Buying your first home can be tedious and overwhelming.
While it’s exciting to visit properties and daydream about your dream home, getting over the financing hurdles is another story. But don’t fret.
This comprehensive guide for first-time homebuyers will walk you through the entire process from start to finish.
Benefits of Being a First-Time Homebuyer
As a first-time homebuyer, you may feel a mix of excitement and apprehension. While the home buying process can seem overwhelming, it’s important to recognize the numerous benefits that come with this milestone.
Financial Assistance
First-time homebuyers have access to several financial assistance programs that can make homeownership more affordable. These include down payment assistance programs, low-interest mortgage loans, and grants specifically designed for first-time buyers. Some of these programs are offered by state and local governments, while others are provided by non-profit organizations or private lenders.
Lower Down Payments
Several loan programs offer lower down payment requirements for first-time homebuyers. The FHA loan, for example, requires as little as 3.5% down if your credit score is 580 or higher. The USDA and VA loans even offer zero down payment options in some cases.
Access to Educational Resources
There’s a lot to learn when you’re buying a home for the first time, but fortunately, there are plenty of resources available. Many organizations offer homebuyer education courses that can help you understand the process and make informed decisions. Some lenders and assistance programs require you to take one of these courses, but even if it’s not mandatory, it can still be a valuable resource.
Before Starting Your Home Search
Check Your Credit
Not only will your credit score play a considerable factor in whether you’re approved for a mortgage, but it will also determine your interest rate.
A small increase or decrease in interest rates may not seem like a big deal. However, mortgage loans are for a hefty sum and for an extended period of time. So, a slight increase or decrease equates to thousands of dollars more spent or saved over the life of the loan.
To have the best chance of being approved for a home loan, you should aim for a credit score of at least 620. It’s possible to get approved for select home loan programs with a score as low as 580, but you may have fewer lenders to choose from.
Run the Numbers
It’s tempting for first-time homebuyers to start searching for homes when they know their credit score is up to par. But that’s probably not a good move until you determine how much home you can afford. Yes, the loan officer will give you a figure when you obtain a preapproval, but that amount isn’t always indicative of what you can afford.
Why so? Well, they focus on the debt-to-income (DTI) ratio to get an idea of a loan amount you qualify for. According to the Consumer Financial Protection Bureau, lenders prefer a DTI ratio of 43% or lower with your new mortgage payment. To illustrate:
CURRENT MONTHLY DEBT
GROSS INCOME
DEBT-TO-INCOME RATIO
MAXIMUM MORTGAGE PAYMENT (USING 43% RECOMMENDATION)
$1,000
$4,000
25%
$720
$2,000
$6,000
33%
$580
$3,000
$10,000
30%
$1,300
Note: Debt-to-Income Ratio = Aggregate Amount of Monthly Debt / Gross Income
The problem is that it fails to consider any expenses unrelated to debt. And if you have hefty insurance, childcare, or even grocery bills, that could be a major concern.
So, your best bet is to look at your current budget and come up with a realistic figure for your new mortgage payment. But don’t forget to keep the recommended DTI ratio in mind.
Explore Mortgage Options
There are several mortgage options on the market for first-time homebuyers, but the most prevalent are:
Conventional Loans
A conventional mortgage is a type of home loan that is not insured or guaranteed by the government. It’s typically offered by a private lender, such as a bank or credit union, and is the most common type of mortgage used to purchase a home.
Conventional mortgages typically require a down payment of at least 3% of the purchase price of the home. Borrowers typically must have a credit score of 620 or higher and a DTI ratio of 36% or lower to qualify. If you have bad credit or are unable to make a large down payment may have a harder time qualifying for a conventional mortgage.
If the loan amount is over $726,200, it becomes a jumbo loan and requires a higher down payment.
FHA Loans
An FHA loan is a type of home loan insured by the Federal Housing Administration (FHA), a government agency within the U.S. Department of Housing and Urban Development (HUD).
FHA loans are designed to make it easier for people to buy homes, especially for first-time homebuyers. They offer lower down payment requirements and more flexible credit guidelines than conventional mortgages.
The minimum credit score required for an FHA loan is 500. If your credit score is between 500 -579, the down payment is 10%. However, if you have a credit score of 580 or above, the down payment is 3.5% of the purchase price.
VA Loans
VA Loans are insured by the Department of Veterans Affairs. They don’t require a down payment and are easier to qualify for than conventional loan products. However, you must be an active-duty member of the armed forces. Surviving spouses also qualify.
USDA Loans
A USDA loan is a type of mortgage offered by the U.S. Department of Agriculture (USDA) to low- and moderate-income borrowers who are looking to buy a home in a rural or suburban area.
See also: 14 First-Time Home Buyer Grants and Programs
Check Out Our Top Picks for 2024:
Best Mortgage Lenders
Most mortgages have a 30 or 15-year term. The latter will cost you more per month, but you’ll save a load of cash on interest.
You can also choose from a fixed or adjustable-rate mortgage (ARM). Fixed-rate mortgages have the same interest rate for the duration of the loan. But ARMs typically start with a lower interest rate for a set amount of time. In fact, they usually span from five to ten years and then adjust depending on the housing market.
Some first-time homebuyers choose ARMs over fixed-rate mortgages because it gives them the option to make a smaller monthly payment in the first few years. It could also mean that you can qualify for a more expensive home. But, be careful not to get too overextended, as erratic market behavior could cause the rate to skyrocket.
Get Preapproved
This is one of the more time-consuming parts of the entire mortgage process for a first-time home buyer. The good news is you don’t have to settle for the first offer that comes your way out of fear that your credit score will take a hit.
“FICO Scores ignore [mortgage] inquiries made in the 30 days prior to scoring,” according to myFICO. So, you won’t be penalized for multiple inquiries.
So, start by researching mortgage lenders that you may be interested in working with. You could also solicit the help of a mortgage broker if you’re strapped for time or want someone to do the legwork for you.
Once you’ve settled on a few lenders, be prepared to provide the following to get preapproved:
Financial statements to confirm your assets, including retirement accounts and real estate
Recent bank statements
Last two pay stubs
W-2s from the last two years
They will also pull your credit report and credit scores. If you qualify, the mortgage lender will then provide you with a preapproval letter, valid for a certain time period, that specifies how much you’re eligible for.
Save Up for a Down Payment and Closing Costs
During the preapproval process, the lender should have discussed loan options that could be a good fit for you. They should also have communicated how much you will need for a down payment and closing costs.
While some sellers may be willing to cover closing costs, be prepared to provide earnest money to secure your offer. And you may need a large down payment if you’re taking out a jumbo loan, or don’t qualify for the FHA or VA loan program. If that’s the case, now’s the time to figure out a plan for it.
If the seller is not paying closing costs, expect to pay between 2% and 5% of the sales price. And if a hefty down payment isn’t required, it’s not a bad idea to bring money to the table. Doing so allows you to reduce the Loan-to-Value, which positions you as less risky to the lender.
You may also be able to avoid private mortgage insurance (PMI), which is required until you reach 20% in equity, and possibly qualify for a reduced interest rate.
How to Find the Perfect Home
Go Home Shopping
All squared away with a preapproval and planned to save up the cash you need? Now, it’s time to go home shopping. But before you go, you have to decide if you want to enlist the assistance of a real estate agent.
It’s possible to find a slew of listings within your price range on the web with minimal effort. However, real estate agents have access to a system that could expand your reach. Even better, they could be integral in helping you choose a home that’s a good buy and negotiating the final purchase price.
And the seller’s agent pays their commission, so no need to worry about forking over extra cash. Just be sure to hire a real estate professional that is seasoned and reputable.
Now for the fun part: home shopping. Be careful not to judge a home solely by its appearance. Some other important factors to keep in mind:
Taxes: are the property taxes affordable or beyond what you can comfortably afford? (You can roll property taxes and homeowners insurance into an escrow account, but they can easily make or break your budget if the figures are steep).
Location: is the home in an area that has historically held its value? Is the location optimal for your commute to and from work?
Crime: is it a high crime area or is it relatively safe?
Condition: how old is the property? Does it need tons of repairs, or is it close to being move in ready?
Floor plan: is the floor plan feasible or ideal for your situation? Would it be appealing to other buyers if you had to sell?
School district: how are the schools? Have they received a good rating, or do they struggle to stay afloat?
All of these factors can have an effect on the value of the property over time.
Submit an Offer
You’ve found the perfect home, and you’re ready to sign on the dotted. Before you can finalize the paperwork and move in, there’s one more important step. And that’s making the offer. Even if the sales price seems fair, you may need to make an offer that’s higher or lower to snag the home.
Why so? Well, there could be a slight or drastic bidding war going on, and the only way for you to win is to beat out the competition. Or maybe your real estate agent did some research and determined the asking price was a bit high based on similar properties in the area or the home’s current condition.
Either way, you want to submit an offer that stands out and gets accepted. Your real estate agent will be able to do so on your behalf. But if you don’t have a real estate agent, check out these letters from Trulia to get you started.
The Mortgage Process
Even after your offer is accepted, there’s still more work to do. You’re not done just yet! It’s time to move on to the mortgage process.
Remember that preapproval letter? The lender will make sure all the information you initially provided is accurate through a process called underwriting.
Depending on how long it’s been since you were preapproved, you may be asked to provide updated bank statements or pay stubs.
The faster you submit the requested information, the quicker you’ll get a response. So, don’t drag your feet if you want a closing date that’s sooner than later.
Home Inspections and Appraisals
Before you close on the home, you will need to have a home inspection and appraisal complete.
The home inspection shouldn’t cost you more than $500. It will give you an overall assessment of the property and identify any potential issues.
The appraisal also plays an integral role as it will give you a solid idea of the home’s fair market value. The lender will mandate it, but it’s not a bad idea to get an independent appraisal done to serve as a second opinion.
An inspection and appraisal may help you decide if you should lower your offer or walk away from the property.
Purchase Homeowners Insurance
Your mortgage lender will require that you take out homeowners insurance. So, you want to start shopping around for quotes and select a policy prior to closing.
Close on Your Loan
At last! You’ve reached the finish line, and it’s time to close on your loan. During the closing, expect to:
Sign a load of paperwork.
Provide any amounts owed for the down payment.
Pay closing costs, which could include property tax obligations, premiums for homeowner’s insurance and association dues, title insurance, and any other costs associated with finalizing the loan.
Pay discount points or prepaid interest that can reduce the interest rate.
But before you show up at closing, it’s a good idea to speak with the lender, so you’ll know what to expect. You can also request a copy of the final closing document, or Closing Disclosure, to see a detailed breakdown of expenses.
A Few More Tips
Here are a few more suggestions for first time home buyers to help you get approved for your first loan:
Refrain from applying for new credit before you close. This could throw off your DTI ratio, lower your credit score, and ultimately prevent you from closing on the loan.
State and local programs may be available to assist with down payments. If you’re low on funds, be sure to explore options that may be available to you.
Several builders offer buyer incentives, like allowances for upgrades and closing costs. So if you haven’t considered new construction, it may not be such a bad idea to take a look if the price points are within your budget.
Should You Rent, Instead?
Perhaps you’ve done a little legwork, ran the numbers, and are on the fence about home buying. You will typically find that it’s cheaper to make monthly mortgage payments than to pay rent.
You can also take advantage of tax deductions and build up equity as you’re making monthly payments. The equity can be borrowed against for a loan or put some extra money in your pocket should you decide to sell before the repayment period ends.
However, renting a home gives you the flexibility to move to a new location if the home isn’t quite what you expected, don’t like the neighborhood, or want something more affordable.
Furthermore, renting allows you to pass the costs of maintaining the home on to the owner. But as a homeowner, you’ll be responsible for costs associated with maintenance and repairs.
Another reason why some choose to rent over buying is the upfront costs. Most landlords require a security deposit. However, it could be substantially lower than the money you may have to bring to the table for the down payment and closing costs.
Ultimately, you have to decide which is the better fit: investing in an asset that could build wealth or continuing to pay rent until you feel the time is right. There is no right or wrong answer; it just depends on your personal preference and financial situation.
Bottom Line
By taking the time to learn about the home buying process, you’ll be well-prepared and save yourself time and headaches. Best of all, you’ll increase your chances of landing your dream home with the most competitive mortgage product on the market.
Frequently Asked Questions
What is the process for buying a home?
The process for buying a home typically involves the following steps:
Determine your budget and get preapproved for a mortgage.
Find a real estate agent and start looking for homes.
Make an offer on a home and negotiate the terms.
Get a home inspection and address any issues that are found.
Get a mortgage and close on the home.
How much house can I afford?
When determining how much house you can afford, there are several factors to take into account. You should consider your income, expenses, down payment, credit score, and mortgage type before making a decision.
A larger down payment can help you get a lower mortgage rate, and a higher credit score can qualify you for better rates and loan terms. Shopping around for mortgage rates and considering different types of mortgages, such as fixed-rate or adjustable-rate, can also help you find the best deal.
Keep in mind that owning a home involves more than just the monthly payments. You will also need to factor in property taxes, insurance, and maintenance costs. You should create a budget that includes all of these costs and leaves room for unexpected expenses.
How much money do I need for a down payment?
The amount of money you need for a down payment will depend on the type of mortgage you get and the price of the home you are buying.
Some mortgage programs, such as FHA loans, allow for down payments as low as 3.5%, while others may require a higher down payment. It’s a good idea to speak with a mortgage lender to determine how much you will need.
Can I buy a house if I have a low credit score?
It’s possible to buy a house with a low credit score. However, it may be more difficult to get approved for a mortgage, and you may have to pay a higher interest rate. Before applying for a mortgage, work on improving your credit scores, as this will help you qualify for a better loan and save you money over time.
