concerned about meeting the more stringent lender criteria required for approval for a jumbo loan, these new limits could allow you to finance a high-priced home with a conventional loan instead.
For 2022, the maximum limits for conforming loans are:
$647,200 for a single-family home in most areas of the country.
Up to $970,800 for high-cost areas where single-family home prices tend to be above average. When setting conforming loan limits, the FHFA has defined high-cost areas as places where 115% of the local median home value is more than $647,200.
Why jumbo loan limits matter
If the amount you want to borrow goes beyond the limits of a conforming loan and you need to get a jumbo loan, your lender may require:
A stronger credit score. The minimum credit score for a jumbo loan is typically at least 680, but some lenders may require an even higher one. The higher your credit score, the lower your interest rate is likely to be.
More cash in the bank. Knowing you have cash reserves, and not too much debt, makes lenders more likely to approve your jumbo loan.
A larger down payment. Requirements vary by lender and depend on your financial history.
An extra appraisal. Some lenders may require a second opinion on the home’s value to be sure it’s worth the amount you’re borrowing.
Additional fees. Since you’re borrowing a larger amount, there may be some extra steps in the loan process, leading to higher closing costs.
Higher interest rates. Although this can fluctuate based on market conditions and individual lender offerings, jumbo loan rates may be higher than those for conforming loans.
Why do conforming loans have limits?
The maximum limits set by the Housing and Economic Recovery Act of 2008, as well as the rules for adjusting the limit, were meant to ensure that loans enabled by Fannie Mae or Freddie Mac would be widely available.
Jumbo loan values exceed these limits, making them nonconforming loans. Lenders view nonconforming loans as riskier because Fannie and Freddie won’t guarantee them. If a borrower stops making payments and the jumbo loan defaults, lenders know they’ll be on the hook for a big chunk of change.
As for upper limits on jumbo loans, that’s up to the lender. Once you’re in the realm of nonconforming mortgages, you can borrow as much as your lender will agree to loan.
An interest-only mortgage requires payments only on the lender’s interest charge. The loan balance, or principal, is not reduced during the interest-only payment period.
Can be appropriate for borrowers who are disciplined enough to make periodic principal payments.
Useful to home buyers who don’t expect to remain in a house for the long term.
Borrowers will have to show lenders substantial assets or a proven ability to pay.
Best for: Borrowers with high monthly cash flow, a rising income, large cash savings or an income that varies from month to month. Also for those who receive large annual bonuses they can use to pay down the principal balance.
An interest-only mortgage offers a lower monthly payment and is best suited for people with ample assets, good credit and a short-term ownership outlook.
If you want a cheaper monthly mortgage payment, just strip it down to its bare bones. That’s what an interest-only mortgage does.
With that benefit in mind, there are also some important drawbacks to consider. For example, it’s harder to qualify for than a typical principal-and-interest loan. And it’s appropriate for only a fairly narrow range of homeowning scenarios.
What is an interest-only mortgage?
An interest-only mortgage requires payments just of the interest — the “cost of money” — that a lender charges. You’re not paying back any of the borrowed money (the principal). That means you’re not building equity in the house except from your down payment or any gain in value that may occur due to local market circumstances.
These home loans are usually structured as adjustable-rate mortgages and frequently have terms of up to 10 years. After that, you’ll have to make amortized payments that are split between interest charges and principal reduction, or pay off the loan, or refinance.
How an interest-only mortgage works
An interest-only loan is offered for a relatively short term, usually five to 10 years. If you remain in the home, you can refinance the loan into a traditional principal-and-interest mortgage, or sign up for another interest-only term.
If you opt for the interest-only loan again, it’s likely your mortgage rate will change; whether that will be higher or lower will depend on the market at that time.
In the meantime, you haven’t paid down any of the loan balance from your regular monthly payments — unless you’ve opted to make additional payments along the way to reduce the principal. At the end of the final interest-only term, and barring any payments you’ve made separately to the principal, your loan balance is the same as it was when you first signed the mortgage papers.
There can be many variations on the structure of these loans, and, of course, mortgage rates can go up or down, so you can use our interest-only mortgage payments calculator to consider different scenarios.
Who can qualify for an interest-only mortgage?
