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A Crucial Step in Qualifying for a Mortgage Is Getting Preapproved

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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Buying a home can be a fulfilling yet frustrating experience. There’s a whole lot more involved than looking at well-staged photos online for hours at a time and then landing the home of your dreams.

One of the most important but overlooked to-dos of homebuying is demonstrating to potential lenders that you’re a creditworthy borrower. One of the best ways to do this is by getting a mortgage preapproval. Here, we’ll break down the preapproval process and explain what you can generally expect.

What is mortgage preapproval?

A mortgage preapproval is a conditional green light from a mortgage lender that you’re eligible to borrow a certain amount of money for a home purchase. Lenders share this information in writing, so you’ll often hear this referred to as a “preapproval letter.”

A mortgage preapproval is different from a mortgage prequalification, though the terms are sometimes used interchangeably. A prequalification provides a rough estimate of how much you might qualify for and comes from a surface-level review of your financial information.

A preapproval is more involved and gives you a more accurate idea of what a lender will offer in terms of a loan amount and interest rate. It also illustrates to home sellers that you’re a legitimate buyer — giving you a leg up in the bidding process.

How to qualify for a mortgage

In order to get preapproved for a mortgage, you first must qualify for one. Potential borrowers interested in a conventional mortgage are generally expected to meet the following requirements:

  • Provide at least a 3% down payment. The loan-to-value ratio — which is a calculation of the mortgage amount divided by the home’s price tag — can’t exceed 97%.
  • Have a minimum credit score of 620. Keep in mind that if your score is on the lower end, you’ll be required to provide a higher down payment at closing.
  • Have a maximum 45% debt-to-income ratio. There’s a threshold on how much of your gross monthly income can go to debt payments to qualify for a mortgage. In some cases, that ratio is capped at 36%, but the overall maximum across mortgage products is generally 45%.
  • Prepare to pay private mortgage insurance. If you put down less than 20% of the purchase price, you’ll pay PMI monthly. This is in addition to your mortgage payment.

There are also employment and income documentation requirements.

Government programs offer slightly more lenient guidelines for certain borrowers. FHA loans are available to people with credit scores as low as 580, and VA loans offer zero-down payment loans to military members and veterans.

The Home Possible® and HomeReady® homebuying programs offered by government-sponsored enterprises Freddie Mac and Fannie Mae also help low- to moderate-income borrowers looking for a conventional loan. It’s important to note that Fannie and Freddie don’t lend directly to borrowers; you’ll need to work with an approved lender to apply for a loan.

How to get preapproved for a mortgage

If you’re confident that you qualify for a mortgage, you can move on to getting preapproved. Here’s a rundown of what you need to know.

When to get preapproved for a mortgage

The best time to seek a mortgage preapproval is when you think you’re ready to buy a house, but before you start spending tons of time house hunting. That’s because it’s not worth falling in love with a home that’s outside the price range you can realistically afford.

Depending on the lender’s process and how quickly you submit the requested documents, a mortgage preapproval can be issued in as little as 24 hours.

Where to get preapproved for a mortgage

There are several types of financial institutions that offer mortgage preapprovals:

  • Banks
  • Credit unions
  • Mortgage brokers
  • Mortgage lenders

Depending on the institution, you may be able to submit your documents electronically for a mortgage preapproval. Check with individual lenders to learn more about their process.

Compare offers with LendingTree

It works in your favor to get multiple mortgage preapprovals — at least two or three. Before you commit to one lender, you want to be sure you’re getting the best available terms for your financial situation. According to LendingTree, which owns MagnifyMoney, homebuyers stand to save more than $27,000 in interest over the life of a $300,000 loan by comparison shopping for the best mortgage interest rates.

LendingTree makes it easy to compare mortgage offers from multiple lenders. It only takes a few minutes to input your information into their secure tool and you will be able to compare the rates and terms of multiple preapproval offers. This is by far the easiest way to make sure your are getting the best deal on your mortgage.