How much will closing costs be?
Closing costs are fees that are paid at the closing of a real estate transaction. These costs can vary widely and may include things like mortgage origination fees, title insurance, and appraisal fees. On average, closing costs can range from 2% to 5% of the purchase price of the home.
What is a mortgage preapproval?
A mortgage preapproval is a letter from a lender that indicates how much you are qualified to borrow for a mortgage. The preapproval letter is based on a review of your financial information, including your credit score, monthly income, and debts. A mortgage preapproval can help you understand how much you can afford to borrow and can make you a more competitive buyer in the real estate market.
What is a mortgage rate?
A mortgage rate is the interest rate that you will pay on your mortgage. The mortgage rate will determine the amount of your monthly payments and the overall cost of your loan. Interest rates can vary depending on the type of mortgage you get and your credit scores.
What is PMI?
PMI, or private mortgage insurance, is insurance that is required by lenders for certain types of mortgages when the borrower has less than a 20% down payment. PMI protects the lender in the event that the borrower defaults on the mortgage. The cost of PMI is typically added to the borrower’s monthly mortgage payment.
A post-occupancy agreement, also known as a post-closing possession agreement, allows the seller to remain in the property they just sold to the buyer for a set period after closing. This can be a win-win for both parties in some situations, but it comes with major risks for the buyers. I have personally bought many houses with post-occupancy agreements and some worked out great while others ended in a costly eviction. A post-occupancy agreement may be needed in some cases but as a regular home buyer, I would be very careful ever accepting one.
Table of Contents
What is a post-occupancy agreement?
In a typical home sale transaction, the seller and buyer agree to a closing date and time, and possession of the home transfers when that closing takes place. The sellers bring the keys and hand them to the buyers if they are both at closing. Or the buyers can pick up the keys or their agent can give them the keys if both parties are not at the closing table (my preference).
In some cases, a seller may want extra time to move out after closing. They may be waiting for their new house to close, or for a house to be built, or they might just want more time to move. This sounds like a reasonable request for the seller but it can come with major risks for the buyer. This is why I try to avoid post-occupancy agreements if possible.
The video below was a nightmare after a post-occupancy agreement went bad:
What are the risks of a post-occupancy agreement?
Many people have heard the stories on the news of a seller who will not move out of their home are they sell. Almost all of these situations come from post-occupancy agreements. During a typical sale, the buyer does a walk-through of the home to make sure it is clean, all the seller’s stuff is moved out, and the property is in the same condition as when they put a contract on it (unless the contract says otherwise). If there is anything wrong, the buyer can delay or even not buy the home.
When the seller is still living in the home and the buyer closes on it (completes the purchase), they cannot make sure it is clean, all the seller’s stuff is gone, or the seller is out. Some sellers want the money that is in their home but want to stay! If the seller does not leave after a post-occupancy agreement, the buyer cannot simply kick them out, they must go to court and evict them.
An eviction can take months or even years in some states like New York.
Why do I agree to post-occupancy agreements?
I am a real estate investor who works hard to get the best deals I can. I buy a lot of distressed properties that need work and many sellers have unique situations. I also buy from many wholesalers who make deals with sellers that I must agree to. In a perfect world, I would never do a post-occupancy agreement but in some cases, it is a take-it-or-leave-it situation and the deal is good enough for me to take the risk.
I would estimate I have some kind of problem with 30 percent of the post-occupancy agreements I do. For me, it is not as big of a problem as it can be for inexperienced homeowners or people who need to move into the home. I also have a YouTube channel that helps me recoup some of my losses with the crazy situations that occur. I also know how to handle evictions, squatters, and other situations where someone not as experienced could be completely lost on what to do.
How should a post-occupancy agreement be structured
There are also risks with how post-occupancy agreements are structured. Some people just agree to let the seller stay and maybe pay a little rent. The problem with this is there is no motivation for them to move out. When we do a post-occupancy agreement we try to make it painful if the seller does not hold up to their obligations and move.
The post-occupancy agreement should always be in writing and money should be held back in escrow from the seller proceeds. I like to hold back at least $10,000 on houses below $400k and if they do not move by a certain date, I get that $10,000 as the buyer. That may seem like a lot but an eviction and a few months of house payments can eat through that very fast. If you are buying a more expensive home, I would hold back much more.
I have seen many agreements that can be wishy-washy and not work out for either party. Some will charge a per diem if the seller does not move like $200 a day. It can be confusing when they are officially out, and when the dates officially start and proving when they are out. I have seen some people create a lease with rent charged and a deposit. You have to be very careful with this as many states have laws on how much the deposit can be compared to rent, how a deposit is paid back or kept, and the rights of the tenant after the lease is started. It is usually easier to evict a seller who does not move than a tenant with a lease.
Another crazy situation:
Should you agree to a post-occupancy agreement?
If you are a regular home buyer looking for a place to move into, be very careful agreeing to a post-occupancy agreement. I would make sure you love that house and have no other options. If you do agree, make sure there is a large enough penalty to make it worthwhile to you if the seller does not move. You also need to make sure your insurance is set up correctly, there is an agreement for who pays for utilities and there is recourse if the house is damaged during the extra time the seller lives there. It also helps if you have a YouTube channel where you can post crazy stories if something goes bad.
Conclusion
I am okay doing post-occupancy agreements if everything is set up correctly and that is my only option. But even as an experienced investor, I try to avoid them if at all possible. If you happen to live in a state with long eviction timelines I would be really careful agreeing to any post-occupancy agreement.
Data experts on the mortgage team at NerdWallet dig into NerdWallet’s survey research, as well as public datasets, to identify trends and provide insights on the ever-changing U.S. housing market. On this page, you’ll find some of NerdWallet’s most-read research and commentaries on home buyers and sellers, mortgage interest rates and homeownership.
For NerdWallet statistics and data on additional topics, including credit cards, banking and student loans, head to our studies and data analysis hub.
Have questions or want to speak with a NerdWallet expert? Reach out to [email protected].
Mortgage interest rates
Daily mortgage interest rates
Mortgage interest rates this week
Mortgage interest rates this month
NerdWallet home and mortgages expert Holden Lewis writes a monthly column covering the near-term forecast for mortgage rates.
Annual home buyer report
Every winter, NerdWallet collaborates with The Harris Poll to survey U.S. adults 18 years and older. The results provide a nationally representative snapshot of how Americans perceive the housing market.
2024 Home Buyer Report: Pessimism reigns as home buyers struggle and the goal of homeownership loses some of its luster.
2023 Home Buyer Report: Higher mortgage interest rates and apprehensions about the economy have Americans unsure about their ability to purchase homes.
2021 Home Buyer Report: Pent-up demand from would-be home buyers clashes with a limited supply of homes for sale.
2020 Home Buyer Report: Buying a home is a top priority, especially for younger generations, but some feel locked out of homeownership.
2019 Home Buyer Report: Recent buyers have had to get competitive to close their deals, and many feel stretched by the costs of homeownership.
2018 Home Buyer Report: Homeownership is a widely shared goal, but concerns about costs keep some buyers sidelined.
Quarterly first-time home buyer affordability report
Each quarter, NerdWallet data analyst Elizabeth Renter analyzes information from sources including the U.S. Census, the Bureau of Labor Statistics and the National Association of Realtors to better understand the challenges facing first-time home buyers.
Q4 2023: A slight bump in inventory isn’t enough to ease affordability challenges.
Q3 2023: Higher mortgage rates outpace slight price declines seen in some metros.
Q2 2023: Seasonality appears to be returning to home prices.
Q1 2023: Banks’ tighter lending standards add to the difficult climate for first-time buyers.
Q3 2022: Price increases slow, but rising mortgage rates eat into potential savings.
Q2 2022: Falling wages and price growth intensify affordability struggles.
Q1 2022: Two years’ worth of data highlights housing market challenges.
Q4 2021: High prices and low inventory are a double whammy in some markets.
Q3 2021: Moderate improvements may be blips, not trends.
Q2 2021: Notable year-over-year decline in affordability.
Q4 2020: Typical winter shifts in the housing market may help home buyers.
Q3 2020: Competition is hot for the limited supply of homes on the market.
Q2 2020: Real estate booms as the country comes out of quarantine.
Q1 2020: Home prices rise, even as the effects of the pandemic are unclear.
Elevated mortgage rates took a bite out of new home sales in February, as they declined slightly from the previous month. Builders continue to respond to affordability concerns; half of the homes sold in February cost under $400,000, compared with 45% in January.
March 25, 2024
Latest housing market columns from Holden Lewis
Additional studies and data analysis
Home buyers
Home improvement
2022 study: After a boom in renovations and DIY projects, homeowners may dial back home improvement plans (Nov. 2022).
2020 study: Homeowners prioritize DIY and paying for projects with cash (Oct. 2020).
Home sellers
2023 data analysis: Why homeowners may want to sell despite higher interest rates (March 2023).
2021 study: What to expect listing a home in a seller’s market (April 2021).
2019 study: What sellers should know before listing (May 2019) .
Housing market
Mortgage denials
2022 data analysis: Higher home prices and debt contribute to home loan denials (Nov. 2023).
2021 data analysis: Competition and lack of collateral drive mortgage denials (Oct. 2022).
2020 data analysis: Tighter lending standards make some home loans harder to obtain (Nov. 2021).
2019 data analysis: Debt-to-income ratio most-cited reason for mortgage denials (Oct. 2020).
The Community Home Lenders of America (CHLA) this week submitted a letter to the Federal Housing Administration (FHA) that urges the agency to “provide comparable down payment treatment for FHA borrowers, regardless of whether or not the seller is willing to pay the home buyer broker commission,” according to an announcement by the organization.
The letter is being sent in response to a series of real estate commission lawsuits and the recent $418 million settlement by the National Association of Realtors (NAR), with the association also agreeing to abolish the “Participation Rule” requiring sell-side agents to make an offer of compensation to buyer brokers.
CHLA contends that the settlement is “likely to result in a shifting from the home seller to the home buyer of the financial responsibility to pay buyer Realtor commissions,” and cites three key concerns in its letter addressed to FHA Commissioner Julia Gordon.
The first is a contention that large swaths of first-time homebuyers, who already face major challenges to enter the housing market, will not be able to meet higher down payment thresholds necessary to pay the buyer’s agent commission when using FHA financing.
“We believe that FHA borrowers should not have to make a much higher down payment merely because the seller is (arbitrarily) unwilling to fund the buyer agent commission,” the letter stated.
The CHLA also raises concerns about preexisting biases that may impact borrowers using FHA financing, a bias they contend has been demonstrated in the past.
“Existing (and well documented) home seller biases against buyers with FHA loans will be exacerbated, because of concerns over the buyer’s ability to make higher down payments,” the letter stated.
The third highlighted concern stems from the potential for inflated sales prices based on commission impacts, with CHLA contending that sellers “may use their leverage over the higher down payment levels to extract a higher sales price in exchange for agreeing to pay the buyer agent commission.”
The letter provides a series of prototype loan scenarios that could spin out of the settlement, illustrating CHLA’s arguments. Among the scenarios is one that CHLA hopes will become standard practice, in which “every home seller will be willing to pay the buyer agent commission, as a courtesy and without extracting a higher price in exchange for doing so,” the letter stated. “However, we do not have confidence that this will be the case.”
FHA borrowers are particularly vulnerable to sellers who may try to leverage a higher sales price, since “paying cash for their agent’s commission may not be economically feasible [for FHA buyers],” the letter read. “Having spent several years building up cash reserves for the down payment, the homebuyer will thus have to wait a few years longer to accumulate the cash necessary to fund this amount.”
Late last month, FHA addressed a common question the agency had received from interested stakeholders, who asked how the proposed settlement agreement will affect the treatment of seller-paid buyer broker fees in transactions that use FHA-insured mortgage financing.
“Under existing FHA policy, if sellers continue to pay buyer-side real estate agent commissions and fees as a manner of state and local law or custom, and if the commissions and fees are reasonable in amount, existing policy would not treat those payments as interested party contributions provided all other requirements are met,” the agency said in an informational notice distributed to professionals via email and published online.
Editor’s note: An FHA statement on a different matter was erroneously included in a previous version of this article.
Mortgage interest rates have continued in the mid-6% range for 16 weeks. The 30-year fixed mortgage interest rate declined slightly to 6.79% from 6.87% the week prior.
Home buyers purchasing a $400,000 home with a 20% down payment at a 6.79% interest rate would have a monthly mortgage payment of $2,084. This is a savings of $217 per month from when mortgage interest rates were 7.79% in October 2023. However, the typical first-time buyer does not put 20% down. Last year, the typical first-time buyer had a down payment of 8%. In that scenario, for a home buyer purchasing a $400,000 home with an 8% down payment at a mortgage interest rate of 6.79%, the mortgage payment would be $2,397.
Housing affordability is one reason the share of first-time buyers last month (at 26%) matched the lowest share ever recorded dating back to 2008. Inventory is the second critical component. First-time buyers need, value, and rely on the expertise of REALTORS® to help find the right home and with negotiations.