Compared with a typical principal-and-interest mortgage, interest-only loans often require higher down payments and lower debt-to-income ratios, as well as good-to-excellent credit scores — for example, a FICO score of 700 or higher.
But the qualifications for these loans aren’t standardized and can vary widely from lender to lender.
One thing is for sure: Borrowers will have to show lenders ample assets and a demonstrated ability to pay.
Typical uses for an interest-only mortgage
“Interest-only loans are generally for those folks that are probably not going to be in the property for a long period of time,” says Jim Linnane, president of retail lending at Stearns Lending. “They’re usually thinking in five-, seven- or 10-year increments.”
The best-suited borrowers have cash and liquid investment assets and are in a “very strong financial position,” Linnane says. “The fact that they are not reducing principal is not a danger for them.”
Some typical attributes of interest-only-mortgage home buyers:
High monthly cash flow.
A rising income.
Large cash savings.
Interest-only mortgages can be appropriate for borrowers who are disciplined enough to make periodic principal payments as well. They might also work for someone with a job that pays large annual bonuses that can be used to pay down the principal balance of the loan each year.
Another example of a possible use: A couple nearing retirement might use an interest-only loan to buy a second home, then sell their first home at retirement, move to the vacation home and pay off the interest-only loan.
“Very few people should be really considering an interest-only loan.”Jim Linnane, president of retail lending at Stearns Lending
But interest-only mortgages are usually not suitable for typical long-term home buyers, including first-time buyers.
“Very few people should be really considering an interest-only loan. It’s usually a cash-flow management tool for wealthier borrowers that feel like they can use their capital and get a better return than the rate that they’re paying on their mortgage,” Linnane says.
Interest-only mortgages aren’t as common as they were a few years ago. Since 2015, after lender abuse that helped fuel the housing crash, Fannie Mae and Freddie Mac stopped purchasing these loans. Lenders have to hold them on their own books or sell them to other investors.
Pros and cons of an interest-only mortgage
When weighing the pros and cons of an interest-only mortgage, keep in mind:
Pros
A lower monthly payment during the interest-only term.
Since interest-only mortgages are usually structured as adjustable-rate loans, initial rates are often lower than those for fixed-rate mortgages.
Cons
You don’t gain any equity in your home while making interest-only payments.
If market values decline, you could lose any equity in your home provided by your down payment — and perhaps any opportunity to refinance.
Unless you move, you’ll face much larger monthly installments down the road, when principal payments are required.
Some interest-only mortgages require a substantial balloon payment, a lump-sum payment at the end of the loan term.
A typical Non-QM Debt Service Coverage Ratio (DSCR) loan allows a borrower to qualify for a mortgage based on cash flow generated from an investment property – through a rental, for example – as opposed to their personal income. A calculation generates a debt-to-income ratio and the higher the ratio, the better.
However, A&D Mortgage recognizes that not every borrower will qualify for a traditional debt-to-income loan. We know that ownership of an investment property is more than just a ratio. That is why we have introduced our A&D Mortgage’s DSCR loan, which allows a ratio as low as zero.
Program highlights:
- FICO 620
- Up to 80% CLTV
- Loan amounts up to $2.5 million
- Max cash-on-hand $1 million, no limit for CLTV <55%
- 40- & 30-year fixed, 5/6 & 7/6 ARM terms
- No income or employment verification
- DSCR as low as 0
- Eligible for Non-Permanent Residents and Foreign Nationals (under Foreign National DSCR Program)
- Ownership of any property within the past 24 months
- Condotels allowed
Conventional mortgages: Lenders use the term conventional mortgages to describe loans that aren’t backed by the government.
Conforming mortgages: Another industry term, which defines a mortgage that meets local loan limits, as set by the government. See the differences between conforming and nonconforming mortgages.
Government-backed mortgages: Loans guaranteed by the Department of Veterans Affairs (VA loans), FHA-insured loans and loans backed or issued by the Department of Agriculture (USDA loans).
Reverse mortgages: A way to unwind equity in a home as a lump sum or stream of income, for homeowners over age 62. See how reverse mortgages work and how seniors use them.
Preapproval FAQs answered
Be prepared to provide details about your employment, income, debt and financial accounts to get preapproved for a mortgage.
