home loans
FHA Loans
Mortgages that are insured by the Federal Housing Administration, otherwise known as FHA Loans, are popular options for first and second-time home buyers. FHA loans are relatively easy to qualify for. FHA offers low down payment and low credit requirements which has made these loans an amazing option for any prospective home buyer. Having the loan backed by the government lets lenders be more flexible with their eligibility requirements. Should a borrower default on repayment of the loan, the FHA reimburses the lender for its loss. With less risk, lenders have more reason to offer FHA loans at competitive rates, which is great for home buyers!
FHA Mortgage Basics
The FHA mortgage program is one of the best tools first time home buyers can use to get into their home when they’re relatively cash poor and have little credit experience. FHA’s 203(b) mortgage insurance program is FHA’s most popular loan product for single-family home buyers.
FHA has down payment as low as 3.5% and low credit requirements for eligibility have made these loans an amazing option for any prospective home buyer.
FHA is backed by the government which allow lenders be more flexible with their eligibility requirements. Should a borrower default on repayment of the loan, the FHA reimburses the lender for its loss. With less risk, lenders have more reason to offer FHA loans at competitive rates, which is great for home buyers!
FHA tightly regulates what kind of closing costs you can be charged, as well as limiting their amounts. However, if you bring a down payment smaller than 20 percent of the purchase price of your home to the table, you’ll be responsible for paying for mortgage insurance.
Pros and Cons of FHA Mortgages
FHA mortgages are generally pretty good options, but they’re not for every home or every home buyer. Just a few things to think about:
- Qualifying for an FHA loan is one of the easiest ways to be approved for a mortgage. They require low down payments, and your credit score can be less than stellar. In fact, borrowers with credit scores as low as 500 can qualify for FHA mortgage loans.
- Low down payment requirement. You can borrow from FHA with as little as 3.5 percent of the purchase price as a down payment. You’ll see benefits for bringing 10 percent, but more than that is just showing off.
- Controlled closing costs. FHA tightly regulates what closing costs can appear on your closing statement and how much they can be. This has deterred some lenders from using them, but overall, FHA loans are very easy to find.
- Competitive Interest Rates. FHA loans offer low interest rates to help homeowners afford their monthly housing payments. This is a great benefit when compared to the negative features of subprime mortgages.
- Bankruptcy / Foreclosure. Having a bankruptcy or foreclosure in the past few years doesn't mean you can't qualify for an FHA loan. Re-establishing good credit and a solid payment history can help satisfy FHA requirements.
- Determining Credit History. There are many ways a lender can assess your credit history, and it includes more than just looking at your credit card activity. Any type of payment such as utility bills, rent, student loans, etc. should all reflect a general pattern of reliability.
- It’s an Assumable Mortgage. This means if you want to sell your home, the buyer can “assume” the loan you have.
Potential lifetime mortgage insurance
Since June 2013, FHA’s mortgage insurance premium (MIP) has been a lifetime sentence for anyone with less than 10 percent down. That can be a big chunk of extra payment for no benefit, forcing you to refinance down the line.
Additional inspections required
Anyone who has sold to an FHA buyer and had problems can tell you that they’re not always easy. Not only do you have your home inspector go through the house, FHA sends an appraiser who performs an FHA inspection. It’s meant to ensure the house meets FHA’s minimum requirements, but can create a last minute logjam.
Can be slow to close
FHA requires additional paperwork and in-the-field inspections to ensure their gamble is one that’s likely to end in long-term homeownership. Foreclosure is a dirty word at FHA, so these loans take a bit longer to close due to the additional checks and balances.
