Get the Lowdown on Government-Backed Mortgage Loans

Get the Lowdown on Government-Backed Mortgage Loans- 150x150The Federal Housing Administration, the United States Department of Veterans Affairs and the United States Department of Agriculture are backing several types of mortgage loans, designed mostly to help those who can’t afford a conventional loan. The government insures these loans against default, meaning that if the borrower stops making monthly mortgage payments, the government becomes responsible with paying the lender.

Regular mortgage loans have very strict qualification requirements and require large down payments. Normally, borrowers are required to make a minimum of 20 percent down payment, but those with good credit scores can qualify for lower down payments. However, if a borrower makes a lower than 20 percent down payment, he or she will have to pay for Private Mortgage Insurance (PMI), which could actually make the overall value of the mortgage loan higher.

The government has designed several mortgage loans designed to help those who can’t afford the high down payment and the strict requirements. Because these loans are insured by the government, borrowers are not required to pay for Private Mortgage Insurance anymore. This article will discuss the main advantages of government-backed mortgages, helping you decide which mortgage loan is better for your situation.

The FHA Mortgage Loan

FHA mortgage loans are backed by the Federal Housing Administration and are mostly geared towards those who can’t come up with a large amount of money to make the down payment, or those who can’t afford to make a lower than 20 percent down payment and end up having to pay for Private Mortgage Insurance.

FHA mortgage loans require a much smaller down payment than conventional loans, making them very attractive for many home buyers. The down payment, which can be a gift, can be as small as 3.5 percent of the loan amount. Closing costs, which can be a bit high, can be financed, and will be included in the loan amount. The downside to this is that you will have to pay interest for those costs as well. This type of loan has more flexible requirements than conventional loans, and can be used to finance single or multi-family homes, condos, or manufactured homes. One downside to FHA mortgage loans is that you can’t borrow as much as you would with a conventional mortgage loan, but these limits differ from one area to another.

The VA Mortgage Loan

VA mortgage loans are insured by the United States Department of Veterans Affairs and are designed to help active duty or retired military personnel become home owners. VA loans require the borrower to use the home bought with a VA loan as a primary residence. VA loans can also help spouses of military members who died in active duty.

Like FHA loans, VA loans eliminate the need requirement to pay PMI, but require a 2 percent founding fee, which can be financed. Unlike conventional loans and even FHA loans, VA loans don’t require a down payment. Also, there is no limit to how much you can borrow on a VA loan.

The USDA Loan

The United States Department of Agriculture also comes to the help of low-income families by insuring a loan for those who wish to buy a home in a rural area. This type of loan can only be used to finance a home which is located in a rural area, in order to increase home ownership in those parts of the country.

Like with VA loans, the borrower who buys a home using a USDA loan must use that home as a primary residence. Another requirement is that the home buyer must be unable to qualify for a regular mortgage loan and pay PMI. USDA loans don’t require a down payment and the closing costs can be financed by including them into the loan amount.

For those who can’t qualify for a conventional mortgage loan, or for those who find these types of loans more attractive, the FHA, the VA, and the USDA loan are great options. These mortgage loan requirements are generally less strict, which will save you a lot of trouble and even money in some cases. So before applying for a regular mortgage loan, take a look at government-backed mortgage loans, which might prove to be a great alternative.

Short on Cash? You Still Have Down Payment Options!

Short on Cash-You Still Have Down Payment Options-150x150Taking out a mortgage loan can be very expensive for most home buyers. Between all the fees and the down payment, you will usually have to spend tens of thousands of dollars before you can even move in your new home. The down payment that you make on your purchase will influence how much your monthly payment will be, and also how much you will be spending overall on your mortgage loan. Many times, the down payment will be the only thing standing between you and home ownership. Coming up with a large amount as a down payment can prove to be very difficult for most people, but, fortunately, there are alternatives that can help you.

The obvious thing to do is to take out money from your savings or sell some or all of your investments to come up with the money for the down payment. But sometimes that’s not possible, either because you have no savings or investments, or simply because you don’t find that to be a good option. In this article, you will find out about other down payment options for when you are short on cash.

Government Insured Mortgage Loans

Government backed mortgage loans, like the Federal Housing Administration (FHA) loans, the United States Department of Veterans Affairs (VA) loans, and the loans offered by the United States Department of Agriculture require a very low or no down payment. Besides this advantage, you won’t be required to pay a higher interest rate or Private Mortgage Insurance (PMI) because you didn’t make a down payment or your down payment was too low.

FHA loans are designed to help people with low incomes, who couldn’t afford a conventional mortgage loan. The loan is insured against default by the Federal Housing Administration, and requires a minimum down payment of 3.5 percent, which is significantly lower than the 10 to 20 percent required on conventional loans.

VA loans help current or former military members become home owners much easier. The loans are backed by the United States Department of Veterans Affairs, and require no down payment to be made by the home buyer who qualifies. The interest rate on a VA loan is comparable to the rates on a conventional loan.

USDA rural development loan are designed by the United States Department of Agriculture in order to increase home ownership in rural areas. Like the VA loan, there is no down payment requirement on a USDA loan, but the loan can only be used to purchase property in a rural area.

