You've finally found a site that explains the basic mortgage guidelines affecting your choice of a mortgage loan and the factors involved in your mortgage approval. Whether you are a seasoned or first time homebuyer, it helps to have an understanding of the basic ground rules for obtaining a mortgage throughout Texas. The guide begins with the basic Mortgage Types and continues to compare their features and the qualification process that might influence your selection of the best for you.

• Mortgage Types
• Down Payment
• Closing & Pre-Paid Costs
• Qualifying Income/Debt Ratios
• Co-Signer/Co-Borrower
• Credit Scores
• Mortgage Insurance
• Automated vs. Traditional Approval
• Fixed Rate vs. Adjustable Rate
• First Time Homebuyer Programs
• Mortgage Banker vs. Mortgage Broker

Mortgage Types

Conventional Mortgage (Fannie Mae)

• A mortgage that is not guaranteed or insured by the Federal Government
• Maximum loan amount is $417,000 (Loans exceeding this limit are referred to as a Jumbo or non-Conforming conventional loans.)
• Eligible borrowers are U.S. citizens, resident aliens, or individuals working under an acceptable work visa (Some conventional loans allow exceptions but these would fall under the category of non-conforming or sub prime home loans. For instance, individuals making a down payment of 30% or more may be eligible for a mortgage and exempt from the residency or visas requirements. Contact John Shellington for more information.)

FHA Mortgage

• A mortgage which is insured by the Federal Housing Administration against default
• Maximum loan amount is:

  Harris County - $200,160
  Galveston County - $200,160
  Brazoria County - $200,160
  Chambers County - $200,160
  Montgomery County - $200,160

• The maximum loan amount for FHA loans is set geographically. Contact us for FHA loan limits outside these areas.
• Eligible borrowers are U.S. citizens and resident aliens.

VA Mortgage

A mortgage which is guaranteed by the Department of Veterans Affairs against default. Maximum loan amount is $417,000 with no down payment. For loan amounts in excess of $417,000,contact us for down payment guidelines. Eligible borrowers are active and discharged veterans. An un-remarried surviving spouse, National Guard, and Reservist may also be eligible. For all eligibility criteria such as period of service, length of service, etc., please visit the VA Eligibility Guidelines. Also note the State of Texas administers a Texas Veteran's Program that has less restrictive guidelines than those necessary to receive a Federally guaranteed VA home loan. The Texas Program is used in combination with a FHA, VA, or Conventional home loan to provide a lower interest rate to eligible "Texas Veterans". To determine your eligibility it will be important for you to have your military discharge paper, form DD 214. This is true whether you were Active Duty, Reservist, or a member of the National Guard. If you can't locate this form, you can go online to the National Personnel Records Center and request a copy of your DD 214.

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Down Payment

Conventional Mortgage

A homebuyer will find a variety of down payment programs with a conventional loan.

0% down payment - Borrower must have acceptable credit scores. This program conserves the borrowers out of pocket expenses but usually entails a slightly higher interest rate and the borrower's cash reserve requirements are higher. (Cash reserve refers to funds a borrower must have remaining in their bank accounts after closing. With 0% down, cash reserve required could be 3 to 6 months of the proposed mortgage payment.

3% down payment - Borrower's out of pocket is less but their mortgage insurance costs could be higher.

5%, 10%, 15%, 20% down payment - These represent the typical incremental down payment schedules for a conventional loan. The one chosen will have an impact on the borrower's mortgage insurance expense. At 20% down payment, mortgage insurance is eliminated.

FHA Mortgage

3% Investment - FHA guidelines call for a borrower to make a minimum investment of 3% of sales price. The FHA definition of a 3% investment is broken down into a minimum of 2.25% down payment with the remaining .75% being applied toward FHA allowable closing costs or down payment. Over the years confusion around the term of investment and down payment have become blurred so most real estate professionals inform the public that FHA requires a 3% down payment.