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What you need to get preapproved

Lenders will request several documents and types of information from you for a mortgage preapproval. Those items typically include:

  • Government-issued photo ID, like a driver’s license
  • Social Security number
  • 2 months of bank statements
  • 1 month of pay stubs
  • 2 years of W-2 or 1099 tax forms
  • Credit reports and scores from all three bureaus

This information helps lenders determine your debt-to-income ratio, creditworthiness and ability to repay if they lend you money.

Advantages of getting preapproved for a mortgage

A mortgage preapproval is close to a must-have for potential homebuyers. Here are some reasons why it’s an important step in the homebuying process.

  • You get a solid idea of the loan you’d qualify for, which makes it easier to determine how much house you can afford.
  • Home sellers will take you more seriously as a potential buyer and will be more comfortable accepting your offer.
  • Lenders are giving you a vote of confidence that you’re more than likely eligible to borrow money from them.
  • You’re given an opportunity to compare interest rates before committing to a specific lender.
  • You’re presented with a picture of where you stand financially and what short-term improvements to your credit you can make before closing, such as paying down more of your debt.

Things to watch for when getting preapproved for a mortgage

There are some caveats to mortgage preapproval, however.

  • A preapproval is not a guarantee that you’ll get a loan from the lender that issued it. Getting preapproved is conditional.
  • There should not be major changes to your financial situation between the time you’re preapproved and when you decide to move forward with a particular lender. Don’t apply for new credit such as an auto loan or credit card, change jobs or take any other action that would affect your eligibility.
  • Preapprovals aren’t indefinite — they often last for about 90 days. You’ll have to go through the process again if you haven’t closed on your home by the time your preapproval expires.

What happens after preapproval?

Once you have your home picked out, then it’s time to complete a full mortgage application.

After you submit your mortgage application, the lender has three days to provide you with a Loan Estimate, which tells you the estimated loan amount, interest rate, closing costs, monthly payment and taxes for your mortgage, among other important details. .

You’ll want to submit mortgage applications for at least two or three lenders and compare the Loan Estimate document you receive from each. Pay attention to all the estimated costs and fees associated with the mortgage transaction to make sure you choose the best deal.

When you’ve made a choice, you’ll need to express your “intent to proceed” with your chosen lender. Notify the lender within 10 business days of receiving your Loan Estimate, according to the Consumer Financial Protection Bureau. You would then provide the lender with additional documentation related to your credit, income, proof of down payment funds and whatever else they require. After that, your loan goes through the underwriting process. You’ll get the property appraised and inspected during this period, as well.

If all goes well and you’re granted full approval, then you’re ultimately scheduled for a final walk-through and closing.

The bottom line

Getting a mortgage preapproval is a crucial step in the homebuying process, but it doesn’t mean you’re in the clear to borrow from a lender just yet. Having a preapproval letter does give you a leg up over the competition, however.

Be sure you’re in the best financial shape possible before you reach out to lenders to begin the preapproval process. Pay down your outstanding debt, clean up any blemishes or errors on your credit report and find ways to increase your available down payment.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Crissinda Ponder
Crissinda Ponder |

Crissinda Ponder is a writer at MagnifyMoney. You can email Crissinda here

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Guide to Getting a Federal Housing Administration (FHA) Mortgage

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Couple Celebrating Moving Into New Home With Champagne

Not all homebuyers have the money to make a traditional 20% down payment. The perception that you need one is one of the main financial obstacles that can discourage people from pursuing homeownership.

In reality, there are several options for buyers who want to get a mortgage but can only pull together a small down payment. One of the best ones, particularly for first-time homebuyers, is an FHA loan.

This article offers you a guide to getting an FHA mortgage, including details on how to qualify and the costs to consider.

Understanding the FHA mortgage program

FHA mortgages are insured by the Federal Housing Administration (FHA), part of the U.S. Department of Housing and Urban Development. The program is a key way that people of moderate income can become homeowners. Nearly 83% of homeowners who borrowed an FHA loan in 2018 were first-time homebuyers, according to a report from HUD.

FHA mortgages are funded by FHA-approved lenders and then insured by the government. This backing protects lenders from loss if borrowers default. Because of this protection, lenders can be more lenient with their qualifying criteria and can accept a significantly lower down payment.

You can get approved for an FHA mortgage with as little as a 3.5% down payment and a credit score of 580. You may also qualify with a credit score as low as 500, though you’ll need to put down 10% instead.