Hedging, Client Retention Tools; STRATMOR on the ICE 24 Event; MBA on the NAR Settlement; Dual Compensation
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Hedging, Client Retention Tools; STRATMOR on the ICE 24 Event; MBA on the NAR Settlement; Dual Compensation
By: Rob Chrisman
7 Hours, 19 Min ago
I saw a sign recently: “Psychic Fair Cancelled Due to Unforeseen Circumstances.” No one can see into the future, or can read minds, and communication is always a good thing. But if I had to predict something, mortgage-related fees (what is disclosed, and how, at closing) will be something in which the CFPB would become increasingly interested. The CFPB believes that “junk” fees are driving up housing costs, and wants to hear from you. Regarding costs, many lenders are wondering about the proposed NAR settlement, its costs, and even dual licensing. Will we see an increase in the number of dual licenses with the recent NAR settlement, and what about the states that do not allow a person to maintain both NMLS licenses and Realtor Licenses simultaneously? Attorney Brian Levy addressed dual compensation in one of his Musings. (Found here, this week’s podcast is sponsored by Visio Lending. Visio is the nation’s premier lender for buy and hold investors with over 2.5 billion closed loans for single-family rental properties, including vacation rentals. Today’s has a roundtable discussion from the ICE conference in Vegas with Brett Brumley, Matt Kovac, Justin Demola, and Rob Chrisman on automation and its benefits to lenders and vendors.)
Lender and Broker Services, Products, and Software
Truv Teams Up with Fannie Mae to Revolutionize Borrower Verifications! We’re thrilled to announce that Truv is now a conditionally authorized report supplier for mortgage lenders using Fannie Mae’s Desktop Underwriter® (DU®) validation service. With Truv’s Day 1 Certainty support lenders can reduce risk of fraud and buybacks by leveraging real-time data directly from the source, lower costs by reverifying a borrower’s income and employment data at no additional expense, accelerate growth by increasing pull-through rates and closing loans faster and improve productivity by reducing time spent collecting data to underwrite loans. Learn more here!
With the recent commissions’ settlement, loan officers must now reevaluate their engagement strategies with their agent network. The key ingredient in long-term success boils down to something so simple, yet very impactful: building closer relationships with homeowners. That’s why loan officers are turning to the Milestones “Super App,” a powerful platform that delivers white-labeled portals to manage the home, build wealth, and everything in between. The value loan officers can bring to homeowners NOW, in close partnership with their agent network, can help them build profitable, long-term relationships for years. Want to start serving your homeowners better? Talk to Sales.
STRATMOR on Customer Experience
When it comes to customer experience, STRATMOR Group covered all angles this week at ICE Experience 24 in Las Vegas. STRATMOR advisors were a common sight on the conference stages, with Brett McCracken sharing his characteristic bombshell secret shopping insights, Mike Seminari revealing some eye-opening truths about the critical importance of having a clean and simple loan process, Sue Woodard challenging tech vendors to look for ways to add value not only to the lender, but the borrower as well, and Garth Graham encouraging lenders to take a hard look at their compensation models to make sure they “get what they pay for.” Looking to refine your organization’s strategies? Contact STRATMOR today.
MBA’s Role in NAR Settlement
No one wants to harm the fragile first-time home buyer, or further dampen the activity in real estate sales and inventory. The Mortgage Bankers Association weighed in on last week’s announced proposed National Association of Realtors’ settlement. Remember that, despite the furor of news and conjecture, the Settlement is subject to court approval although the MBA states we’re likely see changes to go into effect mid-July 2024. “There is also a possibility that the Department of Justice may weigh in on whether the settlement goes far enough, which could result in changes, delays, or abandonment of the settlement. NAR will continue to update its site with the latest information.
“The MBA will work with NAR and other trade associations to limit possible disruption from the settlement and ensure that its provisions are not overly disruptive to home financing. It is important to understand how a change to buyer paid commissions might impact seller contribution limits and we have already advocated for the Department of Veterans Affairs (VA) to lift its prohibition on veterans’ payment for the buyer side agent.
“The proposed nationwide class of home sellers has reached a $418 million joint settlement with NAR that will resolve claims in some of the antitrust class actions against NAR. The Settlement with NAR is in addition to prior settlements (totaling $208.5 million) reached with defendants Anywhere Real Estate, RE/MAX, and Keller Williams.
“Under the terms of the Settlement, NAR will be responsible for paying $418 million in four annual installments along with interest, for the benefit of home sellers across the United States, as well as $3 million toward settlement notices. It also provides for far-reaching changes to NAR’s rules governing real estate broker compensation and the MLS system.
“NAR’s release does not cover agents affiliated with HomeServices of America and its related companies as they are still litigating. And firms that have a total transaction volume of $2 billion or above are not covered by the Settlement. However, the Settlement creates a framework for these larger firms to opt-in to the Settlement to resolve actual or potential claims against them. A firm that wishes to opt-in to the settlement route must deposit into an escrow account an amount equal to 0.0025 multiplied by its average annual ‘Total Transaction Volume’ over the most recent four calendar years and agree to not to engage in the certain prohibited practices. It is unclear at this stage whether the larger firms will in fact opt-in to the Settlement. A similar opt- in provision exists for independent MLS, with the payment being 100 multiplied by their 2023 subscribers.
“In the Settlement, NAR has agreed to various practice changes which are to begin 120 days after the plaintiffs seek preliminary approval of the Settlement. It will eliminate and prohibit any requirement by NAR and NAR MLSs that listing brokers or sellers must make offers of compensation to cooperating brokers or other buyer representatives, and prohibit and eliminate any requirement that such offers, if made, must be blanket, unconditional or unilateral (effectively, eliminating its rules requiring “cooperative” commissions as a condition of listing a home on the MLS).
“It requires MLS participants working with a buyer enter into a written agreement before the buyer tours a home with the following: (a) specify and conspicuously disclose the amount or rate of compensation to be received or how the amount will be determined, (b) the amount of compensation must be objectively ascertainable… It cannot be open-ended such as ‘buyer broker compensation shall be whatever amount the seller is offering to the buyer,’ (c) MLS participants may not receive compensation for brokerage services from any source that exceeds the amount or rate agreed to in the agreement with the buyer.”
The language, “Prohibits NAR MLS participants, subscribers, other real estate brokers, other real estate agents, and sellers from making offers of compensation on the multiple listing service to cooperating brokers or other buyer representatives (either directly or through buyers) or disclosing on the multiple listing service listing broker compensation or total brokerage compensation. It eliminates and prohibits any requirements conditioning participation or membership in a NAR MLS on offering or accepting offers of cooperative compensation.
“Agree not to create, facilitate, or support any non-MLS mechanism for listing brokers or sellers to make offers of compensation to cooperating brokers or other buyer representatives. Require NAR MLS participants acting for sellers to conspicuously disclose to sellers and obtain seller approval for any payment or offer of payment that the listing broker or seller will make to another broker, agent, or other representative acting for buyers. And require MLS participants to disclose to prospective sellers and buyers in conspicuous language that broker commissions are not set by law and are fully negotiable.”
The MBA warned that cooperative commission is not banned; listing brokers and sellers can continue to offer compensation for buyer broker services, just not through the MLS. And the Settlement does not prevent sellers from offering seller concessions through the MLS (e.g., for general buyer closing costs), so long as such concessions are not limited to or conditioned on the use of or payment to a buyer broker.”
The settlement does nothing, unfortunately, to address incompetent, inexperienced real estate agents that do little to promote professionalism, often a complaint from the agent representing the opposite side of the transaction.
Capital Markets
As we mark four years since the big shake-ups caused by the COVID-19 pandemic, the mortgage industry continues to navigate its aftermath, especially in the MBS market. Despite the challenges, there’s been remarkable progress and resilience shown. Vice Capital Markets is one company that has stood firm in the face of adversity, consistently providing steadfast support and innovative strategies to its clients throughout these uncertain times. The company recently shared this video reflecting on the tremendous impact of the pandemic on our industry. If, like me, you’ll be on-site next week at TMC’s The Mane Event in Louisville, Vice Capital President Troy Baars will be on hand to chat about all things capital markets. Drop him a line if you’d like to meet.
Yesterday granted market participants more time to digest the results of this week’s Federal Open Market Committee meeting. As a reminder, the Fed maintained the fed funds rate at current levels and signaled that it would begin cutting this year, which kicked off a post-meeting rally in markets. There’s now more confidence that rate cuts are coming in the second half of the year than there was prior to the meeting. The revised “dot-plot” continues to show the majority of the committee believes that three 25 basis point cuts is the most likely outcome before we close the books on 2024. That said, there were more votes for two 2024 cuts than there were in December.
As far as economic releases, yesterday’s release of flash Manufacturing and Services PMI reading from major economies showed that most pointing to a continued contraction in both sectors. The U.S. was an outlier as both Manufacturing and Services PMI readings indicated an ongoing expansion. Those reports contributed to the early pressure, as did another solid jobless claims reading and a strong existing home sales report.
But existing home sales easily beat expectations and rose 9.5 percent during February. Although historically slow, the 4.38-million-unit pace marks the strongest pace since February 2023, and is likely due to the dip in mortgage rates that occurred at the beginning of the year. Inventory remains tight, but a small swell of new supply hitting the market was another factor driving the faster sales pace.
There is no notable data scheduled for release today but plenty of Fed speakers no doubt reinforcing the message from earlier this week: Chair Powell, Governor Bowman, Fed Vice Chair Jefferson, Fed Vice Chair for Supervision Barr, and Atlanta Fed President Bostic are all scheduled to deliver remarks. We begin the day with Agency MBS prices better .125-.250 than Thursday night, the 10-year yielding 4.22 after closing yesterday at 4.27 percent, and the 2-year at 4.60.
Jobs
“At Evergreen Home Loans, we’re proud of our strong female leadership, with 68 percent of our team being women, including 11 branch managers. We’re on a mission to expand our team with talented Loan Officers who are eager to work in an empowering, supportive environment. Here, you’ll join a group of industry-leading professionals who thrive under the guidance of skilled women leaders. We offer a nurturing space for growth, innovation, and success. If you’re a Loan Officer aspiring to excel in a company that values diversity and leadership, Evergreen Home Loans is your destination. Join us and shape a brighter future in the mortgage industry. To view all job listings, visit Mortgage Jobs.”
“Looking to thrive in the mortgage game? Northpointe Bank has been crushing it for 25 years, leading the charge with a robust product line of traditional, non-QM, and portfolio loans. We’re looking for loan officers and sales teams to join our retail lending team nationwide. Why us? Because we’re not just any bank! Northpointe is like finding a unicorn in the mortgage world: a bank with home lending at its core. Plus, since we’re a bank, there’s no need for loan officers to deal with pesky state licensing. You can originate in all 50 states on day one! Ready to join our winning team? Contact Cody Archer today to hear why Northpointe Bank should be your home.”
As mentioned in yesterday’s Commentary, AmeriHome’s Chief Operating Officer John Hedlund is leaving the company. Also effective April 7, Chief Risk Officer Mark Miller, and Chief Information Officer Dave Andersen, will also be leaving AmeriHome. AmeriHome (the nation’s largest bank-owned correspondent investor) has promoted the following, effective today: Anthony Ho, Managing Director, Chief Credit Officer, Greg McElroy, Managing Director, Chief Operations Officer, Steve Kolker, Managing Director, Correspondent Sales, and Peter Roeske, Managing Director, Retail Lending. AmeriHome Mortgage is a Western Alliance Bank company.
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Are you eligible for the zero-down USDA home loan?
What if you could secure a USDA home loan that allows you to buy a house with no down payment, competitive mortgage rates, and reduced mortgage insurance costs?
It might sound like a dream, but it’s entirely possible with the USDA mortgage program. Designed to assist low- and moderate-income Americans in becoming homeowners, USDA loans provide incredibly affordable financing options for eligible buyers.
Essentially, USDA mortgages empower individuals to transition from renting to owning, even when they thought homeownership was out of reach.
Verify your USDA loan eligibility. Start here
In this article (Skip to…)
>Related: How to buy a house with $0 down: First-time home buyer
What is a USDA loan?
USDA loans are mortgages backed by the U.S. Department of Agriculture as part of its Rural Development Guaranteed Housing Loan program. The USDA offers financing with no down payment, reduced mortgage insurance, and below-market mortgage rates.
Verify your USDA loan eligibility. Start here
The USDA mortgage program is intended for home buyers with low-to-average household incomes. In order to qualify, you must also purchase a home in a “rural area” as the USDA defines it. Those who are eligible can use a USDA mortgage to buy a home or refinance one they already own.
USDA loans offer nearly unbeatable benefits for qualified borrowers. So if this program sounds like a good fit for you, it’s worth getting in touch with a participating lender to find out if you’re eligible.
How do USDA loans work?
The U.S. Department of Agriculture insures USDA loans. Thanks to government guarantees and subsidies, lenders can offer 100% financing and below-market interest rates without taking on too much risk.
Verify your USDA loan eligibility. Start here
Although the USDA backs this program, it typically isn’t the one lending money. Instead, private lenders are authorized to offer USDA loans. That means you can get a USDA mortgage from many mainstream banks, mortgage lenders, and credit unions.
The application process for a USDA mortgage works just like any other home loan. You’ll compare rates and choose a lender, complete an application (often online), provide financial documents, wait for the lender’s approval, and then set a closing day.
The only exception is for very low-income borrowers, who may qualify for a USDA Direct home loan. In this case, you’d go straight to the Department of Agriculture to apply rather than to a private lender.
Types of USDA loans
For eligible individuals and families looking to buy, build, or renovate a home in a rural area, the USDA offers three main mortgage loan types. The loan programs are as follows:.
Verify your USDA loan eligibility. Start here
USDA Guaranteed Loans
Approved private lenders, such as banks and mortgage companies, provide USDA loan guarantees to qualified borrowers. A USDA guaranteed loan is one in which the government backs a portion of the loan, lowering the lender’s risk and allowing them to offer more favorable terms to the borrower. These loans frequently have low interest rates, no down payment, and more lenient credit requirements. The property must be in an eligible rural area as the USDA defines it, and borrowers must meet household income requirements that vary depending on location and household size.
