FHA and VA Loans Might Put Ownership in Reach

Buying a home might be a pretty conventional act, but financing one doesn’t have to be. Loans backed by federal agencies can be a big help if you’re low on cash or your credit score isn’t where you or a conventional lender would like it to be. There’s even a loan that can help you buy a genuine fixer-upper that many lenders won’t touch. So who qualifies, and what are the benefits of these special programs? One thing to note is that the following mortgages are only for the purchase of owner-occupied homes, not investment or rental properties. Beyond that, the requirements vary depending upon the program. Here are some answers to non-conventional mortgage questions.

FHA loans

Despite the name, an FHA loan isn’t issued by the Federal Housing Authority, but it is backed by the federal government. Because your lender knows that the government is guaranteeing the loan, the credit requirements aren’t quite as strict as with a conventional loan. Rates are as good or better than with conventional loans, and you can get an FHA loan with as little as 3.5 percent down. Not every lender offers FHA loans, but you can find several on Zillow by simply getting a rate quote for a mortgage with less than 20 percent down. How much can you borrow with an FHA loan? That varies by state and county, but it’s easy to check the limit for your location.

So why doesn’t everyone get an FHA loan? Because there are some costs. You won’t have to pay for private mortgage insurance as you would with a conventional loan when you put less than 20 percent down, but you will be paying in other ways. FHA loans require an upfront mortgage insurance premium (MIP) of 1.75 percent of the loan. Despite the name, you can roll that into your monthly payments. In addition, your annual MIP is paid each month, and the rate for that varies.

If you pay less than 10 percent down, and your loan was originated on or after June 3, 2013, that monthly MIP never goes away. To stop paying it, you’ll have to refinance to a conventional loan. If you put more than 10 percent down, your are required to pay the MIP for 11 years. You can check out the schedule here.

VA loans

One way to get a zero-down mortgage is through a VA loan. So what is a VA loan? Like the FHA, the U.S. Department of Veterans Affairs doesn’t actually make loans, but it does guarantee them. To get a VA-backed loan, you need qualify for the benefit and to go to an approved lender. You can find a VA lender easily here.

Although eligibility is determined by the VA, you may qualify if you are an honorably discharged veteran or an active member of any branch of the U.S. armed service, or if you are the spouse of either a veteran killed in the line of duty or an active duty member who is listed as MIA or POW.

The service thresholds vary, particularly for those who served in the National Guard or Reserves. You can find them on the Zillow VA loan FAQ page. You will also need a Certificate of Eligibility. You can either ask your lender to obtain your COE or you can get it for yourself from the VA’s ebenefits portal online.

How much house can you buy with a VA loan? In most areas, the VA puts a limit of $417,000 on its loans. But in certain high-cost parts of the country the limit is higher. You can find the limit in your county here.

In addition to the zero-down option, VA loans do not require you to pay any kind of mortgage insurance, even when borrowing 100 percent of your home’s value. As with many things, there is a catch — but it’s relatively small. In addition to the closing costs associated with every home loan, there is a VA funding fee. However, that can be financed or rolled into your monthly payment, and some veterans may even be exempt.

FHA 203k (fixer-upper loans)

Buying a fixer-upper that’s seen better days and turning it into your dream home can become a nightmare if you don’t have a good chunk of cash for repairs stashed away. That’s where the FHA 203k loan can help. You have to meet the usual FHA requirements, but with this loan you can get extra cash upfront to finance everything from new floors to a new roof.

You can get a loan for either the as-is value of the property plus repair costs or 110 percent of the estimated value of the home once repairs are complete, whichever is less. If your fixer-upper needs more modest repairs, you can get a streamlined 203k. This loan will get you the purchase price plus up to $35,000 for things like new appliances or carpets. But don’t get too fancy. You can’t use it to add luxuries like a swimming pool.

The catch? Not all properties will qualify and the application process isn’t as easy as slapping on a fresh coat of paint. You can find more details on the HUD site.

USDA loans

The other zero-down option is a loan backed by the U.S. Department of Agriculture. These loans are for low- to moderate-income buyers looking to purchase a home in rural area. The applicant may not exceed income limits and the dwelling must be “modest, decent, safe and sanitary.”

Also, as always, you must demonstrate an adequate ability to repay the loan. The USDA website will help you determine if you or the area you want to purchase will qualify.

Source: zillow.com

FHA First-Time Home Buyer Loans: The Pros vs. the Cons

The FHA first-time home buyer loan program makes life a lot easier if you’re just starting out in the homebuying process.  The federal government and most states offer insured home loans tailored to first-time homebuyers. These loans offer attractive benefits that can make the home-buying experience less costly and less restrictive. But they aren’t for everyone.

What is an FHA first-time homebuyer loan?

FHA first-time homebuyer loans offer a low down payment, reduced interest, limited fees and the possibility of deferring payments. These types of loans are offered at a federal level by the Federal Housing Administration and by most states.

The FHA defines a first-time homebuyer as a person who has not owned a home for three years. This includes single parents and displaced homemakers who only owned a house previously with a spouse.

The FHA insures lenders against potential default and requires a minimum credit score of 580 or above for a loan with a down payment of 3.5%. Most lenders, though, require a credit score of 620 or 640 and above to approve an FHA loan. In addition to your credit score, you will need to provide full documentation of your income and assets and meet the lender’s debt-to-income ratio, which is typically a maximum of 41% to 43% of your monthly gross income that goes toward the minimum payments on all of your revolving and installment debts.

Pros of first-time homebuyer loans

The comparatively lower restrictions on these loans make them ideal for first-time homebuyers. You might want to consider these loans if:

  • You don’t have enough money saved up for a large down payment.
  • You have a limited ability to meet high interest payments and fees.
  • Your credit score is not high enough to qualify for other loan types.

But even if you do have funds saved for a large down payment, the low interest rates on first-time homebuyer loans could be too good to pass up.

Cons of first-time homebuyer loans

The downside of FHA first-time homebuyer loans is that they have higher mortgage insurance requirements than conventional loans. The mortgage insurance payments must be made for the entire life of the loan unless you make a larger down payment. However, FHA mortgage rates are comparable to conventional loans regardless of your credit score, so you won’t be stuck paying a higher-than-average mortgage rate.

If you are looking to buy a really expensive home in an affluent area, you might have to look elsewhere. On Jan. 1, the federal Housing and Urban Development department reduced the “national ceiling-loan limit” to $625,500 for most affluent of areas. Loan limits vary depending on the median income in that area, so be sure to check with your real estate agent or lender.

Another potential drawback is the requirement that the home you buy will be your primary place of residence. In other words, if you were looking to buy the property with the intention of renting it out, you probably won’t qualify for the loan.

Some other potential drawbacks include:

  • If you sell your home soon after purchasing it, you could lose some of the loan benefits.
  • If you want to refinance at a later date or otherwise change the terms of your debt or your collateral, this may not be possible with a first-time homebuyer loan.
  • While some of these loans don’t require you to purchase private mortgage insurance, you may be required to take out insurance provided by the loan program, and this insurance policy could have higher fees and longer payment terms than a private insurance option.

Despite these drawbacks, a first-time homebuyer loan could still be the most attractive type for you. Take a step back, evaluate your financial situation, consider the home you’re looking to buy and consider your options.

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Ben Apple contributed to this article. 

Source: realtor.com