How do homebuyers determine which loan is right for them? It can be confusing with all the factors, types, and programs available. Basically, there’re conventional loans, which lack government guarantees and often require higher down payment or property mortgage insurance. It’s more difficult to qualify for conventional loans due to stricter credit and income requirements. You need steady income, good credit, and a down payment. FHA loans are insured by the FHA and VA loans are guaranteed by the VA so qualifying is easier.
If you think you might have trouble qualifying for a conventional loan, consider FHA or VA loan programs.
Charged with promoting homeownership and healthy communities, the Federal Housing Administration (FHA) insures private loans made to consumers.
Anyone who is a legal resident of the United States may qualify for an FHA loan. FHA loans are attractive to first-time homebuyers without much cash for a down payment. Lenders view FHA-insured loans as less risky.
Borrowers pay a mortgage insurance premium in exchange for the FHA’s insurance. Some advantages of FHA loans include:
- Loans with higher loan-to-value ratios
- Lower down payments
- Longer terms
- No prepayment penalty (a charge on loans paid off earlier than expected)
- FHA programs insure a variety of loans.
The FHA offers many programs dedicated to its mission, including:
- Section 203(b): The main FHA program insures 10-, 15-, 25-, and 30-year fixed-interest rate loans for owner-occupied houses.
- Title XI (Section 202): Advances interest-free federal capital for housing and services for the elderly.
- Section 203(v): Veterans eligible for a VA loan also may receive this loan to avoid using up their VA entitlement or if they’ve already used it.
- Section 221(d)(3): For nonprofit sponsors to construct, purchase, or rehabilitate multifamily housing for moderate-income families.
- Section 223(e): Insures loans in declining urban areas where financing is difficult to obtain.
- Section 223(f): For the purchase, rehabilitation, or refinancing of existing multifamily housing (such as an apartment complex).
FHA loan requirements include:
- Purchase the mortgage insurance premium (1.75% of the loan amount) upfront at closing and an annual premium of 1.35% for 30-year loans.
- Minimum 3.5% down payment
- 6% max on closing costs and points the seller can pay
- FHA appraisal
- The difference between actual sale price and maximum loan amount must be paid in cash by the borrower as a down payment at closing.
- Rules regarding the buyer’s closing costs. Overages must be waived or paid by the seller.
The Department of Veterans Affairs (VA) may guarantee certain loans made to eligible veterans and reservists. The guarantee on a loan is a maximum amount that the VA will pay to the lender if the borrower defaults.
Advantages and Disadvantages
With VA loans, there are no down payments, no private mortgage insurance requirements, and limits on the closing costs charged to the borrower.
Drawbacks include funding fees as much as 3.3% and only fixed and adjustable rate mortgage loans are available.
VA loans can only be used for the:
- Purchase or construction of an owner-occupied house
- Refinancing of an extant VA loan for lower interest rates
- Refinancing of another mortgage loan
- Repair, alteration, or improvement of owner-occupied property
- Purchase of a condo unit in a VA-approved complex
- Purchase of a farm residence
- Addition of energy efficient improvements
VA Loan Types
The VA guarantees a few types of loans:
- Traditional fixed-rate loan
- Cash-out refinancing: The borrower re-borrows the money that has been repaid.
- Interest rate reduction refinancing loans: Refinance a VA loan to reduce the interest rate.
- Hybrid ARMs: With aspects of fixed-rate and adjustable rate mortgages, the initial interest rate is fixed for the first three years and then may vary with the index.
The VA guarantees only a portion of the total loan amount, based on the size of the loan and the amount of other guarantees the veteran has outstanding. The amount of the guarantee is otherwise known as a veteran’s entitlement. A lender is typically willing to lend four times a veteran’s entitlement.
VA Loan Eligibility
Obtaining a VA loan requires a certificate of eligibility issued by the VA. VA loans, unlike FHA loans, are available only to a select few:
- Discharged (other than dishonorably) military personnel with wartime service of a specified duration
- Discharged (other than dishonorably) military personnel with certain peacetime service
- Active-duty personnel
- Reservists with six years in the reserves or National Guard
- Eligible surviving spouses
The borrower must have served actively for 90 days or have been discharged due to a service-related disability during wartime periods. A veteran who has served 180 days of continuous active duty or been discharged for a service-related disability during certain peacetime periods also is eligible. Spouses of veterans who died in service or from service-related injuries and have not remarried, as well as the spouses of service people missing in action or prisoners of war also are eligible.
Financing options is just one of the topics real estate agents discuss with clients and customers. Agents provide important services as counselors and guides through the sales process. Want to get a Montana real estate license? Take the first step with 360Training.com and enroll in the interactive, online Montana Sales Prelicense course today.
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