What are my options if I have no down payment, or only a small down payment?
A no down payment mortgage allows first-time home buyers and repeat home buyers to purchase property with limited down payment required at closing. Other options, including the FHA loan which requires 3.5% minimum down payment and the HomeReady™ mortgage. Mortgage insurance premiums typically accompany low and no down payment mortgages.
VA Loans: No Money Down 100% Financing
The VA Home Loan is a no-money-down program available to members of the U.S. military and surviving spouses.
Guaranteed by the U.S. Department of Veteran Affairs, VA loans are similar to FHA loans in that the agency guarantees repayment to lenders making loans which means VA mortgage guidelines.
VA loan qualification are straight-forward.
VA loan qualifications are available to active duty and honorably discharged service personnel are eligible for the VA program. In addition, home buyers who have spent at least 6 years in the Reserves or National Guard are eligible, as are spouses of service members killed in the line of duty.
Some key benefits of the VA loan are :
- You may use intermittent occupancy
- Bankruptcy and other derogatory credit do not immediately disqualify you
- No mortgage insurance is required
USDA Home Loans: No Money Down (100% Financing)
No Money Down options exist for non-military borrowers, too. The U.S. Department of Agriculture offers a 100% mortgage. The program is formally known as a Section 502 mortgage, but, more commonly, it’s called a Rural Housing Loan.
The good news about the USDA Loans is that it’s not just a “rural loan” — it’s available to buyers in suburban neighborhoods, too. The USDA’s goal is to reach “low-to-moderate income home buyers”, wherever they may be.
Many borrowers using the USDA Single Family Housing Guaranteed Loan Program make a good living and reside in neighborhoods which don’t meet the traditional definition of rural.
Some key benefits of the USDA loan are :
- You may include eligible home repairs and improvements in your loan size
- There is maximum home purchase price
- Guarantee fee added to loan balance at closing; mortgage insurance collected monthly
Another key benefit is that USDA mortgage rates are often lower than rates for comparable, low- or no-down payment mortgages. Financing a home via the USDA can be the lowest cost means of home ownership.
FHA Loans: 3.5% Downpayment
The FHA mortgage is somewhat of a misnomer because the FHA doesn’t actually make loans. Rather, the FHA is an insurer of loans.
The FHA publishes a series of standards for the loans it will insure. When a bank underwrites and funds a loan which meets these specific guidelines, the FHA agrees to insure that loan against loss.
FHA mortgage guidelines are famous for their liberal approach to credit scores and down payments. The FHA will typically insure a home loan for borrowers with low credit scores so long as there’s a reasonable explanation for the low FICO.
The FHA allows a down payment of just 3.5 percent in all U.S. markets.
Other benefits of an FHA loan are :
- Your down payment may consist entirely from “gift funds”
- Your credit score requirement is 500
- Mortgage insurance premiums are paid upfront at closing, and monthly thereafter
Furthermore, the FHA supports homeowners who have experienced recent short sales, foreclosures or bankruptcies through the agency’s Back to Work program.
The HomeReady™ Mortgage: 3% Downpayment
The HomeReady™ Mortgage is special among today’s low- and no-downpayment mortgages.
Backed by Fannie Mae and available from nearly every U.S. lender, the HomeReady™ mortgage offers below market mortgage rates, reduced mortgage insurance costs, and the most innovative underwriting idea on more than a decade.
With HomeReady™, the income of everybody living in the home can be used to get mortgage-qualified and approved.
For example, if you are a homeowner living with your parents, and your parents earn an income, you can use their income to help you qualify.
Similarly, if you have children who work and contribute to household expenses, those incomes can be used for qualification purposes, too.
With HomeReady™, you can use boarder income to help qualify; and, you can use income from a non-zoned rental unit, too — even if you’re paid in cash.
HomeReady™ home loans were designed to help multi-generational households get approved for mortgage financing. However, the program can be used by anyone in a qualifying area; or who meets household income requirements.
What is private mortgage insurance (PMI)? Do I have to pay it?
Private mortgage insurance is required if you owe more than 80% on your house. This insurance protects the lender if you cannot make your payments. When you default on the loan, the insurance company pays the debt. The cost is added onto your loan, and will be approximately an additional one half percent.
What kinds of government loans are available to buyers?
HUD (US Department of Housing and Urban Development) is committed to increasing home ownership for minorities and low-income Americans. It oversees the FHA (Federal Housing Commission, offering a variety of programs, including 203(K) loans to purchase a home that needs fixing up, financing for FHA-insured homes that have been acquired through foreclosure, and other FHA-insured loans. HUD has many programs to help in housing needs.
FHA loans (offered by the Federal Housing Commission) are the most popular. They don’t actually make the loan; they guarantee loans requiring only a 3% down payment, and they do not have as strict credit policies as many conventional loans.
VA (Veteran’s Administration) loans are really guarantees for loans obtained by certain qualified veterans or other qualifying home buyers or refinancers such as unmarried surviving spouses.
What is the difference between a fixed rate mortgage (FRM) and an adjustable rate mortgage (ARM)?
A fixed rate mortgage has a set interest rate for the life of the loan. An adjustable rate mortgage has a specified adjusting period where the rate can be adjusted along with the payment.
What is included in closing costs?
What are Closing Costs?