VA Mortgage

No down payment is required if the eligible veteran has full guaranty benefits and his loan amount does not exceed $359,650. Don’t forget veterans can use their benefits more than once as long as they have sufficient guaranty benefits remaining.  (Higher loan amount is available with down payment but the amount needed could be as much as the minimum required for conventional loans).

Closing & Pre-Paid Costs

There are more costs to buying a home than just your down payment. In addition, a borrower is expected to pay their closing and pre-paid costs. The following information breaks down how each mortgage type will possibly affect you when preparing for cash needed to close your purchase. Since closing costs vary between lenders and costs may change, no specific amounts will be shown here. However, it is imperative that you compare these costs between lender.    Pre-Paid costs should not be confused with closing costs and they are fairly uniform between lenders. Pre-paid costs involve the prepayment of 15 months home owner insurance, 3 to 4 months property taxes, and interim interest from the date you close the purchase to the last day of that month. One other area to be aware of is the cash reserve requirements of each mortgage type (funds remaining in your asset accounts after you close out your purchase).

Conventional Mortgage

Conventional closing costs are not regulated by the government.  You should always contact your lender for an estimate. The lowest mortgage interest rate quoted could be offset by the highest closing costs. Check out the lender’s interest rate and closing costs. Contact us for an accurate estimate of your costs and available interest rates.

Helpful Tips:

Seller Contributions – Conventional Mortgage guidelines allow the seller to contribute or pay all or a portion of borrower’s closing and pre-paid costs. The percentage allowed is usually determined by the borrower down payment. The seller can pay up to 3% of sales price toward the borrower costs when the down payment is 0%, 3% or 5%. The seller can pay up to 6% of sales price when the down payment is 10% or greater. One special note, FNMA limits seller contributions to 2% if the mortgage is for an investor purchaser.  Consult with your realtor when you consider asking for seller contributions.

Lender Premium Pricing – A lender can pay a portion of the borrower costs through a higher rate on the mortgage. The amount paid when combined with any seller contributions usually can not exceed the limits shown for seller contribution above, i.e. combined seller and lender assistance may not exceed a total of 3% or 6% of sales price.

Loans Against Borrower Assets – A borrower may actually borrow all funds needed for down payment, closing, and pre-paid costs provided they are borrowed against an asset of the borrower such as 401K, stock or bond accounts, other real estate, etc.

Gifts – Gifts for funds to close are allowed provided the borrower demonstrates that 5% of funds needed are from their own resources. Gifts must usually be from a relative. (Exceptions are made.)

Second Liens – Second liens may be used to lower the amount of the first mortgage. This may be desirable because of mortgage insurance considerations. 

FHA Mortgage

Seller Contributions – The seller can contribute up to 6% of sales price towards buyers closing and prepaid cost. (Remember FHA requires the borrower to invest a total of 3%. If the seller pays all of your closing and pre-paid costs, your down payment would have to be 3%.)

Lender Premium Pricing – Same as conventional mortgage except lender and seller total can equal 6% of sales price.

Loans Against Borrower Assets – Same as conventional mortgage

Gifts – Gifts for funds needed for down payment, closing, and pre-paid costs may be obtained from a relative or someone with a clearly defined relationship. FHA allows “all” of the borrower’s down payment, closing, and pre-paid costs to be from a gift.

Wedding Registry – FHA allows a borrower to set up an account at a bank or credit union to receive cash wedding gifts to be used towards the purchase of their home.

VA Mortgage  (Veteran’s closing costs are limited by government regulation.)

Seller Contributions – All closing and pre-paid costs may be paid by the seller. The veteran with no down payment may virtually move in with no expense. Consult your realtor when you consider asking for seller contributions.

Lender Premium Pricing – Same as FHA mortgage
Loans Against Borrower Assets – Same as FHA mortgage
Gifts – Same as FHA mortgage

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Qualifying Income/Debt Ratios

Homebuyers are constantly reminded that in order to qualify for a home loan the mortgage payment must not exceed a percentage of their gross monthly income and their combined debt (mortgage payment, installment payments, and revolving payments) must not exceed a percentage of their gross income. What follows is a brief description of ratio guidelines for each mortgage type. Keep in mind these are only guidelines. Other loan factors, such as down payment or credit scores, will allow for Substantial Deviations. Do not use this information to discourage your mortgage application. For additional information please see the Automated vs. Traditional Approval Section. Better yet, let Milestone take the guess work out entirely with your Pre-Approval.