USDA Direct Loans
The USDA also offers the Single Family Housing Direct loan through the Section 502 Direct Loan Program. These loans are meant to help low-income families buy, build, or fix up small homes in rural areas. The USDA, rather than private lenders, provides funding for direct loans as opposed to guaranteed loans. These loans have favorable terms, such as low interest rates (as low as 1% with payment assistance) and long repayment periods (up to 38 years for eligible applicants). Income, creditworthiness, and the property’s location in an eligible rural area determine eligibility for direct loans.
USDA Home Improvement Loan
The USDA’s Single Family Housing Repair Loans and Grants program, also known as the Section 504 program, provides financing for home improvements. This program provides low-interest, fixed-rate loans and grants to low-income rural homeowners for necessary home repairs, improvements, and modifications that make their homes safer, more energy-efficient, and more accessible. However, if you’re looking for one, you might have a difficult time finding this type of USDA home loan. They are not widely available from lenders.
USDA loan eligibility requirements
To be eligible for a USDA home loan, you’ll need to meet a number of requirements that vary depending on whether you are applying for a USDA loan guarantee or a USDA direct loan.
Verify your USDA loan eligibility. Start here
Some general requirements, however, apply to all USDA loans, specifically those based on both buyer and property eligibility.
USDA loan property requirements
Eligible rural area
The USDA defines an eligible area in rural America as having a population of 20,000 or fewer. To check if the property you’re considering falls within these designated areas, the USDA’s eligibility site provides all the necessary information. We also provide a USDA eligibility map below.
Single-family primary residence
USDA loans are exclusively available for primary residences. Neither investment properties nor second homes are eligible for this program.
Meet safety standards
The property must adhere to the USDA’s minimum property requirements, which focus on safety, structural integrity, and adequate access to utilities and services.
USDA loan borrower requirements
Income limits
You must meet USDA monthly income limits, meaning your household income can’t exceed 115% of the area median income. Conforming to USDA income eligibility requirements ensures the program is accessible to those it’s intended to serve.
Stable income
Applicants are required to demonstrate a stable and dependable income, typically for at least 24 months, before applying. This helps ensure borrowers can maintain their loan payments.
Creditworthiness
Although USDA loans are known for their flexible credit requirements, creditworthiness is still important. Lenders usually seek a minimum credit score of 640 for guaranteed loans, with USDA Direct Loans potentially having more lenient criteria.
Debt-to-income ratio
Your monthly debt, including future mortgage payments, generally should not exceed 41% of your gross monthly income. However, lenders may make exceptions based on credit score and available cash reserves.
Citizenship status
Applicants need to be U.S. citizens, U.S. non-citizen nationals, or qualified aliens with a valid Social Security number to qualify for a USDA loan.
USDA loan eligibility map
The USDA eligibility map is a valuable online resource for potential borrowers. It helps them identify if a property is situated in an area of rural America that qualifies for USDA home loans.
Verify your USDA loan eligibility. Start here
Users can enter a specific address or explore areas of the map to see if they qualify for USDA guaranteed loans or direct loans by using this interactive map.
1 Source: USDAloans.com, based on Housing Assistance Council data
USDA loan rates
Compared to other home loan programs, USDA mortgage interest rates are some of the lowest available.
Check your USDA loan rates. Start here
The VA loan, specifically tailored for veterans and service members, stands alongside the USDA loan as one of the few government-backed loan programs offering competitively low rates. Due in large part to the security that government subsidies and guarantees provide, both the USDA and VA programs are able to offer interest rates below the market average.
Other mortgage programs, like the FHA loan and conventional loan, can have rates around 0.5%–0.75% higher than USDA rates on average. That said, mortgage rates are personal. Getting a USDA loan doesn’t necessarily mean your rate will be “below-market” or match the USDA loan rates advertised.
How to get the best USDA mortgage rates
Strengthening your financial standing is essential for obtaining the best USDA loan rates. Here are some helpful techniques for improving your personal finances:
Boost your credit score.Improving your credit score is an important step toward getting the best USDA loan rates. Taking steps to improve your credit score before applying for a USDA loan often proves beneficial.
Consider a down payment. While a down payment is not required for USDA loans, it can demonstrate to the lender your commitment to repaying the loan. This could also help lenders find your application more appealing.
Minimize existing debt.Lowering your debt-to-income ratio (DTI) by paying off existing high-interest debts can make you more appealing to lenders. It demonstrates that you are capable of handling your loan and making payments on time.
Shop around for lenders.Exploring loan options with multiple participating lenders is a smart move that can save you thousands of dollars over the life of the loan. Comparing their interest rates, fees, closing costs, and loan terms can help you identify the most appealing offer. It’s possible that first-time home buyers will find better options than what USDA loans can offer.
USDA loan costs
When it comes to financing a home purchase with a USDA loan, it’s not just the mortgage rate that you need to consider. You’ll be responsible for various fees and costs, which can add up over time. Understanding these costs upfront can help you make a more informed decision and plan your budget accordingly.
Here’s a breakdown of the expenses you can expect:.
USDA mortgage insurance
The USDA guarantees its mortgage loans, meaning it offers protection to approved mortgage lenders in case borrowers default. But the program is partially self-funded. To keep this loan program running, the USDA charges homeowner-paid mortgage insurance premiums.
Verify your USDA loan eligibility. Start here
Upfront guarantee fee
One of the first costs you’ll encounter is the upfront guarantee fee. This fee is a percentage of the loan amount and is required by the USDA to secure the loan. It’s usually around 1% but can vary. You can either pay this fee upfront or roll it into the loan balance.
Annual guarantee fee
Unlike conventional loans that may not require mortgage insurance, USDA loans come with a monthly mortgage insurance premium. You can expect to pay a 0.35% annual guarantee fee based on the remaining principal balance each year.
The annual fee is broken into 12 installments and included in your regular mortgage payment.
As a real-life example, a home buyer with a $100,000 loan size would have a $1,000 upfront mortgage insurance cost plus a monthly payment of $29.17 for the annual mortgage insurance. USDA upfront mortgage insurance is not paid in cash. It’s added to your loan balance, so you pay it over time.
Inspection fees
Before the loan is approved, the property will need to be inspected to ensure it meets USDA property eligibility requirements. This inspection can cost anywhere from $300 to $500, depending on the location and size of the home.
Closing Costs
Closing costs are a mix of fees that include loan origination fees, appraisal fees, title search fees, and more. These costs can range from 2% to 5% of the home’s purchase price. Some of these costs can be rolled into the loan amount, but it’s best to be prepared to pay some of them out-of-pocket.
How to apply for a USDA home loan
Qualifying for a USDA home loan can be a great way to finance a home, especially if you’re looking to buy in a rural area. These loans offer attractive benefits like zero down payments and competitive interest rates.
However, the USDA loan approval process involves several steps and specific eligibility criteria. Here’s a guide on how to apply for a USDA home loan.
Check your USDA loan eligibility. Start here
Step 1: Check your eligibility
Before diving into the application process, it’s important to determine if you meet the USDA’s eligibility requirements. These typically include:
A minimum credit score of 640
A debt-to-income (DTI) ratio of up to 41%
Income limitations, which vary by location and household size
The property must be located in a USDA-eligible area
Step 2: Gather necessary documentation
You’ll need to provide various documents to prove your eligibility, including:
Proof of income eligibility (e.g., pay stubs, tax returns)
Employment verification
Credit history report
Personal identification (e.g., driver’s license, passport)
Step 3: Pre-Qualification
Contact a USDA-approved lender to get pre-qualified for a loan. During this qualifying process, the participating lender will review your financial situation to give you an estimate of how much you can borrow.
Check if you’re eligible for a USDA loan. Start here
Both pre-approval and pre-qualification can give you a better idea of your budget and show sellers that you are a serious buyer.
Step 4: Property search
Once pre-qualified, you can start looking for a property that meets USDA guidelines. Keep in mind that the home must be your primary residence and be located in an eligible rural area.
Working with a real estate agent who has experience with USDA loans can be a big advantage.
Step 5: USDA home loan application
After finding the right property, you’ll need to fill out the USDA loan application. Your lender will guide you through this process, which will include a more thorough review of your financial situation and the submission of additional documents.
Step 6: Property appraisal and inspection
The lender will arrange for an appraisal to ensure the property meets USDA standards. An inspection may also be required to identify any potential issues with the home.
Step 7: Loan approval and closing
Once the appraisal and inspection are complete and all documentation is verified, you’ll move on to the loan approval stage. If approved, you’ll proceed to closing, where you’ll sign all necessary paperwork and officially secure your USDA home loan.
With the loan secured and the keys in hand, you’re now ready to move into your new home!
By following these steps and working closely with a USDA-approved lender, you can navigate the USDA home loan process with confidence. Always remember to consult with your lender for the most accurate and personalized advice.
How do USDA loans compare to conventional loans?
USDA loans and conventional loans both have fixed terms and interest rates, but they’re different when it comes to down payments and fees.
Down payment
USDA loans don’t ask for a down payment, unlike conventional mortgages, which usually require a 3% down payment. FHA loans require a 3.5% down payment. VA loans, like USDA loans, also don’t require a down payment.
Home appraisal
Both USDA loans and conventional loans need an appraisal from an independent third party before the loan is approved.
The home appraisal for a conventional loan determines whether the loan amount and the home’s value match. If the loan amount doesn’t measure up to the market value of the home, the lender can’t get back their money just by selling the house. If you want to know more about the home’s condition, like the roof or appliances, you need to get a home inspector.
For a USDA loan, the appraisal does two things:
Just like with a conventional loan, it makes sure the home’s value is right for the loan amount.
It checks if the home meets USDA standards. This means the home should be ready to live in. For example, the roof and heating should work properly. The appraisal also looks at whether the well and septic systems follow USDA rules.
If you’re looking for a detailed report on the house, hiring a home inspector is still a good idea.
Fees
While conventional loans charge private mortgage insurance (PMI) when you make less than a 20% down payment, this isn’t the case with USDA loans. You don’t need PMI for USDA direct or guaranteed loans.
However, USDA guaranteed loans have a guarantee fee of 1% at closing and then an annual fee of 0.35% of the loan, added to your monthly payment. You can roll the initial fee into your loan amount.
Loan terms
The term for a USDA guaranteed loan is 30 years with a fixed rate. If you get a USDA direct loan, you can have up to 33 years to pay it back. If you’re a very low-income borrower, you might get up to 38 years to make it more affordable.
FAQ: USDA loans
Verify your USDA loan eligibility. Start here
What is the USDA Rural Housing Mortgage and who is eligible for it?
The USDA Rural Housing Mortgage, officially known as the Single Family Housing Guaranteed Loan Program, is a rural development loan aimed at helping single-family home buyers. It’s often referred to as a “Section 502” loan, based on the Housing Act of 1949 that created this program. Designed to stimulate growth in less-populated and low-income areas, this rural development loan is ideal for those looking to buy in eligible rural areas with the possibility of a zero-down payment.
What is the income limit for USDA home loans?
The income limit for USDA home loans is based on your area’s median income. To be eligible for a USDA loan, you can’t exceed the median income by more than 15 percent. For example, if the median salary in your city is $65,000 per year, you could qualify for a USDA loan with a salary of $74,750 or less.
Do USDA loans take longer to close?
USDA lenders have to send each loan file to the Department of Agriculture for approval before underwriting. This can add around two to three weeks to your loan processing time.
Can I do a cash-out refinance with the USDA program?
No, cash-out refinancing is not allowed in the USDA Rural Housing Program. Its loans are for home buying and rate-and-term refinances only.
What’s the maximum USDA mortgage loan size?
The USDA does not set loan limits, but your household income and debt-to-income ratio have a limit on the amount you can borrow. The USDA typically caps debt-to-income ratios at 41 percent. However, the program may be more lenient for borrowers with a credit score over 660 and stable employment or who show a demonstrated ability to save.
Where can I find a USDA loan lender, and what loan terms are available?
You can find a USDA loan lender by visiting the U.S. Department of Agriculture’s website, which maintains a list of approved lenders for the Rural Housing Program. The USDA Rural Housing loan offers a 30-year fixed-rate mortgage only, with no 15-year fixed option or adjustable-rate mortgage (ARM) program available.
Can I receive a gift or have the seller pay for my closing costs with a USDA loan?
Yes, USDA rural development loans allow both gifts from family members and non-family members for closing costs. Inform your loan officer as soon as possible if you’ll be using gifted funds, as it requires extra documentation and verification from the lender. Additionally, the USDA Rural Housing Program permits sellers to pay closing costs for buyers through seller concessions. These concessions may cover all or part of a purchase’s state and local government fees, lender costs, title charges, and various home and pest inspections.
Can I use the USDA loan for a vacation home, investment property, or working farm?
No, the USDA loan program is designed specifically for primary residences and cannot be used for vacation homes, investment properties, or working farms. The Rural Housing Program focuses on residential property financing.
Am I eligible for the USDA if I recently returned to work or am self-employed?
If you are a W-2 employee, you are eligible for USDA financing immediately, as there’s no job history requirement. However, if you have less than two years in a job, you may not be able to use your bonus income for qualification purposes. Self-employed individuals can also use the USDA Rural Housing Program. To verify your self-employment income, you will need to provide two years of federal tax returns, similar to the requirements for FHA and conventional financing.
Can I use the USDA loan program for home repairs, improvements, accessibility, and energy-efficiency upgrades?