On a $200,000 home, that comes out to a down payment of $7,000 to $20,000 when taking out an FHA loan, depending on your credit score.

Keep in mind you’ll also be responsible for closing costs, which typically cost 2% to 5% of a home’s purchase price. Closing costs are necessary to complete your transaction, and include services such as appraisals and home inspections. However, you may be able to negotiate to have some of these costs covered by the seller.

Is an FHA loan right for you?

FHA loans are particularly suited for several different types of homebuyers.

First-time homebuyers, who often have lower credit scores and smaller available down payments, tend to gravitate to FHA loans. Additionally, boomerang buyers — people who lost a home in the past due to a bankruptcy, foreclosure or short sale — might also benefit from an FHA loan.

Negative credit events such as foreclosure can drop credit scores by more than 100 points in many cases, and there’s typically a waiting period of three years before you’re eligible to buy a home again. Once that’s up, the lower credit score requirements of the FHA loan program could help you become a homeowner again.

Types of FHA mortgages

The FHA offers both 15- and 30-year mortgages, each with fixed rates or adjustable rates.

With a fixed-rate FHA mortgage, your interest rate is consistent through the loan term. You know what your principal and interest payment will be for the life of the mortgage. However, your overall monthly payment may increase or decrease slightly based on your homeowners insurance, mortgage insurance premium and property taxes.

Adjustable-rate FHA mortgages start out with a low and fixed interest rate during an introductory period of time, usually five years. Once the introductory period ends, the interest rate will adjust annually, which means your monthly mortgage payments may increase based on market conditions.

A unique situation where signing up for a low, adjustable-rate FHA mortgage could make sense is if you plan to sell or refinance the home before the introductory period ends and the interest rate changes. Otherwise, a fixed-rate FHA mortgage has predictable principal and interest payments and may be the better option.

FHA loan limits

The FHA imposes a limit on the amount of money that homebuyers are allowed to borrow each year. For 2019, the FHA loan limits for one-unit properties are $314,827 in most U.S. counties and $726,525 for high-cost areas. You can find your county’s loan limit information for one- to four-unit properties by using the FHA’s lookup tool.

Qualifying for an FHA loan

Besides the low down payment, an undeniable benefit of the FHA mortgage is the low credit score requirement. You may qualify for a 3.5% down payment with a credit score of 580 or higher. You can qualify with a minimum credit score of 500, but you’ll have to make at least a 10% down payment.

Your debt-to-income (DTI) ratio is another key metric lenders use when determining whether you can afford a mortgage. DTI measures the percentage of your gross monthly income that is used to repay debt. Lenders consider two DTI ratios when determining your eligibility — the front-end (housing debt) ratio and the back-end (total debt) ratio.

Your front-end ratio is the percentage of your income it would take to cover your total monthly mortgage payment. Lenders typically like to see a front-end ratio of no more than 31%.

Your back-end ratio illustrates the percentage of your income that covers your total monthly debts. Lenders prefer a back-end ratio of 43% or less, but may approve a higher ratio if you have compensating factors, such as a higher credit score or a larger down payment.

You’ll also need to have a steady income and proof of employment for the last two years. Additionally, the home you’re purchasing via FHA must also be your primary residence, at least for the first year.

FHA mortgage insurance

At first glance, an FHA mortgage probably seems like the ultimate hack to buying a home with minimal savings. The flip side to this is you must pay mortgage insurance premiums (MIP) in exchange for your lower down payment.

Remember, FHA-approved lenders offer mortgages that require less money down and flexible qualifying criteria because the Federal Housing Administration will cover the loss if you default on the loan. The government doesn’t do this for free.

FHA mortgage borrowers must “put money in the pot” to cover the cost of this backing through upfront and annual mortgage insurance premiums. The upfront insurance premium costs 1.75% of the loan amount and can be rolled into your mortgage balance.

The annual mortgage insurance premium is divided into 12 installments and paid monthly as part of your mortgage payment. The annual premium ranges from 0.45% to 1.05%, based on your loan term, loan amount and loan-to-value ratio (LTV).