Conventional Mortgage – The standard for conventional loans is published by FNMA (Fannie Mae).

Mortgage Payment (PITI) should not exceed 33% of gross monthly income
Combined Debts (PITI, Installment, and Revolving Payments) should not exceed 41% of gross monthly income. Installment debts with greater than 10 months remaining and all revolving debt payments are to be included in this ratio.
Non conforming or Sub Prime loans may ignore income entirely depending upon credit scores and down payment.

FHA Mortgage

Mortgage Payment (PITI) should not exceed 29% of gross monthly income.
Combined Debts (PITI, Installment, and Revolving Payments) should not exceed 41% of gross monthly income. Installment debts with greater than 10 months remaining and all revolving debt payments are to be included in this ratio.

VA Mortgage

Combined Debts (PITI, Installment, and Revolving Payments) should not exceed 41% of gross monthly income.

Residual Income VA computes residual income by subtracting PITI, Installment and Revolving payments, Social Security withheld, Federal Income Tax withheld, and estimated utilities and home maintenance costs from the veteran’s gross monthly income. The income remaining after this process is referred to as the Residual Income and is compared to VA requirements are a sliding scale based upon the number of persons in a family. The larger the family the more residual income is required. From a qualifying standpoint, the VA places more weight on the Residual Income guideline.

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Co-Signer/Co-Borrower

Conventional Mortgage*
All income from a qualified occupant co-signer/co-borrower may be counted towards the approval process. Their installment and revolving debts must be included as well.
Income from a non-occupant co-signer/co-borrower is of limited value in the approval process. Their installment, revolving, and present mortgage or rental debt must be included as well.

FHA Mortgage*
All income from a qualified occupant co-signer/co-mortgagor may be counted towards the approval process.
All income from a qualified non-occupant co-signer/co-borrower may be counted towards the approval process. Their installment, revolving, and mortgage or rental debt must be included as well.

VA Mortgage*
All income from a qualified occupant co-signer/co-borrower may be counted towards the approval process provided they are the spouse of the veteran or another veteran. A veteran purchasing with their VA benefits must owner occupy the property.
Non-occupant co-signer/co-borrower may not be used to qualify for the VA mortgage.

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Credit Scores

Credit Scores have become the hot topic in the mortgage industry and play a major role in the approval process of your mortgage application. Each individual typically has three credit scores obtained from three major credit agencies, Transunion, Equifax, and Experian. For the history of credit scoring and basic information on how they are compiled, please see the News and Views section of this site for the details.

Conventional Mortgage
FNMA sets the industry standard. Their general guidelines call for your middle credit score to be 620.

For a FNMA conventional loan you will normally need 2 scores
Borrowers with lower credit scores may still obtain approval through the FNMA Expanded Approval process or from “Sub Prime” programs.

For FNMA type loans, Chapter 13 bankruptcies must be two years from date of discharge and Chapter 7 must be 3 years from date of discharge. Credit history since discharge must be paid as agreed. Exception to these time frames are possible but may involve Expanded or Sub Prime loan rates.

Note: If one of the borrowers participating in the purchase has low credit scores, you can exclude them from the approval process provided you are not trying to include their income to qualify. Any monthly installment and revolving debt they have "will not be counted" in the Debt Ratios.

FHA Mortgage
FHA has no stated minimum credit score. However, experience indicates once your credit scores drop below 600, your approval may be more difficult to obtain.
FHA does not require that you have any credit scores. Credit analysis may be completed using “ Alternate Credit” sources such as Rental Payment history, Car Insurance payment history, Utility Bill payment history, etc.