In the world of homebuying, think of a mortgage pre-qualification as a learner’s permit, while a mortgage preapproval is a license to drive. A pre-qualification letter can get you on the road to homeownership but doesn’t prove you can go the distance. With a preapproval letter, you’re in the fast lane. It lets real estate agents and home sellers know you are serious about buying a home.
Is a pre-qualification the same as preapproval?
Pre-qualification is a good first step when you’re not sure if you’re financially ready to buy a home. A mortgage pre-qualification is usually based on an informal evaluation of your finances. You tell the lender about your credit, debt, income and assets, and the lender estimates whether you can qualify for a mortgage and how much you may be able to borrow.
» MORE: See if you’re ready with our mortgage pre-qualification calculator
Preapproval is the next step if you get a thumbs up during pre-qualification. During the mortgage preapproval process, a lender pulls your credit report and reviews documents to verify your income, assets and debts. If you’re confident about your credit and financial readiness to buy a home and you’re ready to start shopping, then you might skip the pre-qualification step and go straight to preapproval.
A mortgage preapproval is an offer by a lender to loan you a certain amount under specific terms. The offer expires after a particular period, such as 90 days.
Preapproval is not a guarantee you will be given a loan and the mortgage can still be denied. A home appraisal must be completed before a loan can close to ensure you aren’t paying more for the home than it’s worth. Also, the lender’s offer may not stand if your financial situation changes between preapproval and closing.
Things not to do after you are preapproved for a mortgage include applying for new credit, making large purchases, or missing loan and credit card payments.
» MORE: Learn more about the difference between pre-qualification and preapproval
What is a preapproval letter?
Once preapproved, your mortgage lender will issue a preapproval letter. This document indicates the type and amount of loan for which you’re approved, among other things. A preapproval letter indicates to both real estate agents and home sellers that you’re financially able to buy a home, and it’s expected that a preapproval letter will accompany any offer you make.
How to get preapproved for a home loan
Get your free credit score. Know where you stand before reaching out to a lender. A credit score of at least 620 is recommended, and a higher credit score will qualify you for better rates. Generally a credit score of 740 or above will enable most borrowers to qualify for the best mortgage rates.
Check your credit history. Request copies of your credit reports, and dispute any errors. If you find delinquent accounts, work with creditors to resolve the issues before applying.
Calculate your debt-to-income ratio. Your debt-to-income ratio, or DTI, is the percentage of gross monthly income that goes toward debt payments, including credit cards, student loans and car loans. NerdWallet’s debt-to-income ratio calculator can help you estimate your DTI based on current debts and a prospective mortgage. Lenders prefer borrowers with a DTI of 36% or below, including the mortgage, though it can be higher in some cases.
Gather income, financial account and personal information. That includes Social Security numbers, current addresses and employment details for you and your co-borrower if you have one. You’ll also need bank and investment account information and proof of income. Documents you’ll need to get a mortgage preapproval letter include your W-2 tax form and 1099s if you have additional income sources and pay stubs. Two years of continuous employment is preferred, but there are exceptions. Self-employed applicants will likely have to provide two years of income tax returns. If your down payment will be coming from a gift or the sale of an asset, you’ll need a paper trail to prove it.
Contact more than one lender. Comparing offers from multiple lenders can help you compare rates and fees and save you thousands of dollars over a 30-year mortgage. Going through the mortgage preapproval process shouldn’t hurt your credit score. FICO, one of the largest U.S. credit scoring companies, recommends confining those applications to a limited time frame, such as 30 days.
Mortgage preapprovals can result in a temporary dip in your credit score. A mortgage preapproval counts as what is known as a hard inquiry. FICO says grouping hard credit inquiries within a 30-day period will reduce the impact on your score.
It can take several days or longer to get preapproved for a mortgage. The timeline varies by lender and how quickly you are able to provide the lender with the information it needs, including proof of your income and assets.
Tax returns, W-2s and pay stubs will be needed to verify your employment and income for mortgage preapproval. Lenders will also need a list of your monthly debt payments, such as student loans and credit cards. Be prepared to provide bank, retirement and investment account statements to show proof of your assets as well.