Your LTV is a metric that compares your loan amount to your home’s value. It also represents the equity you have in the property. For example, putting 3.5% down means your LTV would be 96.5%. In other words, you have 3.5% equity in the home, and your loan is covering the remaining 96.5% of the home value.

Here’s the annual MIP on a 30-year FHA mortgage (for loans less than or equal to $625,500):

  • LTV over 95% (you initially have less than 5% equity in the home) – 0.85%
  • LTV under 95% (you initially have more than 5% equity in the home) – 0.8%

As you can see, starting off with a smaller down payment will cost you more in mortgage insurance premiums. Additionally, in most cases, you’ll pay annual MIP for the life of your loan.

However, if your LTV was less than or equal to 90% at time of origination — meaning you made a down payment of at least 10% — you can cancel MIP after 11 years.

FHA loans vs. conventional loans

Government-backed home mortgages like the FHA loan are special programs serving borrowers who might not qualify for a traditional mortgage.

Conventional mortgages are offered by lenders and banks and typically follow Fannie Mae and Freddie Mac’s mortgage standards. Fannie and Freddie are government-sponsored enterprises that buy loans from mortgage lenders and banks that fit their requirements.

The qualifying criteria bar for conforming loans is usually set higher. For instance, you typically need to have at least a 620 credit score to qualify for a fixed-rate conventional loan. However, credit score minimums vary by lender, but in any case, a score above 620 will be necessary for the most competitive interest rates.

A misconception about conventional mortgages is that borrowers must have 20% for a down payment to qualify. Mortgage lenders may accept less than 20% down for a conventional mortgage if you have a high credit score and pay their version of mortgage insurance premiums, which is called private mortgage insurance (PMI).

Similar to FHA mortgage insurance, PMI is a private insurance policy that protects the lender if you default. Be careful not to confuse the two types of insurance policies.

If you have PMI on a conventional mortgage, you’re able to request the removal of those insurance payments when you build up 20% equity in your home. On the other hand, the mortgage insurance premiums for most new FHA mortgages can’t be removed unless you refinance.

When to choose a conventional mortgage instead

Choosing an FHA loan can be a shortcut to homeownership if you don’t have much cash saved or the credit history to get approved for a conventional mortgage. Still, the convenience comes at a price that can follow you for the entire loan term.

Furthermore, putting a small sum down on a home means it will take you quite some time to build up equity. A small down payment can also increase your monthly payments and interest rate.

Homebuyers with a strong credit score should consider saving a bit more money and shopping for a conventional home loan first before thinking an FHA mortgage is the only answer to a limited down payment.

If you plan to put down at least 5% toward your home purchase and have a good or excellent credit score, it might make sense to borrow a conventional mortgage instead. A conventional home loan with PMI may not require the same upfront insurance payment as the FHA home loan, so you can find some savings there. Plus, you’re capable of getting rid of PMI without refinancing.

There are a few conventional mortgage programs that allow a 3% down payment, including Fannie Mae’s HomeReady program and Freddie Mac’s Home Possible program. These products also have cancellable mortgage insurance.

Shopping for an FHA loan

So, you’ve reviewed all the information and determined that an FHA loan is right for you. Once you’re ready to start the homebuying process, one of the most important things on your to-do list is shopping around.

Gather quotes from multiple FHA-approved lenders to find the most competitive rate. If you’re unfamiliar with the approved lenders in your area, you can use the HUD’s lender list search to locate them.

Comparison shopping for the best mortgage rate can save you thousands in interest over the life of your loan, according to research from LendingTree, which owns MagnifyMoney. Be sure you also compare the various other costs associated with borrowing a mortgage, including lender fees and title-related expenses.

Don’t rush to a decision. If you’re still not sure which mortgage type will be the most cost-effective for you, ask each lender you shop with to break down the costs for a comparison.

This article contains links to LendingTree, our parent company.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Crissinda Ponder
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Crissinda Ponder is a writer at MagnifyMoney. You can email Crissinda here

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2019 FHA Loan Limits in Wyoming

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

If you’re looking to buy a house in Wyoming, you probably already know the state boasts the nation’s smallest population and the lowest population density. Its rural nature makes Wyoming the perfect place for homeowners who want to enjoy the natural wonders of the West without living right on top of their neighbors.Wyoming is also a state where homeownership is a reality for a large portion of the population: The U.S. Census Bureau estimates that more than 69% of the homes in the state are occupied by their owners.

