Credit scores and mortgage loans:
If your score is below 620 to 640: An FHA (Federal Housing Administration) home loan is your best option because most lenders won’t approve a conventional loan for borrowers with a credit score below 640. In addition, your interest rate would be much higher on a conventional loan even if you are approved.
If your score is between 640 and 740: You should compare your options for both FHA and conventional loans because while you can likely qualify for both, your interest rate will be higher for a conventional loan. However, your mortgage insurance is likely to be higher with an FHA loan.
If your score is above 740: Your best bet is likely to be a conventional loan because your credit score qualifies you for the lowest interest rates. Conventional loans are available now with a down payment as little as 3 percent.
“If all of your down payment funds are a gift, then an FHA loan is your best choice. Because for a conventional loan, you need to have your own money for at least some of the down payment,” says Hollensteiner.
VA loans: Veterans Affairs loans have no down payment or mortgage insurance requirement but are limited to eligible members of the military, veterans, spouses and some defense-related employees.
USDA loans: Agriculture Department loans are limited by income and property location, primarily in rural areas, and have no down payment requirement, but they do require mortgage insurance.
Individual lenders, banks and credit unions also offer mortgage products within the guidelines established by their own leadership, the government or investors.
Portfolio loans: Unlike most other conventional loans, this mortgage product is kept on the lenders’ books rather than sold to investors. A lender may establish its own criteria for a loan approval.
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TD Bank’s “Right Step” loan product, designed for first-time buyers but also available to borrowers who have previously owned a home, requires a down payment of 3 percent. Unlike other conventional loan products with low down payments, this mortgage does not require PMI. Hollensteiner says the interest rate on these fixed-rate loans are typically slightly below average mortgage rates. The Right Step loans are kept in TD Bank’s portfolio and are not sold to investors.
“There are two ways to be eligible for these loans: either through income eligibility, which means your income must be at or below 80 percent of the area median income ($82,984 for a four-person household in the D.C. region in 2015), or you are buying a home in a census tract identified as low-to-moderate income,” Hollensteiner says.
In addition, the Right Step program has the following requirements:
•A credit score of 660 or higher.
•An overall debt-to-income ratio of 38 percent, meaning that the minimum amount you pay on your mortgage and other debts every month cannot exceed 38 percent of your monthly gross income.
•Down payment funds must come from the borrower, not from a gift.
•Closing costs can be paid by the sellers.
Borrowers who can qualify for a loan but lack cash may be particularly interested in homebuyer programs. One place to search by location for downpayment assistance programs is downpaymentresource.com.
Homebuyer programs
Many D.C.-area residents assume they make too much money to qualify for a homebuyer assistance program. But Rodriguez says that these programs typically are available to buyers who make up to as much as 120 percent of the area median income ($131,040 for a four-person household in the D.C. region in 2015).
“People self-select themselves out of financial assistance because they think a ‘social service’ agency isn’t for someone like them,” Rodriguez says. “Realistically, everyone can benefit from homebuyer education even if they aren’t eligible for financial aid.”
Rodriguez says it is best for consumers to take a homebuyer education class the moment they think they want to buy a home.
“If you wait until after you’ve applied for a loan and selected a home to take a class, you’ve already made two of the biggest decisions associated with becoming a homeowner,” says Rodriguez. “People think of these classes as social services, but very well-educated, high-income people don’t always understand the nuances of loan programs. Buying a home is complex, and it’s worth it to be educated.”
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NeighborWorks partners in the D.C. region are Manna Inc. in the District and AHC Inc. in Arlington. Maryland residents can find homebuyer education classes and information about down payment assistance programs through the state government’s Maryland Mortgage Program. Virginia residents can take homebuyer education classes and find out if they are eligible for down payment assistance through the Virginia Housing Development Authority (VHDA).
“Most down payment assistance programs are limited to first-time homebuyers, but it’s important to realize that we go by the federal government’s definition of a first-time buyer, which is someone who has not owned a home within the past three years,” says Michele Watson, director of homeownership programs for the Virginia Housing Development Authority in Richmond. “It’s great for active-duty military personnel, in particular, who have been transferred from one station to another and owned a home in the past but want to buy in this area now.”