Yes, the USDA loan program can be used for various purposes, including making eligible repairs and improvements to a home (such as replacing windows or appliances, preparing a site with trees, walks, and driveways, drawing fixed broadband service, and connecting utilities), permanently installing equipment to assist household members with physical disabilities, and purchasing and installing materials to improve a home’s energy efficiency (including windows, roofing, and solar panels).
Can a non-citizen qualify for a USDA loan?
Yes, along with U.S. citizens, legal permanent residents of the United States can also apply for a USDA loan.
Today’s USDA mortgage rates
USDA mortgage interest rates consistently rank among the lowest in the market, next to VA loans.
USDA loans can be particularly attractive to borrowers seeking optimal financial terms, especially in an environment with elevated interest rates. Prospective homebuyers who meet the criteria for a USDA loan may be able to secure a great deal right now.
To find out whether you qualify for one and what your rate is, consult with a trusted lender below.
Time to make a move? Let us find the right mortgage for you
1 Source: USDAloans.com, based on Housing Assistance Council data
Lately, mortgage rates have surged higher, climbing from as low as 2% to over 8% in some cases.
Despite this, home builders have been enjoying healthy sales of newly-built homes.
And somewhat incredibly, they haven’t had to lower their prices in many markets either.
The question is how can they continue to charge full price if financing a home has gotten so much more expensive?
Well, there are probably several reasons why, which I will outline below.
Home Builders Don’t Have Competition Right Now
The first thing working in the home builders’ favor is a lack of competition. Typically, they have to contend with existing home sellers.
A healthy housing market is dominated by existing home sales, not new home sales.
If things weren’t so out of whack, we’d be seeing a lot of existing homeowners listing their properties.
Instead, sales of newly-built homes have taken off thanks to a dearth of existing supply.
In short, many of those who already own homes aren’t selling, either because they can’t afford to move. Or because they don’t want to lose their low mortgage rate in the process.
This is known as the mortgage rate lock-in effect, which some dispute, but logically makes a lot of sense.
At the same time, home building slowed after the early 2000s housing crisis, leading to a supply shortfall many years later.
Simply put, there aren’t enough homes on the market, so prices haven’t fallen, despite much higher mortgage rates.
They Don’t Need to Lower Prices If Demand Is Strong
There’s also this notion that home prices and mortgage rates have an inverse relationship.
In that if one goes up, the other must surely come down. Problem is this isn’t necessarily true.
When mortgage rates rose from record lows to over 8% in less than two years, many expected home prices to plummet.
But instead, both increased. This is due to that lack of supply, and also a sign of strength in the economy.
Sure, home buying became more expensive for those who need a mortgage. But prices didn’t just drop because rates increased.
History shows that mortgage rates and home prices don’t have a strong relationship one way or the other.
Things like supply, the wider economy, and inflation are a lot more telling.
For the record, home prices and mortgage rates can fall together too!
Lowering Prices Could Make It Harder for Appraisals to Come in at Value
So we know demand is keeping prices mostly afloat. But even still, affordability has really taken a hit thanks to those high rates.
You’d think the home builders would offer price cuts to offset the increased cost of financing a home purchase.
Well, they could. But one issue with that is it could make it harder for homes to appraise at value.
One big piece of the mortgage approval process is the collateral (the property) coming in at value, often designated as the sales price.
If the appraisal comes in low, it could require the borrower to come in with a larger down payment to make the mortgage math work.
Lower prices would also ostensibly lead to price cuts on subsequent homes in the community.
After all, if you lower the price of one home, it would then be used as a comparable sale for the next sale.
This could have the unintended consequence of pushing down home prices throughout the builder’s development.
For example, if a home is listed for $350,000, but a price cut puts it at $300,000, the other homes in the neighborhood might be dragged down with it.
That brings us to an alternative.
Home Builders Would Rather Offer Incentives Like Temporary Buydowns
Instead of lowering prices, home builders seem more interested in offering incentives like temporary rate buydowns.
Not only does this allow them to avoid a price cut, it also creates a more affordable payment for the home buyer.
Let’s look at an example to illustrate.
Home price: $350,000 (no price cut) Down payment: 20% Loan amount: $280,000 Buydown offer: 3/2/1 starting at 3.99% Year one payment: $1,335.15 Year two payment: $1,501.39 Year three payment: $1,676.94 Year 4-30 payment: $1,860.97
Now it’s possible that home builders could lower the price of a property to entice the buyer, but it might not provide much payment relief.
Conversely, they could hold firm on price and offer a rate buydown instead and actually reduce payments significantly.
With a 3/2/1 buydown in place, a builder could offer a buyer an interest rate of 3.99% in year one, 4.99% in year two, 5.99% in year three, and 6.99% for the remainder of the loan term.
This would result in a monthly principal and interest payment of $1,335.15 in year one, $1,501.39 in year two, $1,676.94 in year three, and finally $1,860.97 for the remaining years.
This assumes a 20% down payment, which allows the home buyer to avoid private mortgage insurance and snag a lower mortgage rate.
If they just gave the borrower a price cut of say $25,000 and no mortgage rate relief, the payment would be a lot higher.
At 20% down, the loan amount would be $260,000 and the monthly payment $1,728.04 at 6.99%.
After three years, the buyer with the higher sales price would have a slightly steeper monthly payment. But only by about $130.
And at some point during those preceding 36 months, the buyer with the buydown might have the opportunity to refinance the mortgage to a lower rate.
It’s not a guarantee, but it’s a possibility. In the meantime, they’d have lower monthly payments, which could make the home purchase more palatable.
Home Price Cuts Don’t Result in Big Monthly Payment Savings
Price Cut Payment
Post-Buydown Payment
Purchase Price
$325,000
$350,000
Loan Amount
$260,000
$280,000
Interest Rate
6.99%
6.99%
Monthly Payment
$1,728.04
$1,860.97
Difference
$132.93
At the end of the day, the easiest way to lower monthly payments is via a reduced interest rate.
A slightly lower sales price simply doesn’t result in the savings most home buyers are looking for.
Using our example from above, the $25,000 price cut only lowers the buyer’s payment by about $130.
Sure, it’s something, but it might not be enough to move the needle on a big purchase.
You could take the lower price and bank on mortgage rates moving lower. But you’d still be stuck with a high payment in the meantime.
And apparently home buyers focus more on monthly payment than they do the sales price.
This explains why home builders aren’t lowering prices, but instead are offering mortgage rate incentives instead.
Aside from temporary buydowns, they’re also offering permanent mortgage rate buydowns and alternative products like adjustable-rate mortgages.
But again, these are all squarely aimed at the monthly payment, not the sales price.
So if you’re shopping for a new home today, don’t be surprised if the builder is hesitant to offer a price cut.
If they do offer an open-ended incentive that can be used toward the sales price or interest rate (or closing costs), take the time to consider the best use of the funds.
Those who think rates will be lower in the near future could go with the lower sales price and hope to refinance. Just be sure you can absorb the higher payment in the meantime.
Read more: Should I use the home builder’s lender?
The investing information provided on this page is for educational purposes only. NerdWallet, Inc. does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks, securities or other investments.
Welcome to NerdWallet’s Smart Money podcast, where we answer your real-world money questions. In this episode:
Learn how to utilize a tax advantaged 529 plan to help your or a friend’s children save for future education expenses.
This Week in Your Money: What are the risks of purchasing a home without an inspection? How can you plan for major expenses when healthcare providers can’t tell you how much their services will cost? Hosts Sean Pyles and Sara Rathner share their hot takes on unexpected financial challenges, with tips and tricks on handling surprise expenses, understanding the importance of home inspections, and dealing with healthcare industry inefficiencies.
Today’s Money Question: What are the benefits of a 529 college savings plan? Can you contribute to a friend’s 529 plan to support their child’s future? NerdWallet writer Elizabeth Ayoola joins Sean and Sara to discuss the essentials of 529 college savings plans. They discuss the types of educational expenses covered, the tax benefits associated with 529 plans, and the flexibility of choosing different state plans. They also answer a listener’s question about how to approach the sensitive topic of financial gifts for education with parents, sharing methods for contributing to a loved one’s 529 plan without overstepping boundaries. Then, they discuss the implications of the Secure Act 2.0 on 529 plans, methods for estimating necessary savings for a child’s education, and tactful ways to discuss educational contributions with parents.
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Episode transcript
This transcript was generated from podcast audio by an AI tool.
Sara Rathner:
Hey Sean, has money ever made you mad?
Sean Pyles:
Yeah, it has, especially when I get a bill that I don’t expect to pay but have to anyway. So yeah, why?
Sara Rathner:
Yeah. Yeah, those surprise major expenses are a huge pain. I just had to replace my washing machine because the fun never stops in my house.
In this episode, we are going to let off a little steam about what makes us mad in the world of money.
Sean Pyles:
Welcome to NerdWallet’s Smart Money Podcast. Our job today is to help you be smarter with your money, one money question at a time. I’m Sean Pyles.
Sara Rathner:
And I’m Sara Rathner.
So listener, this show is all about you and your money questions. So, whatever financial decision you’re pondering, whatever’s making you mad about your money, let us know.
Sean Pyles:
Leave a voicemail or text the Nerd hotline at 901-730-6373. That’s 901-730-NERD. Or you can email your questions to podcast@nerdwallet com.
Sara Rathner:
In this episode, Sean and I answer a listener’s question about contributing to 529 accounts for your loved ones. But first, we’re going to yell into the void in our semi-regular Money Hot Takes segment.
Sean Pyles:
So here’s how this works. Sara and I just rail against whatever we feel like in the world of money. And let’s put, say, 100 seconds on the clock. That’s what? A second for every penny in a dollar. I don’t know, it’s just an arbitrary number really.
Sara Rathner:
That works for me. It’s a nice round number.
Sean Pyles:
All right, Sara, are you ready?
Sara Rathner:
Sean Pyles:
I’m starting my timer. Go.
Sara Rathner:
All right. I hate the trend where home buyers feel pressure to completely waive getting a home inspection before buying a property. That’s different from the type of waiver where you’ll still do the inspection, but then you’re assuming the cost of anything you find. It’s when you just do without the inspection entirely.
I live in a block of houses that are like 107 years old, and two houses on my block sold with waived inspections where the buyers had to put tens of thousands of dollars unexpectedly into problems in their house that they didn’t know about. I just had a neighbor text me asking for a roofer because the first time it rained since she moved in her house, it started raining on the inside of her house, which means that the seller just lived with that for however long before selling the house and passing the problem onto somebody else.
So especially if you’re a first-time home buyer, if you are going to drain your savings to buy your house, and then you’re not going to have much money left for repairs, be really careful about this. And as a society, can we just make inspections mandatory? That’s more consumer-friendly, honestly. People need to know what they’re getting into, and frankly, people should feel pressure to keep their houses well maintained before sale. There I said it.
Sean Pyles:
You’ve got 40 more seconds if you want to keep on railing.
Sara Rathner:
Oh man, I do? Well, if you haven’t bought a home yet, what’s nice about getting an inspector involved is they’ll look at all the major systems of the house, the appliances, the roof, all sorts of stuff, the electrical, the plumbing, and they will tell you the lifespan of some of those major things like a furnace or a boiler, your roof, your HVAC system. And even if something is going to go in the next year or two, at least you have this laundry list of things and when they’ll probably need to be replaced, and you can begin to budget for those replacements.
Sean Pyles:
Okay, that’s 100 seconds.
Sara Rathner:
Boom. All right, Sean, you got any reaction?
Sean Pyles:
Well, I totally feel that, because buying a house without knowing what’s wrong with it is very risky financially. Buying a house can be financially risky in and of itself, depending on how expensive the home is. But imagine getting into the house, it’s your first day, you’re super happy to be a homeowner, and then you realize, oh, it’s raining inside the house, or the crawl space is infested with termites. You don’t know what you’re getting into if you don’t have an inspection. And even if it may make you a more competitive buyer, it isn’t worth it, in my opinion, to get yourself into something like that because you just don’t understand the risks you could be taking on. And I’m all about mitigating risks as much as possible.
Sara Rathner:
All right, Sean, I have had my turn, and now it is your turn. I have set my timer for 100 seconds. And go.
Sean Pyles:
Okay. Today I am mad about industries that are designed to extract money from us while making our lives miserable or at least really frustrating. And I have one, maybe two, examples depending on how far 100 seconds takes me.
First step is healthcare. Americans spend far more on healthcare than other wealthy nations. Nearly 18% of our GDP in 2021 went to healthcare. And what are we getting for it? An incompetent extractive industry that exploits nearly everyone that engages with it. Among wealthy nations, the US has the highest rates of infant and maternal mortality and excess deaths, not to mention the daily indignities that come with trying to access healthcare.
I have a recent example that is a microcosm of these larger issues. I recently got a bill in the mail for some regular lab work, and the thing is, I have these labs done every few months, and they’re always covered by my insurance. But this time I got a surprise bill for nearly $200, and I’d already had an expensive month with some car repairs, and I was not excited about the prospect of an additional $200 to cover. So I called my doctor, and they said, “Oh yeah, the company that does the lab work just messed up. Oops, just disregard the bill.”
So if I hadn’t called my doctor, I would have been on the hook for this bill. This was a relatively small bill as far as medical bills go, and it was fairly easy for me to clear up. I’m obviously very fortunate in this case, but for so many people, especially those with chronic illnesses or complex medical conditions, the onslaught of navigating insurance, verifying that you’re being billed correctly and then somehow coming up with the money to cover bill after bill is just totally exhausting and can make achieving financial goals nearly impossible.
So why am I going on and on about things that we already know too much about?
Sara Rathner:
Just so you know, you’re over time.
Sean Pyles:
Oh, God. I’m going to keep going. I’m almost done.