So how do you make your Wyoming homeownership dreams come true? One popular option is a loan backed by the Federal Housing Administration (FHA). Last year, 0.23% of the nation’s FHA loans originated in Wyoming, where buyers took advantage of the federal backing to access benefits like lower interest rates and smaller down payments.

But keep in mind that FHA loans are subject to limits on the amount you can borrow. Those limits change every year to keep up with housing prices across the country. This year, FHA loan limits have climbed in Wyoming, allowing potential buyers who qualify for an FHA loan to borrow up to $314,827 for a single-family home.

Wyoming FHA Loan Limits by County

County NameOne-FamilyTwo-FamilyThree-FamilyFour-FamilyMedian Sale Price
ALBANY$314,827 $403,125 $487,250 $605,525 $239,000
BIG HORN$314,827 $403,125 $487,250 $605,525 $139,000
CAMPBELL$314,827 $403,125 $487,250 $605,525 $228,000
CARBON$314,827 $403,125 $487,250 $605,525 $174,000
CONVERSE$314,827 $403,125 $487,250 $605,525 $207,000
CROOK$314,827 $403,125 $487,250 $605,525 $199,000
FREMONT$314,827 $403,125 $487,250 $605,525 $77,000
GOSHEN$314,827 $403,125 $487,250 $605,525 $159,000
HOT SPRINGS$314,827 $403,125 $487,250 $605,525 $157,000
JOHNSON$314,827 $403,125 $487,250 $605,525 $225,000
LARAMIE$314,827 $403,125 $487,250 $605,525 $243,000
LINCOLN$314,827 $403,125 $487,250 $605,525 $253,000
NATRONA$314,827 $403,125 $487,250 $605,525 $215,000
NIOBRARA$314,827 $403,125 $487,250 $605,525 $165,000
PARK$314,827 $403,125 $487,250 $605,525 $241,000
PLATTE$314,827 $403,125 $487,250 $605,525 $175,000
SHERIDAN$314,827 $403,125 $487,250 $605,525 $253,000
SUBLETTE$314,827 $403,125 $487,250 $605,525 $235,000
SWEETWATER$316,250 $404,850 $489,350 $608,150 $259,000
TETON$726,525 $930,300 $1,124,475 $1,397,400 $789,000
UINTA$314,827 $403,125 $487,250 $605,525 $206,000
WASHAKIE$314,827 $403,125 $487,250 $605,525 $173,000
WESTON$314,827 $403,125 $487,250 $605,525 $184,000

How are FHA loan limits calculated?

FHA loans are backed by the federal government, and it sets the loan limits.

The government sets a floor limit, which is the maximum amount that buyers are allowed to borrow in areas deemed “low cost.” It also sets a ceiling limit, the maximum amount an eligible buyer can access in an area that’s considered “high-cost.”

The FHA bases its figures on the conforming loan limit — the biggest loan that Fannie Mae and Freddie Mac will buy — with the floor set at 65% of the conforming loan limit, and the ceiling at 150%.

All 23 counties in Wyoming are considered low-cost, and therefore have the loan limit of $314,827.

These are the limits that the FHA has set for low-cost areas across the United States this year:

  • One-unit: $314,827
  • Two-unit: $403,125
  • Three-unit: $487,250
  • Four-unit: $605,525

These are the limits set for high-cost areas across the USA in 2019:

  • One-unit: $726,525
  • Two-unit: $930,300
  • Three-unit: $1,124,475
  • Four-unit: $1,397,400

Are you eligible for an FHA loan in Wyoming?

Of course, just buying a house in Wyoming won’t guarantee you a $314,827 mortgage, nor does it grant you access to an FHA loan. There are requirements to meet regarding your credit score, debt-to-income ratio and other factors. You can find out more in MagnifyMoney’s complete guide to FHA loans.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Jeanne Sager
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Jeanne Sager is a writer at MagnifyMoney. You can email Jeanne here

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