Loan Insurer, Lenders, and Loan Programs all mean different things. But all can affect the type of loan you get and/or if you get an approval. Additionally, specific lenders have a great deal of pull when it comes your approval of a particular mortgage.
There is an important difference between liquidity providers, loan insurer’s, guarantors and the lenders that provide loans to borrowers. For the purposes of this site, I will refer to these entities as loan guarantors collectively and lenders. But, let’s talk about the different agencies separately so you understand their roles in the housing market.
Federal National Mortgage Association (FNMA), or Fannie Mae, and Federal Home Loan Mortgage Corporation (FHLMC), or Freddie Mac are both are government sponsors enterprises (GSE). They provide liquidity to local banks which allows banks to continue to making mortgages for potential home buyers.
The Federal Housing Administration (FHA) provides mortgage insurance on loans made by FHA-approved lenders throughout the United States and its territories. FHA loans are government insured loans.
The Department of Veteran’s Affairs (VA) guarantees a portion of mortgage loans for eligible borrowers. This enables VA lender’s to provide more favorable terms eligible borrowers. VA loans are government insured loans.
U.S. Department of Agriculture (USDA), as part of its USDA Rural Development Guaranteed Housing Loan program, guarantees 90% of a mortgage loan for eligible rural home buyers. This guarantee enables the lenders to provide more favorable terms. USDA loans are government insured loans.
Loan Insurers Requirements
Before any of these guarantors will buy or insure a mortgage, there are specific guidelines the borrower and property must meet. These guidelines are loan parameters that the lender must meet or exceed in reference to borrowers and property.
For example, although FHA will technically lend to a borrower with a credit score of 500 many lenders will not approve a borrower with less than a 580 score. Although conventional loan programs allow borrowers to have credit scores as low as 620, some lenders might restrict these loans to borrowers with credit scores of 660 or 680.
Today’s Lender Requirements
After the mortgage crisis, the Consumer Financial Protection Bureau (CFPB) finalized the Ability to Repay rule which promotes responsible lending practices. Lenders are responsible for providing borrowers with Qualified Mortgages (OM’s). Which means the lender has a made a good faith effort to determine that borrowers have the ability to repay their loans.
The Ability to Repay rule and the Qualified Mortgage standard, hold the lenders accountable for writing bad loans. This makes lenders weary of writing loans to borrowers that could potentially default.
The Ability to Repay Act
The Ability to Repay (12 CFR § 1026.43(c)(2)) rule requires lender to check for the following:
- Current or reasonably expected income or assets. (Other than the value of the property securing the loan), which the member will rely on to repay the loan
- Current employment status. (If you rely upon employment income when assessing a member’s ability to repay the loan)
- Final monthly mortgage payment for the covered mortgage loan. (Calculated using the introductory or fully indexed interest rate, whichever is higher, and based on monthly, fully amortizing payments that are substantially equal)
- Total monthly payments on simultaneous loans secured by the same property
- Monthly payments for property taxes and insurance you require the member to buy. Additionally, all other costs related to the property such as homeowners association fees or ground rent
- Debts, alimony, and child support obligations
- Monthly debt-to-income ratio or residual income. (Calculated using the total of all of the mortgage and non-mortgage obligations listed above, as a ratio of gross monthly income)
- Credit history
Qualified Mortgages (OM’s)
Additionally, the Qualified Mortgage standards prohibits certain harmful loan features such as:
- An “interest-only” period, when you pay only the interest without paying down the principal, which is the amount of money you borrowed.
- “Negative amortization,” which can allow your loan principal to increase over time, even though you’re making payments.
- “Balloon payments,” which are larger-than-usual payments at the end of a loan term. The loan term is the length of time over which your loan should be paid back. Note that balloon payments are allowed under certain conditions for loans made by small lenders.
- Loan terms that are longer than 30 years.
- A limit on how much of your income can go towards your debt, including your mortgage and all other monthly debt payments. This is also known as the debt-to-income ratio.
- No excess upfront points and fees. If you get a Qualified Mortgage, there are limits on the amount of certain upfront points and fees your lender can charge. These limits will depend on the size of your loan. Not all charges, like the cost of a credit report, for example, are included in this limit. If the points and fees exceed the threshold, then the loan can’t be a Qualified Mortgage.
- Certain legal protections for lenders. Your lender gets certain legal protections when showing that it made sure you had the ability to repay your loan. Even with these protections, you may still be able to challenge your lender in court if you believe it did not make sure you had the ability to repay your loan. Source
Power of the Lender
Keep in mind, the lender has the final say. Most lenders will offer a variety of programs. You can find lenders that offer both conventional and FHA loans. Just remember, although FHA allows borrowers to have a 500 credit score does not mean the lender will. Information might say Fannie Mae and Freddie Mac allow scores as low as 620 credit score. But, it does not mean the lender will write a loan for you.
These days lenders will try their hardest to make the best loans possible and keep a healthy ratio of good loans to bad loans. FHA requires their approved lenders to maintain a certain level of non-defaulted to defaulted loans. If they fall below an approved ratio they could lose their status an as approved FHA lender. This is why most FHA lenders will require above a credit score above 620. Which means if you have a between a 580 – 620 credit score it could be difficult finding an FHA lender. It does not mean it’s impossible, but it could be difficult. Anything below 580 and…(silence).
It’s important to find the right lender when you are going to get a loan. Make sure to read some helpful tips about what to look out for here.
One lender that does provide FHA loans to borrowers with a 580 credit score is Quicken Loans.
Once you have spoken with a lender the two of you can decide on a loan program that works best for you. The loan program will determine what parameters you must meet. Down payment and credit are crucial factors, but employment, available funds and property types are all factors as well. When you are ready to buy a home, discuss all the options you qualify for with your mortgage broker or loan officer to see which one works best for you.