Chapter 13 bankruptcies must be paid as agreed for 12 months and a letter from trustee permitting your mortgage application obtained to apply for a FHA home loan. Chapter 7 must be discharged two years. Credit histories since discharge date should be paid as agreed.
Note: If one of the borrowers participating in the purchase has low credit scores, you can exclude them from the approval process provided you are not trying to include their income to qualify. Any monthly installment and revolving debt they have "will be counted" in the Debt Ratios.

VA Mortgage
VA has no stated minimum credit score. However, experience indicates once your credit scores drop below 600, your approval may be more difficult to obtain.

VA does not require that you have any credit scores. They allow “Alternate Credit” to be used similar to FHA Borrowers with prior bankruptcies must meet guidelines similar to FHA.
Note: If one of the borrowers participating in the purchase has low credit scores, you can exclude them from the approval process provided you are not trying to include their income to qualify. Any monthly installment or revolving debt they have" will be counted" in the Debt Ratios.

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Mortgage Insurance

Lenders reduce their exposure to loan defaults by obtaining mortgage insurance or guaranty. The amount and cost depend upon the type of loan chosen.

Conventional Mortgage –

If the borrower is making less than a 20% down payment, the lender requires the loan to be insured by a private mortgage insurance company (hence the term “PMI”). The amount of mortgage insurance is usually added to the monthly payment. Insurance costs are determined by down payment, length of the loan, interest terms of the loan, fixed vs. adjustable, and most recently your credit scores.

You may be able to eliminate PMI entirely with the use of second lien financing. For example, making a 5% down payment and combining it with a 15% second lien, your first lien is now 80% of the sales price and mortgage insurance is not needed. This loan structure has grown popular for several reason:

1. The interest on the second lien is tax deductible while the PMI costs are not. PMI may become tax deductible at a later date if legislation before Congress is enacted.

2. The second lien is usually based on a 15 year term which allows a more rapid build up of equity.

3. The second lien may sometimes be used as a bridge loan. For instance, you’re selling another property or expect to receive a large sum of money from another source either of which will occur after you close on the purchase of your home. With the added funds, you can payoff the second lien leaving only your lower first lien payment (with no PMI). Without the second lien, you could still prepay these funds against principal but your mortgage payment stays the same.

FHA Mortgage -
The Federal Government insures loans against default through the Federal Housing Administration. This agency insures 100% of the principal on loans made under their guidelines. FHA insured loans have an up front insurance premium which is usually added to the loan amount. A monthly premium is also added to the borrowers total payment (FHA hits the borrower twice).

Calculating the Up Front Premium:

30 Year / Fixed Rate Loan = 1.50% X Loan Amount = Premium

15 Year / Fixed Rate Loan = 1.50% X Loan Amount = Premium

Calculating the Monthly Premium:*

30 year / Fixed Rate Loan = .50% X Base Loan Amount = Annual Premium/12 mos. = Monthly Premium

15 Year / Fixed Rate Loan = .25% X Base Loan Amount = Annual Premium/12 mos. = Monthly Premium

*The base Loan Amount is the loan amount before adding the Up Front Premium.

VA Mortgage -
The Dept. of Veteran’s Affairs guarantees a veteran’s loan against default. Although they do not have an insurance premium, it charges the veteran a Funding Fee of 2.15% X Loan Amount if it is the first use of housing benefits by the vet. The Funding Fee is 3.35% if the veteran is using their benefits for the second or more time. The Funding Fee may be added and financed in the VA loan.

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Automated vs. Traditional Approval

The mortgage approval or underwriting process has evolved into two methods:
Automated Underwriting - This method employs a computer to analyze the borrower's income, assets, liabilities, and credit scores. This process is usually done on one of two systems, DO/Desk Top Originator (FNMA) or LP/Loan Prospector (FHLMC). To take full advantage of the small but important differences in these systems, Milestone uses both DO and LP.

Advantages of Automated Underwriting:

Speed - Once the income, assets, liabilities, and credit scores have been entered, the loan approval is available within seconds

Flexibility - The affects of minor changes to down payment, income, cash reserve, or liabilities can be seen instantly. What would happen if your down payment increased by $500 or you paid off a small debt? Your answer is back in seconds.