Sara Rathner:
Keep going, Sean. Let’s do this.
Sean Pyles:
All right. I am going on and on about this because I think it’s important to remind people that it does not have to be this way. We are in an election year, people, so I don’t know, let’s try to do something about it.
Okay, Sara, how many seconds was that?
Sara Rathner:
Oh, well I stopped timing it the second it hit the clock, so that might’ve been just an extra 10 seconds, honestly.
Sean Pyles:
Okay. It’s hard to fit so much into such a small amount of time.
Sara Rathner:
You know what? Your rage is such that it cannot be fit into a tiny container and that is valid. It’s okay to let the rage out and give it some more space.
I agree with you. What’s annoying is, for example, this past year I had a baby, and that is expensive to the tune for me of $7,000 out of pocket after insurance. Hi. $7,000 is a lot of money, people.
And what was annoying about that, and this is something for anybody who maybe is facing a planned medical procedure like a surgery or childbirth or anything like that, or who takes medication for chronic illnesses, I tried to call the billing department at the hospital to talk to my insurance company to say, “Can you at least give me an idea of how much money I will be out?” I knew going into it that I would be having a C-section. So I could say, “I’m having a C-section, that means I have to work with an anesthesiologist, which is an extra expense. Can you tell me ballpark, even if you’re off by a grand, how much should I budget for this?” And everyone’s like, “We don’t know.” Shrug emoji.
Then the bills just fly in for months and you think you’re done. So you’re like, “Okay, we’re done paying for the hospital bill. Now we can put our money into other stuff.” And then you get another bill for like, $1,100.
Sean Pyles:
And you have to question, was this billed correctly? Was it coded correctly? You don’t know. And it just flies in the face of all the things that we try to talk about in the personal finance space, which is around anticipating big expenses, budgeting for it, saving up for it if you can. It’s impossible when you don’t know what you’re going to be paying.
Sara Rathner:
Right, and if you’re facing surgery, what, are you just going to not have anesthesia to save money? Do not recommend.
Sean Pyles:
That is not a money-saving tip that we would recommend. No.
Sara Rathner:
No, that’s a place where you should spend good money, get good and numb.
But really it is an extra expense. And that’s so, so frustrating because you are not only out a lot of money, but you’re feeling kind of vulnerable because you’ve just gone through some medical stuff, even if it’s just blood work or something, and you want to take good care of your health, and it’s sometimes financially impossible to do that.
Sean Pyles:
Yeah. Not to mention completely demoralizing.
Sara Rathner:
Yeah, and some people just don’t go to the doctor because of the cost, or the dentist. And then years later, they’re faced with really serious health issues because they’ve been neglecting their health because of the cost.
Sean Pyles:
Yeah. I don’t know, it’s really tough in this space to talk about medical expenses because at NerdWallet and in the personal finance realm, we try to give actionable advice, and a lot of the time the advice is reactive. If you get a medical bill, you do have to ensure that it’s coded correctly. Maybe try to work out a payment plan with your medical office if you can’t cover the bill in one go. But it’s so hard to be proactive like you were just describing and understand what you’re going to have to pay if you want a routine procedure like blood work or something more significant like having a baby, makes me want to yell into the void all day every day.
Sara Rathner:
Yeah. Well, we took more than 100 seconds about this. If you have a body, then this is something that affects you, and it is really hard to deal with those extra unexpected costs.
Sean Pyles:
All right, so that is what we are mad about this week, listener. I know there’s a lot to be mad about in the world of money, so do not keep it in. Let us hear what you’re mad about, and we might just share it on a future episode.
You can text your Money Hot Take to us or leave a voicemail on the Nerd hotline at 901-730-6373. That’s 901-730-NERD. Or you can email it to podcast@nerdwallet com.
Sara Rathner:
All right, I don’t know about you, but my heart rate is starting to come down from all of that. Ooh, deep breaths, everyone. This episode’s money question is up next. So calm down too and stay with us.
Sean Pyles:
This episode’s money question comes from Lauren, who wrote us an email. Here it is.
“Hi nerdy Nerds. I’m not a parent. I’m never going to be a parent. Because of that, I have made it part of my financial plan to contribute to the 529 plans of kids around me. Because I don’t have nieces and nephews, I’m contributing toward the savings of my friend’s three-year-old. How much needs to go into a 529 starting at age two or three to cover a four-year private college?”
“I got the details on this kid’s 529 plan from his dad and started contributing about $100 a month. We didn’t talk about it. I intend to keep chipping in until the kid is done getting formal education 20 to 25 years from now. How do I talk to the parents? I want to understand if I’m helping enough without becoming privy to their private financial details. I also don’t want to make it seem like I have any vote whatsoever in how the kid charts an educational path. How do I broach this with the parents?”
Sara Rathner:
To help us answer this listener’s question, on this episode of the podcast, we are joined by NerdWallet writer Elizabeth Ayoola. Welcome.
Elizabeth Ayoola:
Hello, and hi.
Sean Pyles:
Elizabeth, so good to have you on.
So let’s start by setting some groundwork. Can you please describe what a 529 college savings plan is, how they work, and why they’re such a big deal?
Elizabeth Ayoola:
A 529 plan is a huge deal indeed to me anyway. I wish I had one when I went to college because I was left with a huge bill. But anyways.
529s are tax advantaged college savings plans, and they allow people to save and invest money for education expenses. So, with that said, the money gets to grow, and it gets to compound, which can mean beneficiaries have a nice education pot to pull from when they need the money. And for those who don’t know what compounding is, it’s essentially when your interest earns interest.
Sara Rathner:
It’s the eighth wonder of the world.
Elizabeth Ayoola:
Sara Rathner:
So you mentioned education expenses and that’s what the purpose of this account is, but what kinds of education expenses can you use a 529 to fund?
Elizabeth Ayoola:
Funds in a 529 account can be used to cover a vast range of qualified expenses, and that can range from tuition to computers and education related equipment. The expenses can also be used to pay for education needs of your beneficiaries. And the good thing that I like is that the beneficiaries can be in anywhere from kindergarten through grade 12. So that said, it’s not only for college students.
Sean Pyles:
Right, that is a really good point because people hear about 529 accounts, and they think they may be specifically for people going through a traditional four-year education, but people can also use the funds in the 529 college savings plan to cover things like trade schools too. So it really isn’t only for that traditional four-year higher education route.
Sara Rathner:
So earlier you mentioned that 529s are tax advantaged accounts. Can you talk a little bit about the tax treatment of them, and what should people know when they’re considering opening a 529?
Elizabeth Ayoola:
Well, one thing that I personally like about these accounts that some people don’t know also is that some states offer a tax deduction if you contribute to their plan. And when I say their plan, I mean the state that you live in. But there is no federal tax deduction for a 529 contribution. So it’s only at a state level. The tax deduction is usually capped. So no, you can’t just deduct your entire contribution. The deduction amount varies from state to state. So it’s best that you check in your state what the amount may be, if they offer it.
And a little bit off-topic, but I also like that the IRS doesn’t set a cap on your contributions to a 529 account, although some states do set a limit.
Sean Pyles:
And I’ll call out two other tax benefits of 529 college savings plans. The first is that investment growth in this account is tax-free, and second, distribution for qualified expenses like tuition or books are also tax-free.
Elizabeth, another important thing to know about 529 college savings plans is that each state has their own, and you don’t have to choose the 529 plan from the state that you live in. And this can all get a little bit confusing because there are so many states to choose from. So, at a high level, can you outline the main differences between a 529 from one state to the next, and how would someone go about choosing which state’s 529 plan to use?
Elizabeth Ayoola:
One of the major differences that people should know and a reason that people may cheat on their state’s 529 plan is lower fees. I personally have a 529 from a different state than my current home state for that very reason. So people should consider shopping around and comparing fees before opening an account. Ultimately, the goal should be to do some math and see whether the deductions and the credits that you’re going to get in the state that you live in are worth more than the lower fees that you could get in another state in the long term.
Also, note that you can open multiple 529 accounts. I have multiple 529 accounts. I recently opened a second one in my home state, Florida, because my son was awarded a grant and it could be transferred to a 529 account, but the catch was it had to be a Florida 529 plan.
Sara Rathner:
So 529s have some flexibility, which we talked about before, not just for four-year educations, but also for trade schools and for K to 12 expenses as well. And interestingly enough, 529s were just made even more flexible. Can you talk about recent changes around the ability to roll 529 funds into a Roth IRA, and what that means for folks who maybe aren’t considering going to college?
Elizabeth Ayoola:
The Secure Act 2.0 was recently passed, and if I can be honest, that’s what motivated me to open up my first 529 account, and I just opened it last year. I was always on the fence and only saved money in a brokerage account because I was afraid of what would happen if my son decided not to go to college in 15 years. He’s six, by the way.
I decided to get off the fence when the Secure Act 2.0 made it possible for people to roll at least a portion of the unused funds into a Roth account. However, you do have to wait until 15 years after you’ve opened the 529 account before you can roll those funds over. And you can also only roll up to a certain limit starting in 2024. It may be ideal to read the IRS’s rules, they have a lot of fine print around the conversion or speak to a finance professional about it.
I think Roths are also awesome because they aren’t subject to required minimum distributions and withdrawals. They’re also tax-free when you meet certain requirements like waiting until 59-1/2, amongst other rules.
Sara Rathner:
All right, well thank you for that great summary of the tax rules surrounding this new change. We just want to let you all know that we are not investing or tax professionals, and if you have any specific questions to your own situation, definitely consult a professional who can give you guidance.
Now let’s turn to the fun stuff. The math, Sean. I know that you are in the midst of your certified financial planner coursework. I have slogged through that myself. It is a lot. It is a lot of math.
Sean Pyles:
Sara Rathner:
And now that you know how to do it, I’m sure you’re eager to show off your chops. So are there any insights you can share that will help our listener figure out how much they need to save every month or every year to help their friends reach their savings goals?
Sean Pyles:
As a matter of fact, yes. And you’re right, I have been waiting for an opportunity to show off what I’ve been learning about because often I’m just doing calculations in silence and this is a time for me to be loud and proud about hitting buttons on a calculator. So let’s do it.
I’ll spare you and our listeners the specifics of the calculation, but I plugged the listener’s situation into a time value of money calculation and got a rough estimate for how much they will need to save.
Sara Rathner:
All right, drum roll. What’s the number?
Sean Pyles:
For our listener to meet the savings goal that they outlined in their question, remember, they want to save for four years of education at a private college starting now-ish and saving until the kid finishes school. They would need to save around $8,000 per year. Obviously, that’s a lot of money to contribute to a 529 account, no less for a kid who isn’t your own. And this is why 529s are often just part of the picture when it comes to paying for college, which usually includes some combination of scholarships, grants and loans and generous gifts from family friends.
Sara Rathner:
That is definitely more than a hundy a month.
Sean Pyles:
Yeah, that’s for sure.
All right, so all of that math out of the way, I want to talk about the other part of our listener’s question. They seem to be concerned about how much they should contribute and also how to talk about this with their friends. I am not a parent, so I would love to hear from both of you who are parents, how you would approach the situation if you had such a generous friend. Would you welcome the money, or say get out of my business? Or if you are going to accept this money, if you want to have this conversation with your friend, how would you want them to communicate that with you?
Elizabeth Ayoola:
Honestly, I would welcome the money, especially because I’m a single mama. So as a matter of fact, my friends always contribute to my son’s savings account in London for his birthdays or holidays and I really, really appreciate it. It can be a better gift to me than toys that stab me in the foot within a few days.
Sean Pyles:
Elizabeth Ayoola:
I would also appreciate a friend asking me what my savings goals are, so they know how to support that goal. However, I do think, for the sake of boundaries, I would like my friend to ask me my comfort level with the topic before they dive in and start trying to give advice.
I think it’s also important to note that not everyone is comfortable discussing money or financial goals. But with that said, here’s an example of maybe how somebody could say it. So you may say, “Hey, I want to help you reach John’s college savings goal. Are you comfortable discussing that target number you have in mind, and can you tell me how I can support that?” Or another option could be you saying, “Hey, would you like to do the math yourself and then let me know how I can support that goal?” So those are just a couple of options.
Sara Rathner:
Yeah, I mean, I’m not going to look a gift horse in the mouth. College is expensive now, and it’s only going to become even more expensive in the future. Even in-state tuition, where I live in Virginia, is often over $20,000 a year. That used to be the economical way to get a four-year degree, and now it’s also very, very expensive. So what’s it going to be like by the time my kid’s in college? I don’t know. A lot.
Sean Pyles:
I think we can confidently say more money.
Sara Rathner:
Confidently, we can say a whole lot more money.
I would want my friends to decide for themselves what they feel comfortable giving, because I don’t feel comfortable telling another person how they should allot their money because they have other competing financial goals and obligations. And I never want to tell another person what they can do with their money unless they specifically ask me to tell them what to do with their money, which nobody ever asks me.
Sean Pyles:
And you also don’t want to give the impression that your friends can’t look after their own family’s finances, right? That’s a bit of the awkwardness underlying the question, is you want to help someone that you care about and this child that you’re seeing grow up in the world, but you don’t want to impose your will upon them. It seems like our listener is being very thoughtful about that. And you don’t want to make it seem like you think they aren’t doing enough.
Sara Rathner:
Right, or you think their kids should go to a four-year private university because that’s what you value, but maybe the parents have other values that they want to impart upon their child as the kid grows up, and then the kid will go off and do their own thing as a young adult.
In my case, we have a 529 for our son. We have family members who’ve contributed money. They’ve just written checks to us, and then we deposit it into our account that is tied to our 529 and then deposit the money into the 529.
