A mortgage is an agreement between a buyer and a lender that allows the buyer to purchase or refinance a home, and gives the lender the right to take the property if the buyer fails to repay the money borrowed. There are several types of mortgages, each with their own requirements. Buyers typically receive pre-approval for mortgages when buying a home. Potential homebuyers should take the time to learn about their mortgage options, what is typically needed to apply for a mortgage, and why you should pursue pre-approval.
Mortgage Types
There are several mortgage types available through private lenders and the federal government. The Federal Housing Finance Agency (FHFA) sets mortgage loan amount limits for each state that say the maximum amount that lenders can give to a borrower. Below is a list of the most common mortgage types and their requirements.
Conventional Loans
Conventional loans are any mortgages not backed by the federal government, meaning they are available through private lenders. They are harder to qualify for than government-backed mortgages. Conventional loans often require a minimum 620 credit score and private mortgage insurance for a down payment less than 20% of the loan. Borrowers are often required to provide in-depth income, employment, credit, asset, and debt documentation, and pay at least a 3% down payment.
Fixed-Rate Mortgages
Fixed-rate mortgages are home loans with an interest rate that stays the same for the entire loan term, most commonly a 15- or 30-year mortgage. The interest rate will only change if borrowers refinance their mortgage.
Adjustable-Rate Mortgages
Adjustable-rate mortgages (ARMs) are loans with a variable interest rate. It can be a risky option, because buyers don’t know the exact payment amounts they will have the entire term of the loan. An example ARM is a 5/1 ARM, where the interest rate is fixed for the first five years of the loan, and then adjusts annually for the remainder of the loan.
High-Balance Loans
High-balance loans are conventional loans that can only be used in designated, high-cost areas set annually by the Federal Housing Finance Agency. The balance exceeds conventional loan limits but meets local loan limits set by the FHFA.
Jumbo Mortgages
- Jumbo mortgages are larger than high-balance mortgages, and are typically used for luxury homes or homes in highly competitive areas. The FHFA designates the areas and loan limits. These loans often require a down payment of at least 20% and a high credit score (680 and above).
FHA Loans
FHA loans are backed by the Federal Housing Administration and cater to borrowers with credit blemishes and limited down payment funds. FHA loans require a 580 credit score, 3.5% down payment, and include a mortgage insurance premium requirement for most borrowers
VA Loans
VA loans are for military service members, veterans and eligible spouses. They are backed by the Department of Veteran’s Affairs. VA loans require a minimum 620 credit score. There is no mortgage insurance requirement and no income or loan limits.
USDA Loans
USDA loans are backed by the Department of Agriculture and are provided to low to moderate income buyers in designated rural areas. No down payment or mortgage assistance required.
Second Mortgages
A second mortgage is a lien taken out against a property that already has a home loan on it. They allow borrowers to borrow against the equity they have built in their home. Borrowers can use the money from a second mortgage for almost anything, and second mortgages offer lower interest rates than credit cards. Second mortgages are different from a mortgage refinance, which is when borrowers replace a primary mortgage loan with a new loan.
Reverse Mortgages
Reverse mortgages are loans that are repaid when the borrower sells the home. Homeowners 62 and older may qualify. Lenders makes payments to the borrower from their available equity, in a lump sum or monthly. Borrowers repay by selling their home or refinancing to take out a new, forward mortgage to cover what’s owed.
Although there are many mortgage types, the good news is documents typically required to apply for a mortgage is the same for most types. When visiting a lender to apply for pre-approval, be sure to take the following documents:
- W-2s and tax returns for the last 2 -3 years (include business tax returns if you are self-employed).
- 30 days’ worth of pay stubs for each person signing the loan.
- 2 - 4 months of bank or credit union statements for checking and savings accounts.
- Addresses where you’ve lived the last 2 - 3 years.
- Brokerage account statements for 2 - 4 months, and a list of other assets like boats, RVs, and stocks and bonds.
- Most recent 401k statement.
- Documentation to verify additional income (child support, pension, social security, etc).
- Copies of driver’s licenses and social security cards for all borrowers on the loan.
Pre-approval is as close as a potential homebuyer can get to confirming their creditworthiness without having a purchase contract in place. Homebuyers complete a mortgage application and the lender verifies the information provided. Lenders perform a credit check on the homebuyer. If pre-approved, the homebuyer will receive a pre-approval letter, which is an offer (but not a commitment) to lend the homebuyer a specific amount, good for 90 days.
Some real estate professionals will request a potential homebuyer have a pre-approval letter before showing them a home.
Pre-approval shows a home seller and their real estate professional that a potential homebuyer is serious about the home purchase and can secure the financial means to complete the purchase. Homebuyers with pre-approval are more likely to actually complete the purchase versus homebuyers without pre-approval.