Homebuyers looking to secure an FHA loan must first meet a few standard eligibility requirements. While not as strict as most conventional loans, FHA loans require borrowers to conform to these standards:
- Must be a lawful resident of the USA
- Valid Social Security Number is required
- Must adhere to state age requirement for signing a mortgage
- Must have steady employment or source of income for at least two years
- Must have a credit score of at least 580
- Borrowers with credit scores between 500 and 579 are still eligible, but a down payment of no less than 10% must be made
- Must be able to pay a down payment of 3.5% minimum (unless more is required as stated above)
- Must have a debt-to-income ratio of less than 45% (actual amount varies by lender)
- Must have a clean Credit Alert Verification Reporting System (CAIVRS) report showing no current delinquencies
- Must intend to use loan proceeds toward a primary residence
- Property must be appraised by an FHA-approved appraiser
- Property must meet minimum standards
- Must be 2 years out of bankruptcy (if applicable)
- Must be 3 years out of foreclosure (if applicable)
A “conventional, conforming” mortgage is kind of the cream of the crop when it comes to home loans, but what makes it conventional and whose rules is it conforming to? Being a conventional, conforming loan means that this particular loan will be purchased by the Federal National Mortgage Association (otherwise known as Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac) because it meets their requirements for purchase. These rules change yearly, generally in the fall. The main change, year after year, is to the upper loan limits.
For 2018, the conventional loan limit in most parts of the United States is $453,100. Areas designated as “high-cost” have higher rates, like Alaska and Hawaii, where limits may meet or exceed $679,650 for a single family home because housing is so much more expensive.
Anything above that limit is known as a jumbo loan, which is usually a conventional, non-conforming loan. Fannie and Freddie aren’t that into jumbos, so they leave them be and they’re instead sold to private investors or held by the banks that initially wrote them.
Fannie and Freddie were both created as a response to the fact that most mortgage borrowers had little available cash. Fannie was a product of the Great Depression, created as part of the New Deal, and essentially birthed the secondary mortgage market. Mortgages are often sold onto the secondary market to free up capital for banks so they can continue lending to house-hunters. Fannie, then, enabled more Americans to get into homes of their own in an era when people were defaulting on their mortgages left and right.
Freddie was created in 1970 as a direct competitor to Fannie Mae. There were concerns that Fannie’s 1968 privatization would ultimately hurt home buyers, but both are now under conservatorship by the US federal government and function in basically the same way. Whether your loan is bought or guaranteed by Freddie Mac or Fannie Mae, it’s still a conventional conforming loan with terms that are most likely identical.
A conventional mortgage is typically the best choice for a home buyer, if they can qualify, but they’re not perfect for everyone. This handy chart will help you tease out the nuance.
- Higher credit score requirements. Conventional mortgages typically require the borrower to have a credit score of at least 620.
- Conventional home loans may have lower downpayment requirements. Some lenders allow down payments as low as 3% on conventional loans.
- Conventional home loans can allow you to buy more than a primary home. Unlike some kinds of loans (ex. FHA and VA loans), conventional mortgages allow you to purchase vacation and investment homes.
- Conventional mortgages may have more flexible terms: When compared to FHA loans or jumbo loans, conventional mortgage borrowers may be able to have more flexibility, especially when it comes to the length, or term, of their loan.
- Loan size limitations. As mentioned previously, a conventional mortgage can only get you a home loan of a certain size, depending on the state and county in which you live.
- Debt-to-income (DTI) ratio requirements. Conventional home loans also require borrowers to have a specific DTI ratio (a borrower's monthly recurring debts divided by their monthly income). To get a conventional loan, your DTI usually needs to be well below 50%.
Anyone and everyone is a great borrower for a conforming conventional loan, but there are some buyers who are more ideal than others. These buyers are:
- Established, just like their credit file.
- Plan to keep the home for a long time.
- Have few other outstanding debts.
- Are experienced homebuyers or are at least willing to hire experts to look over their prospective home.
Often, a conforming conventional loan can end up being the best deal you’ll get on a mortgage because they’re only offered to borrowers who represent very little risk. They also come with much lower mortgage insurance rates than are generally available under other programs.
If you’re looking at a conventional loan, always do so with caution. Some of the worst loans that came out of the mortgage crisis of the mid 2000s were considered non-conforming conventional loans. With so many options available, it can be easy to get confused about which is which. Non-conforming conventional loans can sound like amazing deals — and they usually are, at first. However, at a certain point, terms start to change or a massive balloon payment pops up.