Ultimately, when you contribute, you do go through the account owners, and that’s oftentimes parent or guardians. You are going to have to communicate with them because they’re ultimately the gatekeeper of that account. They are the owners, and then the child is the beneficiary.
Sean Pyles:
That actually brings up something that I wanted to talk about, which is who would own this account? The listener could in theory open up a 529 account on their own for this kid. But long-term, it’s probably going to be easier if the parents are the owners of the account, because that way when the kid is eventually ready to go to college or trade school or what have you, the parent can be the one managing those distributions.
Personally, I know as a friend, as much as I love my friends and my friends’ kids, I don’t want to have to manage that down the road. So that’s something else that they should think about when they’re talking about this with their friends.
Sara Rathner:
I definitely agree with talking to the parents and ultimately contributing to an account that the parents or guardians are in charge of.
Sean Pyles:
Well, Elizabeth, do you have any final thoughts around 529s and helping your friend’s kids afford college?
Elizabeth Ayoola:
I think we have given some very juicy tips here and only two more things come to mind, which is one, while it’s noble to contribute to your friend’s kids or loved one’s kids’ 529 account, please take advantage of any state income tax deductions that you might be eligible for. The rules around this can be muddy. And I know the original listener who asked this question lives in a different state than where he’s contributing, but sometimes you’re able to get a deduction depending on the state that you live in. So if you can get money back, I mean, why not?
My second thing that I’ll say is that if your loved one doesn’t have a number in mind, guide them to a college savings calculator or run the numbers together over coffee if they’re open to doing that.
Sean Pyles:
Great. Well, thank you so much for coming on and talking with us.
Elizabeth Ayoola:
I loved it. Thank you for having me.
Sean Pyles:
And that is all we have for this episode. If you have a money question of your own, turn to the Nerds and call or text us your question at 901-730-6373. That’s 901-730-NERD. You can also email us at [email protected].
Visit nerdwallet.com/podcast for more info on this episode. And remember to follow, rate, and review us wherever you’re getting this podcast.
Sara Rathner:
This episode was produced by Sean Pyles and myself. Kevin Berry and Tess Vigeland helped with editing. Sara Brink mixed our audio. And a big thank you to NerdWallet’s editors for all of their help.
And here’s our brief disclaimer:
We are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances.
Sean Pyles:
And with that said, until next time, turn to the Nerds.
The VA home loan: Unbeatable benefits for veterans
For many who qualify, VA home loans are some of the best mortgages available.
Verify your VA loan eligibility. Start here
Backed by the U.S. Department of Veterans Affairs, VA loans are designed to help active-duty military personnel, veterans and certain other groups become homeowners at an affordable cost.
The VA loan asks for no down payment, requires no mortgage insurance, and has lenient rules about qualifying, among many other advantages.
Here’s everything you need to know about qualifying for and using a VA loan.
In this article (Skip to…)
Top 10 VA loan benefits
1. No down payment on a VA loan
Most home loan programs require you to make at least a small down payment to buy a home. The VA home loan is an exception.
Verify your VA loan eligibility. Start here
Rather than paying 5%, 10%, 20% or more of the home’s purchase price upfront in cash, with a VA loan you can finance up to 100% of the purchase price.
The VA loan is a true no-money-down home mortgage opportunity.
2. No mortgage insurance for VA loans
Typically, lenders require you to pay for mortgage insurance if you make a down payment that’s less than 20%.
This insurance — which is known as private mortgage insurance (PMI) for a conventional loan and a mortgage insurance premium (MIP) for an FHA loan — would protect the lender if you defaulted on your loan.
VA loans require neither a down payment nor mortgage insurance. That makes a VA-backed mortgage very affordable upfront and over time.
3. VA loans have a government guarantee
There’s a reason why the VA loan comes with such favorable terms.
The federal government guarantees these loans — meaning a portion of the loan amount will be repaid to the lender even if you’re unable to make monthly payments for whatever reason.
This guarantee encourages and enables private lenders to offer VA loans with exceptionally attractive terms.
4. You can shop for the best VA loan rates
VA loans are neither originated nor funded by the VA. They are not direct loans from the government. Furthermore, mortgage rates for VA loans are not set by the VA itself.
Instead, VA loans are offered by U.S. banks, savings-and-loans institutions, credit unions, and mortgage lenders — each of which sets its own VA loan rates and fees.
This means you can shop around and compare loan offers and still choose the VA loan that works best for your budget.
5. VA loans don’t allow a prepayment penalty
A VA loan won’t restrict your right to sell the property partway through your loan term.
There’s no prepayment penalty or early-exit fee no matter within what time frame you decide to sell your home.
Furthermore, there are no restrictions regarding a refinance of your VA loan.
You can refinance your existing VA loan into another VA loan via the agency’s Interest Rate Reduction Refinance Loan (IRRRL) program, or switch into a non-VA loan at any time.
6. VA mortgages come in many varieties
A VA loan can have a fixed rate or an adjustable rate. In addition, you can use a VA loan to buy a house, condo, new-built home, manufactured home, duplex, or other types of properties.
Or, it can be used for refinancing your existing mortgage, making repairs or improvements to your home, or making your home more energy-efficient.
The choice is yours. A VA-approved lender can help you decide.
Verify your VA loan eligibility. Start here
7. It’s easier to qualify for VA loans
Like all mortgage types, VA loans require specific documentation, an acceptable credit history, and sufficient income to make your monthly payments.
But, compared to other loan programs, VA loan guidelines tend to be more flexible. This is made possible because of the VA loan guarantee.
The Department of Veterans Affairs genuinely wants to make the loan process easier for military members, veterans, and qualifying military spouses to buy or refinance a home.
8. VA loan closing costs are lower
The VA limits the closing costs lenders can charge to VA loan applicants. This is another way that a VA loan can be more affordable than other types of loans.
Money saved on closing costs can be used for furniture, moving costs, home improvements, or anything else.
9. The VA offers funding fee flexibility
VA loans require a “funding fee,” an upfront cost based on your loan amount, your type of eligible service, your down payment size, and other factors.
Funding fees don’t need to be paid in cash, though. The VA allows the fee to be financed with the loan, so nothing is due at closing.
And, not all VA borrowers will pay it. VA funding fees are normally waived for veterans who receive VA disability compensation and for unmarried surviving spouses of veterans who died in service or as a result of a service-connected disability.
10. VA loans are assumable
Most VA loans are “assumable,” which means you can transfer your VA loan to a future home buyer if that person is also VA-eligible.
Assumable loans can be a huge benefit when you sell your home — especially in a rising mortgage rate environment.
If your home loan has today’s low rate and market rates rise in the future, the assumption features of your VA become even more valuable.
VA loan rates
The VA loan is viewed as one of the lowest-risk mortgage types available on the market.
Verify your VA loan eligibility. Start here
This safety allows banks to lend to veteran borrowers at lower interest rates.
Today’s VA loan rates*
Loan Type
Current Mortgage Rate
VA 30-year FRM
% (% APR)
Conventional 30-year FRM
% (% APR)
VA 15-year FRM
% (% APR)
Conventional 15-year FRM
% (% APR)
*Current rates provided daily by partners of the Mortgage Reports. See our loan assumptions here.
VA rates are more than 25 basis points (0.25%) lower than conventional rates on average, according to data collected by mortgage software company Ellie Mae.
Most loan programs require higher down payment and credit scores than the VA home loan. In the open market, a VA loan should carry a higher rate due to more lenient lending guidelines and higher perceived risk.
Yet the result of the Veterans Affairs efforts to keep veterans in their homes means lower risk for banks and lower borrowing costs for eligible veterans.
VA mortgage calculator
Eligibility
Am I eligible for a VA home loan?
Contrary to popular belief, VA loans are available not only to veterans, but also to other classes of military members.
Find and lock a low VA loan rate today. Start here
The list of eligible VA borrowers includes:
Active-duty service members
Members of the National Guard
Reservists
Surviving spouses of veterans
Cadets at the U.S. Military, Air Force or Coast Guard Academy
Midshipmen at the U.S. Naval Academy
Officers at the National Oceanic & Atmospheric Administration.
A minimum term of service is typically required.
Minimum service required for a VA mortgage
VA home loans are available to active-duty service members, veterans (unless dishonorably discharged), and in some cases, surviving family members.
To be eligible, you need to meet one of these service requirements:
You’ve served 181 days of active duty during peacetime
You’ve served 90 days of active duty during wartime
You’ve served six years in the Reserves or National Guard
Your spouse was killed in the line of duty and you have not remarried
Your eligibility for the VA home loan program never expires.
Veterans who earned their VA entitlement long ago are still using their benefit to buy homes.
The VA loan Certificate of Eligibility (COE)
What is a COE?
In order to show a mortgage company you are VA-eligible, you’ll need a Certificate of Eligibility (COE). Your lender can acquire one for you online, usually in a matter of seconds.
Verify your VA home loan eligibility. Start here
How to get your COE (Certificate of Eligibility)
Getting a Certificate of Eligibility (COE) is very easy in most cases. Simply have your lender order the COE through the VA’s automated system. Any VA-approved lender can do this.
Alternatively, you can order your certificate yourself through the VA benefits portal.
If the online system is unable to issue your COE, you’ll need to provide your DD-214 form to your lender or the VA.
Does a COE mean you are guaranteed a VA loan?
No, having a Certificate of Eligibility (COE) doesn’t guarantee a VA loan approval.
Your COE shows the lender you’re eligible for a VA loan, but no one is guaranteed VA loan approval.
You must still qualify for the loan based on VA mortgage guidelines. The guarantee part of the VA loan refers to the VA’s promise to the lender of repayment if the borrower defaults.
Qualifying for a VA mortgage
VA loan eligibility vs. qualification
Being eligible for VA home loan benefits based on your military status or affiliation doesn’t necessarily mean you’ll qualify for a VA loan.
You still have to qualify for a VA mortgage based on your credit, debt, and income.
Verify your VA loan eligibility. Start here
Minimum credit score for a VA loan
The VA has established no minimum credit score for a VA mortgage.
However, many VA mortgage lenders require minimum FICO scores of 620 or higher — so apply with many lenders if your credit score might be an issue.
Even VA lenders that allow lower credit scores don’t accept subprime credit.
VA underwriting guidelines state that applicants must have paid their obligations on time for at least the most recent 12 months to be considered satisfactory credit risks.
In addition, the VA usually requires a two-year waiting period following a Chapter 7 bankruptcy or foreclosure before it will insure a loan.
Borrowers in Chapter 13 must have made at least 12 on-time payments and secure the approval of the bankruptcy court.
Verify your VA loan home buying eligibility. Start here
VA loan debt-to-income ratios
The relationship of your debts and your income is called your debt-to-income ratio, or DTI.
VA underwriters divide your monthly debts (car payments, credit cards, and other accounts, plus your proposed housing expense) by your gross (before-tax) income to come up with your debt-to-income ratio.
For instance:
If your gross income is $4,000 per month
And your total monthly debt is $1,500 (including the new mortgage, property taxes and homeowners insurance, plus other debt payments)
Then your DTI is 37.5% (1500/4000=0.375)
A DTI over 41% means the lender has to apply additional formulas to see if you qualify under residual income guidelines.
VA residual income rules
VA underwriters perform additional calculations that can affect your mortgage approval.
Factoring in your estimated monthly utilities, your estimated taxes on income, and the area of the country in which you live, the VA arrives at a figure which represents your “true” costs of living.
It then subtracts that figure from your income to find your residual income (e.g. your money “left over” each month).
Think of the residual income calculation as a real-world simulation of your living expenses.
It is the VA’s best effort to ensure that military families have a stress-free homeownership experience.
Here is an example of how residual income works, assuming a family of four which is purchasing a 2,000 square-foot home on a $5,000 monthly income.
Future house payment, plus other debt payments: $2,500
Monthly estimated income taxes: $1,000
Monthly estimated utilities at $0.14 per square foot: $280
This leaves a residual income calculation of $1,220.
Now, compare that residual income to for a family of four:
Northeast Region: $1,025
Midwest Region: $1,003
South Region: $1,003
West Region: $1,117
The borrower in our example exceeds VA’s residual income standards in all parts of the country.
Therefore, despite the borrower’s debt-to-income ratio of 50%, the borrower could get approved for a VA loan.
Verify your VA loan eligibility. Start here
Qualifying for a VA loan with part-time income
You can qualify for this type of financing even if you have a part-time job or multiple jobs.
You must show a 2-year history of making consistent part-time income, and stability in the number of hours worked. The lender will make sure any income received appears stable. See our complete guide to getting a mortgage when you’re self-employed or work part-time.
VA funding fees and loan limits
About the VA funding fee
The VA charges an upfront fee to defray the costs of the program and make it sustainable for the future.
Veterans pay a lump sum that varies depending on the loan purpose and down payment amount.
The fee is normally wrapped into the loan. It does not add to the cash needed to close the loan.
Find out if you qualify for a VA loan. Start here
VA home purchase funding fees
Type of Military Service
Down Payment
Fee for First-Time Use
Fee for Subsequent Use
Active Duty, Reserves, and National Guard
None
2.3%
3.6%
5% or more
1.65%
1.65%
10% or more
1.4%
1.4%
VA cash-out refinance funding fees
Type of Military Service
Fee for First-Time Use
Fee for Subsequent Uses
Active Duty, Reserves, and National Guard
2.3%
3.6%
VA streamline refinances (IRRRL) & assumptions
Type of Military Service
Fee for First-Time Use
Fee for Subsequent Uses
Active Duty, Reserves, and National Guard
0.5%
0.5%
Manufactured home loans not permanently affixed
Type of Military Service
Fee for First-Time Use
Fee for Subsequent Uses
Active Duty, Reserves, and National Guard
1.0%
1.0%
VA loan limits in 2024
VA loan limits have been repealed, thanks to the Blue Water Navy Vietnam Veterans Act of 2019.