Qualifying Income/Debt Ratios - The mortgage payment and total debt to income ratios mentioned earlier are frequently exceeded by the automated underwriting process based upon credit scores, assets, etc.. Deviations are far greater than permitted under the traditional underwriting process.

Traditional Underwriting - Traditional underwriting means a loan is underwritten by a human who brings to the process all their personal bias and focus on the text book treatment of debt ratios and credit scores. Your mortgage lender should only be using this as a quality control method for checking and certifying data entered under the automated system and when errors occur in the Automated Analysis. Since FHA and Va do not require credit scores, alternate credit referrals may be used such as Rental History, Car Insurance and Utility Payment Histories, etc.. Traditional Underwriting would be used when you have a FHA or VA mortgage with no credit scores.

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Fixed Rate Loan vs. Adjustable Rate Loan

A fixed rate loan implies that the interest and principal portion of your payment remains constant for the life of the loan while an adjustable rate loan implies periodic changes to your interest rate and your payment. In choosing an adjustable rate loan, you must determine the frequency of rate changes and the amount. The following should assist you in asking the right questions regarding an adjustable rate:

Adjustment Period – This refers to how often your loan can be adjusted. You’ll commonly hear these loans referred to as 1/1, 5/1, 7/1, 10/1, etc.. A 1/1 loan means that it adjusts once every year for the life of the loan. A 5/1 loan means that the loan will remain at the initial rate for the first 5 years and thereafter adjust every 1 year for the remainder of the loan.
Initial Rate – The rate at which the loan begins

Market Index – The benchmark rate that is used each time your loan comes up for adjustment( 1 year T-bill, Cost of Funds Index, etc. )
Margin – The lender adds a pre-determined amount (margin) to the market index to arrive at the new rate for your loan

Rate Change Limits – Each adjustable rate loan should have maximum change limits to the rate for each adjustment and a limit to the total change over the life of the loan

When choosing an adjustable rate loan, you assume a degree of risk but it could still present you with a better choice than a fixed rate depending upon length of time you’ll live in the home, the current rate environment, etc. I hope this information will help you ask the right questions when researching adjustable rate loans. Contact your mortgage expert, John, for assistance.

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First Time Homebuyer Programs

First Time Homebuyer Programs fall into three categories:

Mortgage Credit Certificates (MCC) which allow the borrower to deduct a portion of their annual mortgage interest payments as a credit against income taxes owed on your tax return. The benefits of this are much greater than simply taking an itemized deduction for the annual interest paid. Any portion of the annual interest paid which can not be taken as a credit may still be shown in itemized deduction section of your tax return.

Mortgage Bond Programs refer to loan programs that offer mortgage funds obtained from the sale of tax exempt bonds. The proceeds from the bond sale are used to provide the borrower with below market rates of interest loans and/or down payment and closing cost assistance.

Grant Funds are just as their name implies, outright grants from non-profit entities that may be used for down payment and/or closing costs. A portion of the grant may have to be repaid if the property is sold within a stated period of time.

First Time Homebuyers are defined as those individuals who have not had an ownership interest in a home within the last three years. These programs may be sensitive to the borrower's gross annual income and are available only in specific geographic areas. They do not follow any time table as to availability so a borrower must keep close watch on news publications or contact the agencies running the programs for details. The two most common agencies in the Houston area are Housing Opportunities of Houston and Southeast Texas Housing Finance Corp.

With interest rates at 40 year lows, FHA and 0% down Conventional loans allowing seller and lender contributions, the popularity of First Time Homebuyer Programs is down.

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Mortgage Broker vs. Mortgage Banker

As a mortgage broker, Gulf Coast Mortgage is subject to numerous federal and state regulations including net worth requirements and annual audit. A mortgage broker initiates the loan application and obtains your mortgage approval similar to mortgage bankers.  Both lender types use the automated underwiritng process mentioned above.  In many cases, a mortgage broker will have a greater selction of investors and mortgage programs to choose from.  In addition, our interest rates and closing costs are extremely competitive.  Gulf Coast Mortgage and I work for you from application through closing.