Take Out Cash from a Retirement Account

In order to come up with money for a down payment, you can also withdraw cash from retirement accounts, such as IRAs or 401(k)s. If this is your first time buying a home, you can withdraw up to $10,000 by yourself or up to $20,000 if you have a joint account with your spouse. Unless you have a Roth IRA, the money that you withdraw will be taxable, but you won’t be required to pay an early withdrawal penalty.

Taking out money from a 401(k) can also be done without paying a penalty, but your employer will have to okay the withdrawal, and the money will have to be returned within 5 years, with interest.

Get Help from Your Family

Many young home buyers receive help from their families when buying a home, especially if it’s the first time. The money must be received in the form of a gift, which can cover part or all of the down payment. However, you will have to provide your lender with proof that the money used for the down payment was a gift, and not a loan. A letter explaining the relationship between the person that gives the money and the person that receives it and the purpose of the amount given as a gift must be sent to the lender before they can approve the gift as a down payment.

Get Help from Your Employer

Some companies and organizations have come up with programs that are designed to help employees become home owners by giving them the money for the down payment as a low interest loan. These types of loans are like a second mortgage, so you will probably have to come up with part of the down payment. This makes them only useful if you want to make a 20 percent down payment and avoid paying for Private Mortgage Insurance.

Use the Equity in Your Home

Only applicable if you are buying a second home, using the equity in your home is a viable option of coming up with the down payment for a new home purchase. Using the equity as a down payment can be done in two ways: by doing a cash-out refinance or by taking out a home equity loan.

As you have read in this article, there are other options that can help you if you’re short on cash and can’t afford to make the large down payment that will make your interest rate lower and help you avoid paying for Private Mortgage Insurance. It would be a shame for the down payment to be the only thing to come between you and buying your dream home, so, hopefully, these alternatives will make becoming a home owner easier for you.

Do You Live in a Rural Area? If Yes, a USDA Home Loan is for You!

Do You Live in a Rural Area-If Yes a USDA Home Loan is for You- 150x150In an effort to increase home ownership in rural areas, the United States Department of Agriculture started offering USDA backed loans back in 1991. By using a USDA loan, you can purchase, refinance, repair, or relocate a home, as long as the home is located in a rural area. This type of loan is designed to help only certain individuals, but it is very similar to other government backed mortgage loans, such as FHA (Federal Housing Administration) and VA (Department of Veterans Affairs) loans.

This type of loan was initially designed to help people living in rural areas become home owners, but it can also be used to finance multiple types of properties and even businesses. For those who qualify, the USDA offers 100 percent financing with low interest rates, and loan terms from 30 to 38 years.

Advantages to Choosing a USDA Home Loan

USDA home loans are designed to help people, so they will have more advantages when compared to other types of mortgage loans. Here are the most important benefits, which should help you decide if a USDA home loan is the right choice for you:

  • The biggest benefit of the USDA home loan is that you receive 100 percent financing, which means that you won’t have to make a down payment. Down payments on conventional loans are usually 20 percent of the loan value, and one of the main reasons some people can’t afford to buy a home through a conventional mortgage loan. The only other loan that offers 100 percent financing is the VA loan, which is designed for current military members or veterans.
  • Another benefit is the possibility of financing the closing costs into the loan. This is also a large advantage, because closing costs can sometimes be fairly high, and very hard to come up with, especially when moving into a new home. Most conventional loans will require you to pay the closing costs before being granted the loan, which makes it harder to qualify for those who can’t afford to pay these costs.
  • Buying a home with less than perfect credit score will attract higher interest rates, or even make it impossible for you to qualify for a mortgage loan. With the USDA loan, the credit requirements are less strict, giving people, who otherwise couldn’t qualify for a mortgage loan, the possibility of becoming home owners.
  • USDA home loans also come with lower interest rates. This means that not only you will be paying less monthly, but the overall value of your loan will be lower than if you were getting a conventional loan. Even if interest rates on conventional loans are lower at the moment, you will still get a better deal on your rate by choosing a USDA home loan.

Applying for a USDA Home Loan

Whether you are purchasing a home, refinancing, improving your home, or just taking advantage of the cheap land prices, doing it through a USDA home loan will bring you great benefits. However, to qualify for this type of loan, you need to meet a few criteria and be aware of the process. Here are the steps to applying for a USDA home loan:

  • Select one of the two loan options that the United States Department of Agriculture offers. If your income is at or under 115 percent of the median income in the area, then you could qualify for the Guaranteed Housing Loan. If your income is very low or moderate, usually below 50 percent of the median income, you will be able to apply for a Direct Loan, or a Section 502 Loan. The home that you are planning to buy with a USDA home loan must be your primary residence and located in a rural area.
  • Maintain your credit score at a decent level. You won’t need to have a perfect credit score in order to be granted a USDA home loan, but you will encounter problems if your credit score is very low. Foreclosure or bankruptcy on your credit report can even make it impossible for you to qualify for a USDA home loan. Also keep a low debt-to-income ratio or your lender will consider you a bigger default risk and refuse to give you the loan.
  • Make sure that the home that you consider buying is located in an eligible area. Because they are designed to increase home ownership in rural areas, USDA home loans will only be approved for those who purchase homes in certain areas.

Applying for a USDA home loan is no different than applying for a conventional mortgage loan. The big difference is that this type of loan comes with greater advantages, the biggest one being the cost. The downside is that you can only use the USDA home loan to purchase a home in a rural area but, depending on each individual’s plans and situation, this might not be a downside at all.