There is no maximum amount for which a home buyer can receive a VA loan, at least as far as the VA is concerned.
However, private lenders may set their own limits. So check with your lender if you are looking for a VA loan above local conforming loan limits.
Verify your VA loan eligibility. Start here
Eligible property types
Houses you can buy with a VA loan
VA mortgages are flexible about what types of property you can and can’t purchase. A VA loan can be used to buy a:
Detached house
Condo
New-built home
Manufactured home
Duplex, triplex or four-unit property
Find out if you qualify for a VA loan. Start here
You can also use a VA mortgage to refinance an existing loan for any of those types of properties.
VA loans and second homes
Federal regulations limit loans guaranteed by the Department of Veterans Affairs to “primary residences” only.
However, “primary residence” is defined as the home in which you live “most of the year.”
Therefore, if you own an out-of-state residence in which you live for more than six months of the year, this other home, whether it’s your vacation home or retirement property, becomes your official “primary residence.”
For this reason, VA loans are popular among aging military borrowers.
Buying a multi-unit home with a VA loan
VA loans allow you to buy a duplex, triplex, or four-plex with 100% financing. You must live in one of the units.
Buying a home with more than one unit can be challenging.
Mortgage lenders consider these properties riskier to finance than traditional, single-family residences, so you’ll need to be a stronger borrower.
VA underwriters must make sure you will have enough emergency savings, or cash reserves, after closing on your house. That’s to ensure you’ll have money to pay your mortgage even if a tenant fails to pay rent or moves out.
The minimum cash reserves needed after closing is six months of mortgage payments (covering principal, interest, taxes, and insurance – PITI).
Your lender will also want to know about previous landlord experience you’ve had, or any experience with property maintenance or renting.
If you don’t have any, you may be able to sidestep that issue by hiring a property management company. But that’s up to the individual lender.
Your lender will look at the income (or potential income) of the rental units, using either existing rental agreements or an appraiser’s opinion of what the units should fetch.
They’ll usually take 75% of that amount to offset your mortgage payment when calculating your monthly expenses.
VA loans and rental properties
You cannot use a VA loan to buy a rental property. You can, however, use a VA loan to refinance an existing rental home you once occupied as a primary home.
For home purchases, in order to obtain a VA loan, you must certify that you intend to occupy the home as your principal residence.
If the property is a duplex, triplex, or four-unit apartment building, you must occupy one of the units yourself. Then you can rent out the other units.
The exception to this rule is the VA’s Interest Rate Reduction Refinance Loan (IRRRL).
This loan, also known as the VA Streamline Refinance, can be used for refinancing an existing VA loan on a home where you currently live or where you used to live, but no longer do.
Check your VA IRRRL eligibility. Start here
Buying a condo with a VA loan
The VA maintains a list of approved condo projects within which you may purchase a unit with a VA loan.
At VA’s website, you can search for the thousands of approved condominium complexes across the U.S.
If you are VA-eligible and in the market for a condo, make sure the unit you’re interested in is approved.
As a buyer, you are probably not able to get the complex VA-approved. That’s up to the management company or homeowner’s association.
If a condo you like is not approved, you must use other financing like an FHA or conventional loan or find another property.
Note that the condo must meet FHA or conventional guidelines if you want to use those types of financing.
Veteran mortgage relief with the VA loan
The U.S. Department of Veterans Affairs, or VA, provides home retention assistance. The VA intervenes when a veteran is having trouble making home loan payments.
The VA works with loan servicers to offer loan options to the veteran, other than foreclosure.
Find out if you qualify for a VA loan. Start here
In fiscal year 2019, the VA made over 400,000 contact actions to reach borrowers and loan servicers. The intent was to work out a mutually agreeable repayment option for both parties.
More than 100,000 veteran homeowners avoided foreclosure in 2019 alone thanks to this effort.
The initiative has saved the taxpayer an estimated $2.6 billion. More importantly, vast numbers of veterans and military families got another chance at homeownership.
When NOT to use a VA loan
If you have good credit and 20% down
A primary advantage to VA home loans is the lack of mortgage insurance.
However, the VA guarantee does not come free of charge. Borrowers pay an upfront funding fee, which they usually choose to add to their loan amount.
The fee ranges from 1.4% to 3.6%, depending on the down payment percentage and whether the home buyer has previously used his or her VA mortgage eligibility. The most common fee is 2.3%.
Find out if you qualify for a VA loan. Start here
On a $200,000 purchase, a 2.3% fee equals $4,600.
However, buyers who choose a conventional mortgage and put 20% down get to avoid mortgage insurance and the upfront fee. For these military home buyers, the VA funding fee might be an unnecessary expense.
The exception: Mortgage applicants whose credit rating or income meets VA guidelines but not those of conventional mortgages may still opt for VA.
If you’re on the “CAIVRS” list
To qualify for a VA loan, you must prove you have made good on previous government-backed debts and that you have paid taxes.
The Credit Alert Verification Reporting System, or “CAIVRS,” is a database of consumers who have defaulted on government obligations. These individuals are not eligible for the VA home loan program.
If you have a non-veteran co-borrower
Veterans often apply to buy a home with a non-veteran who is not their spouse.
This is okay. However, it might not be their best choice.
As the veteran, your income must cover your half of the loan payment. The non-veteran’s income cannot be used to compensate for the veteran’s insufficient income.
Plus, when a non-veteran owns half the loan, the VA guarantees only half that amount. The lender will require a 12.5% down payment for the non-guaranteed portion.
The Conventional 97 mortgage, on the other hand, allows down payments as low as 3%.
Another low-down-payment mortgage option is the FHA home loan, for which 3.5% down is acceptable.
The USDA home loan also requires zero down payment and offers similar rates to VA loans. However, the property must be within USDA-eligible areas.
If you plan to borrow with a non-veteran, one of these loan types might be your better choice.
Explore your mortgage options. Start here
If you apply with a credit-challenged spouse
In states with community property laws, VA lenders must consider the credit rating and financial obligations of your spouse. This rule applies even if he or she will not be on the home’s title or even on the mortgage.
Such states are as follows.
Arizona
California
Idaho
Louisiana
Nevada
New Mexico
Texas
Washington
Wisconsin
A spouse with less-than-perfect credit or who owes alimony, child support, or other maintenance can make your VA approval more challenging.
Apply for a conventional loan if you qualify for the mortgage by yourself. The spouse’s financial history and status need not be considered if he or she is not on the loan application.
Verify your VA loan home buying eligibility. Start here
If you want to buy a vacation home or investment property
The purpose of VA financing is to help veterans and active-duty service members buy and live in their own home. This loan is not meant to build real estate portfolios.
These loans are for primary residences only, so if you want a ski cabin or rental, you’ll have to get a conventional loan.
If you want to purchase a high-end home
Starting January 2020, there are no limits to the size of mortgage a lender can approve.
However, lenders may establish their own limits for VA loans, so check with your lender before applying for a large VA loan.
Spouses and the VA mortgage program
What spouses are eligible for a VA loan?
What if the service member passes away before he or she uses the benefit? Eligibility passes to an unremarried spouse, in many cases.
Find and lock a low VA loan rate today. Start here
For the surviving spouse to be eligible, the deceased service member must have:
Died in the line of duty
Passed away as a result of a service-connected disability
Been missing in action, or a prisoner of war, for at least 90 days
Been a totally disabled veteran for at least 10 years prior to death, and died from any cause
Also eligible are remarried spouses who married after the age of 57, on or after December 16, 2003.
In these cases, the surviving spouse can use VA loan eligibility to buy a home with zero down payment, just as the veteran would have.
VA loan benefits for surviving spouses
Surviving spouses have an additional VA loan benefit, however. They are exempt from the VA funding fee. As a result, their loan balance and monthly payment will be lower.
Surviving spouses are also eligible for a VA streamline refinance when they meet the following guidelines.
The surviving spouse was married to the veteran at the time of death
The surviving spouse was on the original VA loan
VA streamline refinancing is typically not available when the deceased veteran was the only applicant on the original VA loan, even if he or she got married after buying the home.
In this case, the surviving spouse would need to qualify for a non-VA refinance, or a VA cash-out loan.
A cash-out mortgage through VA requires the military spouse to meet home purchase eligibility requirements.
If this is the case, the surviving spouse can tap into the home’s equity to raise cash for any purpose, or even pay off an FHA or conventional loan to eliminate mortgage insurance.
Qualifying if you receive (or pay) child support or alimony
Buying a home after a divorce is no easy task.
If, prior to your divorce, you lived in a two-income household, you now have less spending power and a reduced monthly income for purposes of your VA home loan application.
With less income, it can be harder to meet both the VA Home Loan Guaranty’s debt-to-income (DTI) guidelines and the VA residual income requirement for your area.
Receiving alimony or child support can counteract a loss of income.
Mortgage lenders will not require you to provide information about your divorce agreement’s alimony or child support terms, but if you’re willing to disclose, it can count toward qualifying for a home loan.
Different VA-approved lenders will treat alimony and child support income differently.
Typically, you will be asked to provide a copy of your divorce settlement or other court paperwork to support the alimony and child support payments.
Lenders will then want to see that the payments are stable, reliable, and likely to continue for another 36 months, at least.
You may also be asked to show proof that alimony and child support payments have been made in the past reliably, so that the lender may use the income as part of your VA loan application.
If you are the payor of alimony and child support payments, your debt-to-income ratio can be harmed.
Not only might you be losing the second income of your dual-income households, but you’re making additional payments that count against your outflows.
VA mortgage lenders make careful calculations with respect to such payments.
You can still get approved for a VA loan while making such payments — it’s just more difficult to show sufficient monthly income.
VA loan assumption
What is VA loan assumption?
One benefit for home buyers is that VA loans are assumable. When you assume a mortgage loan, you take over the current homeowner’s monthly payment.
Verify your VA loan home buying eligibility. Start here
That could be a big advantage if mortgage rates have risen since the original owner purchased the home. The buyer would be able to acquire a low-rate, affordable loan — and it could make it easier for the seller to find a willing buyer in a tough market.
VA loan assumption savings
Buying a home via an assumable mortgage loan is even more appealing when interest rates are on the rise.
For example:
Say a seller-financed $200,000 for their home in 2013 at an interest rate of 3.25% on a 30-year fixed loan
Using this scenario, their principal and interest payment would be $898 per month
Let’s assume current 30-year fixed rates averaged 4.10%
If you financed $200,000 at 4.10% for a 30-year loan term, your monthly principal and interest payment would be $966 per month
Additionally, because the seller has already paid four years into the loan term, they’ve already paid nearly $25,000 in interest on the loan.
By assuming the loan, you would save $34,560 over the 30-year loan due to the difference in interest rates. You would also save roughly $25,000 thanks to the interest already paid by the sellers.
That comes out to a total savings of almost $60,000!
How to assume (take on) a VA loan
There are currently two ways to assume a VA loan.
The new buyer is a qualified veteran who “substitutes” his or her VA eligibility for the eligibility of the seller
The new home buyer qualifies through VA standards for the mortgage payment. This is the safest method for the seller as it allows the loan to be assumed knowing that the new buyer is responsible for the loan, and the seller is no longer responsible for the loan
The lender and/or the VA needs to approve a loan assumption.
Loans serviced by a lender with automatic authority may process assumptions without sending them to a VA Regional Loan Center.
For lenders without automatic authority, the loan must be sent to the appropriate VA Regional Loan Center for approval. This loan process will typically take several weeks.
When VA loans are assumed, it’s the servicer’s responsibility to make sure the homeowner who assumes the property meets both VA and lender requirements.
VA loan assumption requirements
For a VA mortgage assumption to take place, the following conditions must be met:
The existing loan must be current. If not, any past due amounts must be paid at or before closing
The buyer must qualify based on VA credit and income standards
The buyer must assume all mortgage obligations, including repayment to the VA if the loan goes into default
The original owner or new owner must pay a funding fee of 0.5% of the existing principal loan balance
A processing fee must be paid in advance, including a reasonable estimate for the cost of the credit report
Find out if you qualify for a VA loan. Start here
Finding assumable VA loans
There are several ways for home buyers to find an assumable VA loan.
Believe it or not, print media is still alive and well. Some home sellers advertise their assumable home for sale in the newspaper, or in a local real estate publication.
There are a number of online resources for finding assumable mortgage loans.
Websites like TakeList.com and Zumption.com give homeowners a way to showcase their properties to home buyers looking to assume a loan.
With the help of the Multiple Listing Service (MLS), real estate agents remain a great resource for home buyers.
This applies to home buyers specifically searching for assumable VA loans as well.
How do I apply for a VA loan?
You can easily and quickly have a lender pull your certificate of eligibility (COE) to make sure you’re able to get a VA loan.
Most mortgage lenders offer VA home loans. So you’re free to shop and compare rates with just about any company that catches your eye.
Getting a VA loan for your new home is similar in many ways to securing any other purchase loan. Once you find an ideal home in your price range, you make a purchase offer, and then undergo VA appraisal and underwriting.
VA appraisal ensures that the home meets its minimum property requirements (MPRs) and is structurally sound and safe for occupancy.
What’s more, VA-specific mortgage lenders are actually some of the highest-rated (and lowest-priced) on the market. Here are a few we’d recommend checking out.
Time to make a move? Let us find the right mortgage for you