Pre-qualification and preapproval sound similar, but typically only one — preapproval — will get real estate agents and sellers to take you seriously.
In today’s competitive market, agents likely will require you to be preapproved before showing you properties.
But there’s a wrinkle to keep in mind. Lenders use their own terms to describe the different application and approval phases. For simplicity, we’re using the terms “pre-qualification” to refer to an initial, less formal phase and “preapproval” to refer to a phase involving documentation of financial information and a credit check.
What is mortgage pre-qualification?
Generally in the pre-qualification phase, you describe your credit, debt, income and assets, although application processes vary by lender. Based on this overall financial picture, the lender estimates how much you may be able to borrow. Some lenders will also do a credit check.
A credit check results in an inquiry on your credit report. A “soft inquiry” doesn’t affect your credit score, but a “hard inquiry,” which happens when you apply for a loan, can lower your credit score by a few points. The impact will be minimal, and credit scoring models generally count multiple hard inquiries in a short amount of time to shop rates as a single inquiry.
A credit check for pre-qualification may involve only a soft inquiry, but the only way to know is to check with the lender. If you’re concerned about even a small drop in your credit score, it might make sense to hold off on applications that involve hard credit inquiries until you’re ready to shop for a mortgage.
You can get pre-qualified over the phone, online or in person.
Getting pre-qualified can give you a sense of your financial readiness and introduce you to various mortgage options. It’s often a good step for first-time home buyers who are just testing the waters and aren’t ready to jump in.
What is mortgage preapproval?
A mortgage preapproval takes the process to the next level. Preapproval requires you to provide proof of your financial history and stability. The lender will verify your income, employment, assets and debts, and will check your credit report.
You’ll provide information in the form of W-2s, a current pay stub, a summary of your assets and your total monthly expenses, and, if you already own real estate, a copy of your mortgage statement.
With many lenders you can get preapproved online, with phone support from a loan officer if needed.
If you satisfy the requirements, you’ll get a preapproval letter, which states the amount and type of mortgage the lender is willing to offer, along with the terms.
Your real estate agent will want to see the letter. Knowing how much you can borrow will help the agent understand your price range and direct you to appropriate listings. Sellers will also want to know that you’re preapproved. Virtually no offer to buy a home without mortgage preapproval will be considered in today’s market, unless the buyer is paying 100% in cash.
Preapproval, though, isn’t a guarantee of final mortgage approval. After you find a home to buy, your application will go through full mortgage underwriting. The lender will review your finances and order a home appraisal to estimate the property’s value and a title search to confirm the property is free of any claims.
Pre-qualification vs. preapproval
Pre-qualification | Preapproval |
|---|---|
May include a credit check. | Includes a credit check. |
Requires an estimate but no proof of your credit, debt, income and assets. | Requires documentation of your financials and verification of employment. |
Estimates how much you can borrow to buy a home. | Provides a preliminary mortgage offer, but not a guarantee of full loan approval. |
Won’t convince real estate agents and sellers you’re a serious buyer. | Gives real estate agents and sellers confidence in your ability to get a mortgage. |
Can take as little as a few minutes to provide information. | May take 30 minutes or more to fill out the application. |
Can get an answer in a few minutes. | May take days to get an answer. |
Get pre-qualified or preapproved?
If you’re just starting to think about buying a home, getting pre-qualified is a good idea. You’ll get a sense of how much you might be able to borrow, and you can talk to lenders about the types of mortgages to consider and what else you can do to prepare.
But if you know you’re ready to go shopping, you can skip pre-qualification and go straight to preapproval.
The best time to get preapproved is just before you start shopping for homes. By verifying how much you’re qualified to borrow, preapproval helps you decide what you can afford. (However, you may not want to spend as much on a home as the amount you can borrow.) A mortgage preapproval letter also puts you a step ahead of other prospective buyers who aren’t yet preapproved.
The time frame varies by lender, but commonly a mortgage preapproval is good for 90 days. The preapproval letter may have an expiration date on it. If you’re still shopping for homes after that point, you can ask the lender to renew the preapproval. You may need to provide updated information, and the lender may check your credit again.
FICO, one of the largest credit scoring companies, recommends confining rate shopping to a relatively narrow period, such as 30 days.