Although banks are hungry for the amount of business they had before 2008, they are still required to hold their ground with some regulations that are cutting their own throats. Over the last two months, I have interviewed over twelve (12) banks and lending agencies for loan requirements for my own use and found some hefty requirements.
Banks do one of two things with a loan they create. They sell it on the primary market or keep the loan “in house,” meaning they receive the payments and earn the interest themselves. Most of your smaller community banks keep loans “in house,” which means they can make their own rules about the requirements for approving a loan. The rest are sold to Freddie Mac or Fannie Mae, which tell the banks the criteria of the loans they will buy.
All banks differ a little in the home loan requirements, but as of this posting, these are the basic minimum requirements for getting a loan approved at the majority of banks.
Requirements for standard homes:
- Debt to income ratio of 38% (no more than 38% of your monthly income goes out in debt payments, i.e. car loan, credit cards, mortgage, etc.)
- Credit score of 640 or better. Some will go as low as 580, but the interest rate is much higher. WARNING: Do not let them run your credit until they run your financial figures first. Know what your credit score is and ask them if they can offer a loan program based on those numbers. If they can offer something, then let them run your credit to verify the score and credit history you should have already told them about.
- Bankruptcy – FHA loans require two years’ time after discharge date. If any real estate was lost in the bankruptcy, they require three years from discharge. Most banks are requiring two forms of credit established after the bankruptcy for a twelve (12) month period. Any car loan, credit card or gas card will work.
- Rural real estate – Many banks I talked to require 51% of the total value of the property be in the home/improvements. Some would not create a loan that encumbers more than 10 acres.
- Mobile homes – FHA loans will only be approved on mobile homes that have a permanent foundation and have not been moved from its original location. I bought a foreclosure and moved it to another property; FHA would not approve it for a refinance. Dumb rules, I know.
- Down payment – Most banks only loan up to 80% for “in-house” loans. Loans being sold as FHA or conventional loans finance up to 90%. FHA first home program can approve 97%, if you can qualify.
- Lines of Credit – My favorite. Most banks require the same financial numbers as an “in-house” loan and those that do home equity lines of credit (HELOC) will loan up to about 60-75% of the value of an investment property or 80% of your primary residence. Some banks will approve a line the day after purchase of a house if you paid cash. The rest require six (6) months to a year of owning the property before they approve a line of credit, whether it is your primary residence or an investment property.
Just remember, bigger banks are more strict with the rules, but they loan a higher percentage of the value. Smaller banks do more in-house financing and are less strict, but they don’t loan as much on a house. Know your finances and your credit score before you call and the conversation will go much smoother. Good luck.
*These are the opinions of the writer. This article is for informational purposes only. Consult a professional.
