The Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) are both Government Sponsored Enterprises (GSEs), which means they are backed by the government but they are not part of the government. Fannie Mae and Freddie Mac don’t directly offer mortgage loans but instead buy the mortgages from banks, credit unions, and other financial institutions so that they, in turn, can lend to more homeowners. Even after the mortgage is sold, the original lender can often still be the servicer for the loan.
Fannie and Freddie purchase bundles of these conforming mortgage loans from banks, which means the loans must “conform” to the rules set by the GSEs.
Lenders want these mortgages to be eligible for purchase, so their loan guidelines are often very similar, if not identical, to guidelines set by Fannie and Freddie. So when you apply for a mortgage loan at a bank, it’s a good idea to know what these guidelines are.
One factor that determines your eligibility is your debt to income ratio. To calculate your debt to income ratio take your total debt payment and divide it by your total monthly income. For example, if you have a total monthly debt of $2,000 and a monthly income of $6,000, your debt to income ratio is 33%. Current guidelines allow a debt to income ratio up to 45%.
Fannie /Freddie loans require a minimum FICO credit score of 620 to qualify, but the approval process for applicants with credit scores between 620 and 660 may take longer than higher scores.
There are several loans insured by the government, and one of the most popular types is a Federal Housing Administration, or FHA, loan. FHA is part of the U.S. Department of Housing and Urban Development or HUD. FHA loans require as little as 3.5% down and credit requirements for FHA loans are lower than for conventional mortgage loans.
Many borrowers are under the impression that FHA loans are only for first time Home Buyers. This is absolutely not the case! Even if you’ve owned numerous homes over the years, FHA financing is absolutely available to you. There are also no income caps on this product, meaning if you are a higher income earner you won’t be disqualified as you would be on a Mass Housing Loan or USDA loan.
Home buyers who use FHA loans pay an Upfront Mortgage Insurance Premium. It’s called an upfront mortgage insurance premium because you pay it upfront at closing. Because it’s added to your loan balance, you pay interest on it for the life of the loan.
You must also pay an Annual Insurance Premium each month on an FHA loan of 1.75%. For loans $625,500 or less, if your loan to value is 95% or lower, the annual mortgage insurance for a 30 year fixed interest rate loan is now .80% of the base loan amount. If your loan to value is greater than 95%, the annual mortgage insurance premium is .85% of the base loan amount.
For a 15 year fixed rate FHA mortgage, if your loan to value is 90% or under, the annual mortgage insurance premium is 0.45% of the base loan amount; loan to values over 90% will have annual mortgage insurance rates of 0.70%. Also starting June 3, 30-year fixed loans will have to pay the premium for the life of the loan.
You are required to have a minimum credit score of 580 to qualify for FHA’s 3.5% down payment program, unless the loan is above $625,000, which will require a down payment of 10%.
There are debt-to-income requirements for FHA loans. A debt-to-income ratio is a comparison of your pre-tax income to housing and non-housing expenses.
Keep in mind that FHA loans are for the purchase of a primary residence (1-4 family) property only, not for investment property.
The Department of Housing and Urban Development (HUD) announced that it lower FHA single-family loan limits on January 1, 2015. To see what the FHA loan limits are in your area, visit the FHA Mortgage Loan Limits page on the HUD website. It’s a good idea to shop around to get the lowest rates for FHA loans.
If you’re an active or former member of the armed forces and you meet specific criteria for length and time of service, you can get a no-down payment loan guaranteed by the Department of Veterans Affairs, also known as a VA loan. Many veterans don’t even know they have this option available to them.
In addition to not needing a down payment, you do not have to pay mortgage insurance with a VA loan. The home must be for the purchase of your primary residence, as opposed for an investment property. There is a funding fee that comes with this loan, around 2 percent of the loan, which can be rolled into the loan amount. Under certain circumstances, such as a service-related disability, this funding fee can be waived.
In November of 2015, MassHousing announced a wonderful program for veterans and active duty military that makes it substantially easier for them to obtain mortgages. Some of the program’s benefits include non-spouse co-borrows are now able to be co-signors, rental income is allowable for 2 family home purchases. Condominiums are not required to go through the rigorous VA approval process.
In order to qualify, you have to show that you have the ability to pay the loan amount. The VA qualifying standards include debt-to-income ratio, your income, and FICO scores. Additional qualifying requirements may vary by lender.