When you purchase a home using a mortgage, your lender is required to disclose all fees which you’ll incur as part of the transaction. These fees are known as “closing costs”
By definition, closing costs are costs paid by a home buyer which would not be applicable in an all-cash transaction. However, the term is used in more general terms to include all of the costs associated with buying a home.
This can include lender fees such as a discount points, origination, and processing; and may also include settlement costs such as title search fees, attorney costs, and flood certifications.
The blanket term “closing costs” can also include fees assessed by state and local governments including transfer stamps, and other local taxes.
Closing costs vary from loan-to-loan because many fees are based on the exact amount of money borrowed. The more you borrow, in general, the higher your costs.
As a buyer, finding money for a down payment and for closing costs can make purchasing a home cost-prohibitive.
Thankfully, there’s a “clean” way to get your closing costs paid. The solution is called Seller Concessions, and lenders have special places in their guidelines to allow for it to happen.
Asking for Seller Concessions for Closing Costs
Seller concessions is a formal arrangement by which a home seller agrees to pay some, or all, of a buyer’s closing costs at the time of closing.
Seller concessions are allowed on all major loan types, including conventional loans backed by Fannie Mae and Freddie Mac; FHA Loans backed by the Federal Housing Administration; VA Loans backed by the Department of Veterans Affairs; and, USDA loans backed the U.S. Department of Agriculture.
How Seller Concessions Work
First, a home buyer and home seller reach agreement on a sales price for a home.
Then, the buyer and seller both agree to raise the sales price of home above its original level, with the seller agreeing to concede the entire “raised amount” toward the buyer’s closing costs at settlement.
Sometimes, seller concessions will cover all of a buyer’s cost. Other times, it will not. In no circumstance, however, may the amount of seller concessions exceed the amount of closing costs charged to the buyer.
The buyer cannot use seller concessions to get “cash back” at closing, or for any other purpose than to pay for closing costs shown on a settlement statement.
In addition, seller concession may not be used to compensate for home appliances or roofing in need of repairs; or, to make the buyer’s downpayment.
Seller concessions may only be used to offset buyer closing costs.
What documents will be required to close a loan?
Documents required vary from loan to loan, but generally the following are required:
- Most recent 2 years of W-2’s
- Most recent 2 years of tax returns (all pages & schedules)
- Most recent 30 days of pay check stubs which includes year to date income
- Most recent 2 months of bank statements (any non-payroll deposits must be documented so limit cash deposits)
- Most recent 2 years residency and employment history
- Driver’s License (and Work VISA or Green Card if applicable)
- Purchase Contract
- Other pertinent items such as: Bankruptcy Papers, Divorce Decree, Marital Dissolution, and Parenting Plan
- Name and phone number of your Home Owner’s Insurance Agent
Is it more expensive to rent or to own?
Owning a home is often considered the better deal, but keep these considerations in mind:
- many home buyers do not build any equity in the first few years-the bank takes it all in interest-and many move before they begin building equity
- purchasers costs often increase due to mortgage interest adjustments, payment adjustments, increased property taxes, insurance premium increases, and maintenance costs
- the tax break for owning a home only kicks in if the deductible expenses (such as interest) are higher than the standard deduction
- there are other reasons that may make renting a better option:
- Many maintenance and repair costs belong to landlord
- Easier relocation for job opportunities without having the cost and hassle of reselling your home
- Often, more convenient access to transportation, employment, retail entertainment, and other common facilities
Why do I need to check my credit prior to buying a house?
The lender will obtain a credit report. If you look at it prior to a loan application, you have a chance to clean up detrimental items before you have to explain them to the lender. Also, if your score is low, you can do specific things to increase your score such as paying down debt, increasing cash in the bank, and making payments consistently on time, over a period of time.
What is the difference between conforming and non-conforming loans?
Conforming loans are mortgage loans that meet specific, uniform national standards (most commonly referred to as Fannie Mae and Freddie Mac requirements) that deal with document specs, debt-to-income ratio limits, maximum loan amounts, and interest rates.
Non-conforming loans are loans that do not meet banking qualifications generally due to borrower’s financial status or property that does not meet required criteria. These types of loans are funded by private money and usually have a much higher interest rate than conforming loans. Loans that exceed Fannie Mae limits are called “Jumbo” loans.
Where do the names Fannie Mae and Freddie Mac (loan regulating entities) originate?
The Fannie Mae entity was created in 1938 under President Franklin D. Roosevelt to help the home buying economy which was floundering at that time. In 1968, Freddie Mac was chartered to provide competition. These are not government funded entities, only government sponsored, with the idea of creating national standards and guidelines to ensure a long-term healthy housing market.
They operate by borrowing foreign, low-interest money that, in turn, allows them to provide local banks with money to offer affordable housing loans. Together these two entities control about 90% of the secondary mortgage market.
They were dubbed these names from the acronyms of their respective government sponsored entities:
- Federal National Mortgage Association (FNMA): Fannie Mae
- Federal Home Loan Mortgage Corporation (FHLMC): Freddie Mac
What are points?
Points are a fee that is expressed as a percentage of the loan amount: one point is 1% of the loan amount.
Origination points are charged as a fee for some of the costs of the loan processing.
Discount points are basically a prepaid interest, or a fee to reduce the interest rate, known as a rate buy down.