Newer loan disclosures make it easier to spot these types of loans, however. Always read everything before you sign it, especially if you’re dealing with a lender who works with many different banks (a broker) as opposed to a banker at the bank where you have your checking account. Brokers can offer many types of loans bankers don’t typically have access to, which can be both good and bad, depending on your situation.
USDA
When you’re looking for a simple life, and you’re also looking for a mortgage with a low down payment, it’s time to check out what the US Department of Agriculture has to offer. We have all the details below, but if you’d prefer a more personal introduction, contact our experts at Home.Loans and we’ll walk you through it point by point.
The United States Department of Agriculture (USDA) designed these loans to pull the population out of cities and into surrounding areas. USDA eligible properties are typically located outside of city limits, in suburbs or rural areas. The USDA Guaranteed Loan is not meant to finance farms; rather, they are geared towards the standard single-family home.
This zero-down, 100% financing home loan has income limits and property eligibility requirements. However, you don’t have to be a first time home buyer to take advantage of this great home mortgage option. The USDA Loan is available to anyone that meets income and credit requirements.
Mortgages and home repair loans available through the USDA are a special kind of beast that’s tightly limited in scope. In general, they’re limited to rural areas. That’s defined as populations of less than about 35,000. USDA loans are designed for those who have low to modest incomes. USDA loans can be used for first-time home buyers. They can also be used to make a second-time purchase. There are also options for home repair loans to renovate and rehabilitate an already owned property.
Like with FHA’s mortgage program, the USDA has a wide range of offerings to fulfill a number of different needs. Some of the department’s loans are serviced by banks. Others are self-serviced (these can also come with subsidized interest rates). Because the USDA is very particular in how its loans are handled, it can be challenging to find a lender who will make a USDA home loan. But, they are out there!
Providing affordable homeownership opportunities promotes prosperity, which in turn creates thriving communities and improves the quality of life in rural areas. This program assists approved lenders in providing low- and moderate-income households the opportunity to own adequate, modest, decent, safe, and sanitary dwellings as their primary residence in eligible rural areas. Eligible applicants may build, rehabilitate, improve, or relocate a dwelling in an eligible rural area. The program provides a 90% loan note guarantee to approved lenders. This reduces the risk of extending 100% loans to eligible rural home buyers.
USDA mortgages and loans have some commonalities that set them apart from other mortgages. Let’s look at the benefits and drawbacks of the USDA mortgage program.
Low down payment options
USDA loans are either guaranteed or made directly by the USDA. This means buyers are often able to come to closing with zero money down and leave with their own home.
Easy, flexible repayment terms
Both USDA mortgage loan programs make it easy to make payments, but the Direct Loan program goes a step further. Loan terms are partially calculated on how you’re able to repay the loan itself. Terms range from 33 to 38 years, based on your income.
Lower mortgage insurance
USDA loans typically have lower mortgage insurance than conventional or FHA loans.
Less stringent credit terms
There is no minimum credit score requirement for USDA loans. However, if your credit report shows 680 or higher, your application might move a bit faster. And, you might get to take out a slightly larger loan.
Financing even low-income buyers
It can be difficult for a low-income buyer to buy a house. Mortgage minimums imposed by some programs and banks can put home ownership out of their financial reach. USDA fills that gap by providing financing with smaller loans designed for rural areas that often have lower property values.
Another USDA Loan advantage is that the mortgage insurance fee is just 0.35% monthly. That’s nearly half of what is charged on a conventional loan and a quarter of what is charged on FHA. There are no loan amount limits like FHA; instead, the applicant’s income determines the maximum loan size. USDA Loans also allow buyers to roll closing costs into the mortgage — up to 100% of the appraised value of the home.
Loans are limited to rural areas as defined by the USDA.
If you’re a city dweller or looking to move closer in, you’ll have to find a different loan. USDA limits its loans primarily to areas with populations of 35,000 or less.
Income eligibility is required
This can be great for lower-income buyers. But buyers with higher incomes are out of luck — even if they have no assets or a lot of debt. This can be frustrating for those who are right on the edge of qualification or have a lot of debt.
Monthly payments are limited by income
In most cases, a borrower’s PITI ratio (principal, interest, taxes, insurance) cannot exceed 29% of their monthly income. And, their TD ratio (total debt including car payments, student loans, etc.) cannot exceed 41% of their monthly income.