The debt-to-income figure is a ratio of your debt to your income. The VA prefers a debt to income ratio of less than 41%. But exceptions can be made under certain circumstances.
To reduce delays in the processing of the loan, you should be prepared to give the lender the complete names and addresses and your employee identification numbers for present and past employers covering a 2 year period. You should also have your account numbers for savings and checking accounts and all open and recently closed debts on hand.
Credit requirements for VA loans are more lenient than for conventional loans. If you’re a veteran with no credit history it’s generally acceptable to use “non-traditional” credit to show you can pay bills on time. Some examples of “non-traditional” credit would be utility, phone, or car insurance bills.
You do not need to go to the Department of Veteran Affairs to get a VA loan. The Department of Veterans Affairs doesn’t lend money, they just guarantee the loan. You can apply for a VA loan with any mortgage lender that participates in the VA home loan program. You will need to get a Certificate of Eligibility from VA to prove to the lender that you are eligible for a VA loan. Lenders set their own interest rates, discount points, and closing points. You should shop around for the best rates.
Mortgage loans above the conforming loan limits set by Fannie Mae and Freddie Mac are called jumbo loans. They are also known as non-conforming loans. The conventional loan limit in most counties in eastern Massachusetts for a single-family home is $688,850, so if a borrower wants to purchase a home priced above this amount, they must apply for a jumbo loan. Jumbo loans also allow buyers to purchase luxury homes—those priced at $1 million or above, as well as second homes and personal investment properties.
Since these loans don’t conform to the limits, they can’t be sold to Fannie Mae or Freddie Mac, which means the bank takes on the risk for the loans. From 2008 to 2011 banks were reluctant to offer jumbo loans because they didn’t want to take the risk involved after the housing crisis. Now that the housing market is stabilizing, banks are offering jumbo loans again.
Jumbo mortgages often require a higher down payment of 20% or more for their loans. You typically need a 20% to 25% down payment on private jumbo loans, and mortgages over $1 million can require up to 30% for a down payment.
In order to qualify for a jumbo mortgage, you have to have a low debt-to-income ratio (DTI) that allows you to comfortably to pay the principal, interest, taxes, and insurance each month. The DTI compares your monthly debt obligations to your pre-tax income. As a rule, the monthly mortgage payment on a jumbo loan should not exceed 43% of your pre-tax income. You will also need to present proof of income and document two years of income history when applying for a jumbo loan.
Lenders will want to see that you have enough money saved to cover housing expenses in case of an emergency. They will typically require 6 to 9 months of cash available to cover the monthly principal, interest, taxes, and insurance payment, also known as PITI reserves.
A good credit score is also needed to qualify for a jumbo mortgage. Required scores vary according to the lender, but you should expect to have a score of at least 700.
If you put less than 20% down on a home, your lender will likely require you to pay Private Mortgage Insurance or PMI. This is to protect the lender against default. PMI benefits first-time buyers because it allows them to buy a home without putting down a large down payment. Starting April 1, 2013, for FHA loans if you put down less than 10%, you will have to pay that premium for the life of the loan. If you put down more than 10%, it can be eliminated after 11 years.
Use our Mortgage Calculator at the top of this page to figure out what your monthly payments would be.
The first step in getting a mortgage is to get your finances in order and figure out what you can afford. You want to be able to buy a home you can afford in good times and in bad. Remember you don’t have to buy a home that will cost as much as what you qualify for. On average, couples spend about 28%-33% of their income on housing, but you may want to spend less.
The second thing to do when you shop for a loan is to hire a mortgage broker, especially if your credit is less than perfect. Mortgage brokers are usually paid by the lender. They can determine how much you can afford, offer credit counseling, and recommend the best options for your needs. The broker does all the legwork for you so you don’t have to call every lender in your area.
One of the most important factors in getting a mortgage is your credit score. Lenders look at several factors when considering you for a mortgage and your history of repaying debts has a big impact on what your monthly mortgage payments will be. When your credit score is high you will be eligible for lower interest rates. You can get a free copy of your credit report by going to
Once you know what you can afford and what type of loan you’ll get, you can search listings below for a home.
Questions about buying a home in Massachusetts or New Hampshire?