Your property must meet eligibility criteria
FHA requires a basic property inspection, but that’s nothing compared to what happens during a USDA inspection. It’s great for the future owner, if the house can pass muster. In some areas, the only homes that will be approved for USDA loans are homes built specifically for the program.
There are two types of USDA home loans: the Direct and the Guaranteed. The Direct is when the borrower obtains a loan directly from their local USDA office. The Guaranteed is when the borrower works with a private lender. As with all home loans, a person’s income and credit are considered. However, with USDA Loans the property location and the number of people in a buyer’s home also come into play.
There are a few home loan options under the USDA loan program. USDA mortgage solutions share the low-interest and zero-down-payment requirement; however, they do have different terms and purposes. Below are summaries of each USDA loan product.
The Single Family Housing Direct Home Loans program, also known as the Section 502 Direct Loan Program, is a USDA loan program designed to help low-income families in rural areas buy, renovate, or repair adequate housing. Unlike some other USDA programs, it provides payment assistance, a subsidy that helps reduce the borrower’s mortgage payments for a certain period of time. Eligibility is restricted to families whose household income falls below 80% of the AMI, are planning to use the home as their primary residence, and are otherwise unable to find “decent, safe, and sanitary housing.
This is a USDA loan for moderate-income households that make no more than 115% of the AMI. In addition, borrowers must agree to use the home as their primary residence, and be a U.S. citizen, U.S. non-citizen national or Qualified Alien. In general, the UDSA’s Single Family Housing Guaranteed Loan program is meant to be used for modest housing in rural areas. Plus, it can also be used to refinance eligible loans.
The USDA’s Section 504 Home Repair program, also known as the Single Family Housing Repair Loans & Grants program, is designed to help low income homeowners repair their homes– allowing them to remove health hazards and increase safety. To qualify for the program, a household needs to make less than 50% of the AMI and not be able to access to affordable credit from other sources. In addition, grants are available to homeowners 62 years and older who cannot pay back a home repair loan. The maximum loan available is $20,000, and the maximum grant available is $7,500, though these can be combined to create a total of $27,500 in loans and grants. For loans, the interest is capped at a cool 1%, making this a fantastic program for homeowners in need.
The USDA Mutual Self-Help loan is for low-income households that can’t buy or build adequate housing. The program allows qualified organizations to monitor and help homeowners in the construction of safe, clean housing. Since 1965, the USDA’s Mutual Self-Help Program has helped non-profit organizations build 50,000 homes in low-income areas.
- Meet income eligibility requirements
- Agree to personally occupy the dwelling as their primary residence
- Be a U.S. Citizen, U.S. non-citizen national or Qualified Alien
- Have the legal capacity to incur the loan obligation
- Have not been suspended or debarred from participation in federal programs
- Demonstrate the willingness to meet credit obligations in a timely manner
- Purchase a property that meets all program criteria
Because of the limited scope of USDA loans, it’s not hard to imagine the buyer who would use this kind of program. These are buyers who:
- Live in a rural area
- Have little free cash to use for a down payment.
- Are interested in building home equity for their future.
- Make an average or below-average income for their area.
Rural development loans have been an important part of life in the country for a long time, enabling farmers to buy farms and their children to buy houses in villages and small towns nearby. For families that want to remain close, even if not everyone wants to stay on the family farm, they’re a solid option that ensures that a first home is affordable.
Protecting your country in good times and bad should come with some benefits beyond sleeping on a cot and eating MREs. The United States Department of Veteran’s Affairs (VA) guarantees a home loan product made just for you. Let us help you find the VA Loan that’s right for you, right now. Don’t want to wait? Go ahead and contact us at home.loans and we’ll do this thing together.
VA loans are one of the perks of honorable military service, giving vets a chance to own a home of their own after a certain amount of service during war or peace time. Although not made by the Department of Veterans Affairs, the department does insure a large percentage of the value of each of these notes. This allows vets to get a break on terms like interest, down payments and even mortgage insurance, saving them a bundle over the life of their loans.
Both active duty and retired military are eligible for a VA loan after a set period of time, based on their service period. For example, Gulf War vets are required to serve at least 90 days of active duty or to fully complete the term they were ordered to active duty for without a dishonorable discharge. That group includes vets that were in service from August 2, 1990 until the present. There’s a full list of VA loan eligibility for the curious here.
VA loans are designed to provide those who serve(d) the military with good homes. The VA loans may be used for the following purposes:
- Purchase a home
- Build a home
- Purchase and improve a home
- Adapt a home for disability access or
- Refinance an existing mortgage.
There is no limit on the amount that you can borrow, but there is a limit on how much of the loan the VA loan program can guarantee. How much the VA loan program can guarantee is dependent on the county limits.
If you’re considering getting a VA home loan, and want to estimate your potential monthly payments, try our VA mortgage calculator. By simply inputting the loan amount and interest rate, and setting the loan program, you can get a look at what your monthly payments may look like over time. While our calculator doesn’t factor in everything (like closing costs), it’s a great way to see if a VA home loan is the mortgage solution that works best for you (and your budget!)
Since VA loans come in adjustable-rate and fixed-rate variations, our VA mortgage calculator can help you look into both of these options. And, if you’re considering refinancing your current VA loan, or refinancing a non-VA loan into a VA loan, our calculator can also give you the deets. Top of Form
MONTHLY PAYMENT BOTTOM OF FORM
The home.loans VA loan calculator is a tool designed to help you get a handle on your potential monthly payments. For ease of use, it breaks your monthly estimates into principal and interest portions. Plus, you can use the VA loan calculator to help you determine other monthly expenses, like property taxes, homeowners insurance, and monthly HOA dues.
Amortization
This is a way of paying off debt using payments that consist of both principal and interest. In most cases, a fixed repayment schedule is agreed upon by both the borrower and the lender, and the amount of interest paid during each interest paying decreases over time. That means that as you go on, a higher percentage of each payment goes to paying off the principal.
Loan to Value (LTV)
This is a way that lenders calculate risk before deciding to give you a loan. To calculate LTV, a lender will usually take the amount of a potential mortgage and divide it by the appraised value of a home.
Loan Term
The term of a loan, or loan term, is the amount of time for which a loan agreement remains in force. At the end of a the loan term, the loan should either be fully repaid or refinanced into a new loan.
Annual Percentage Rate (APR)
This is a calculation of interest, plus the other costs, like points, broker fees, and other charges, that you’ll pay during a year of your loan, expressed as a percentage. Because of this, your APR will almost always be more than your interest rate.
Principal
This is the amount of money originally borrowed from the lender. Monthly payments consist of principal payments combined with interest (as well as the payment of fees, taxes, and other expenses.) As the borrower pays off the principal, it will grow smaller over time.
Interest
Interest is a specific percentage of the principal that is paid to the lender. For fixed-rate home loans, this stays the same throughout the entire loan term, but for adjustable-rate mortgages, it can vary based on changes in the market.
Down Payment
This is the initial cash payment you’ll make towards buying a home. Fortunately, in many cases, you can get a VA loan without any down payment.
A VA loan can have a fixed rate or an adjustable rate. It can be used to buy a house, condo, new-built home, manufactured home, duplex, or other types of properties.
Or, it can be used to refinance your existing mortgage, make repairs or improvements to your home, or make your home more energy efficient. The choices are yours. A VA-approved lender can help you decide.
A VA loan can be used to buy an existing home or a condominium in a VA-approved development, or to build a home.
According to the VA there is “no maximum that an eligible veteran may borrow using a VA-guaranteed loan.” However, there are county limits that must be used to calculate the VA’s maximum guaranty amount for a particular county. In other words, there’s no limit to how much you can spend on your new home with a VA loan, but the VA has limits on how much liability it will assume, which can affect the amount of money your lender will let you borrow.
Generally, eligible veterans or military personnel can get loans up to $417,000 with no money down. But that number can be much higher in certain counties that have a higher cost of living. Ask your lender about county limits for VA loans.
Ready to get pre-approved? Schedule your call with a home buying consultant today!
