An Introduction to Government Home Loan Programs
Federal Housing Administration (FHA) Loans
The Federal Housing Administration was established in 1934 to advance opportunities for Americans to own homes. By providing private lenders with mortgage insurance, the FHA gives lenders the security they need to lend to first-time buyers who might not be able to qualify for conventional loans. The FHA has helped more than 26 million Americans buy a home. The FHA works to make home ownership a possibility for more Americans. With the FHA, you don’t need perfect credit or a high-paying job to qualify for a loan. The FHA also makes loans more accessible by requiring smaller down payments than conventional loans. In fact, an FHA down payment could be as little as a few months rent. And your monthly payments may not be much more than rent. Lender claims paid by the FHA mortgage insurance program are drawn from the Mutual Mortgage Insurance fund. This fund is made up of premiums paid by FHA- insured loan borrowers. No tax dollars are used to fund the program.
Anyone who meets the credit requirements can afford the mortgage payments and cash investment, and who plans to use the mortgaged property as a primary residence may apply for an FHA-insured loan. FHA loan limits vary throughout the country, from $115,200 in low-cost areas to $208,800 in high-cost areas. The loan maximums for multi-unit homes are higher than those for single units and also vary by area. Because these maximums are linked to the conforming loan limit and average area home prices, FHA loan limits are periodically subject to change. Ask your lender for details and confirmation of current limits.
With the exception of a few additional forms, the FHA loan application process is similar to that of a conventional loan. There is no minimum income requirement, but you must prove steady income for at least three years, and demonstrate that you’ve consistently paid your bills on time. Seasonal pay, child support, retirement pension payments, unemployment compensation, VA benefits, military pay, Social Security income, alimony, and rent paid by your family – all qualify as income sources. Part- time pay, overtime, and bonus pay also count as long as they are steady. Special savings plans, such as those set up by a church or community association, also qualify. Income type is not as important as income steadiness with the FHA. Short-term debt doesn’t count as long as it can be paid off within 10 months. And some regular expenses, like childcare costs, are not considered debt. Talk to your lender or real estate agent about meeting the FHA debt-to-income ratio.
The FHA allows you to use 29 percent of your income towards housing costs and 41 percent towards housing expenses and other long-term debt. With a conventional loan, this qualifying ratio allows only 28 percent toward housing and 36 percent towards housing and other debt. You may qualify to exceed these percentages if you have:
• A large down payment
• A demonstrated ability to pay more toward your housing expenses
• Substantial cash reserves
• Net worth enough to repay the mortgage, regardless of income
• Evidence of acceptable credit history, or limited credit use
• Less-than-maximum mortgage terms funds provided by an organization
• A decrease in monthly housing expenses.
You must have a down payment of at least 3 percent of the purchase price of the home. Most affordable loan programs offered by private lenders require between a 3-5 percent down payment, with a minimum of 3 percent coming directly from the borrower’s own funds. Besides your own funds, you may use cash gifts or money from a private savings club. If you can do certain repairs and improvements yourself, your labor may be used as part of a down payment (called “sweat equity”). If you are doing a lease purchase, paying extra rent to the seller may also be considered the same as accumulating cash.
The FHA is generally more flexible than conventional lenders in its qualifying guidelines. In fact, the FHA allows you to re-establish credit if:
• Two years have passed since a bankruptcy has been discharged
• All judgments have been paid
• Any outstanding tax liens have been satisfied
• Appropriate arrangements have been made to establish a repayment plan with the IRS or State Department of Revenue
• Three years have passed since a foreclosure
• A deed-in-lieu issue has been resolved.
If you prefer to pay debts in cash or are too young to have established credit, there are other ways to prove your eligibility. Talk to your lender for details. Except for the addition of an FHA mortgage insurance premium, FHA closing costs are similar to those of a conventional loan. The FHA requires a single, up-front mortgage insurance premium equal to 2.25 percent of the mortgage to be paid at closing. This initial premium may be partially refunded if the loan is paid in full during the first seven years of the loan term. After closing, you will then be responsible for an annual premium (paid monthly) if your mortgage is over 15 years or if you have a 15-year loan with an LTV (loan to value ratio) greater than 90 percent. Although you can’t roll closing costs into your FHA loan, you may be able to use the amount you pay for them to help satisfy the down payment requirement.
You can assume (take over the mortgage payments) an existing FHA-insured loan, or, if you are the one deciding to sell, allow a buyer to assume yours. Assuming a loan can be very beneficial, since the process is streamlined and less expensive compared to that for a new loan. Also, assuming a loan can often result in a lower interest rate. The application process consists basically of a credit check and no property appraisal is required. You must demonstrate that you have enough income to support the mortgage loan. In this way, qualifying to assume a loan is similar to the qualification requirements for a new one. FHA mortgage programs are available to all buyers. These programs are designed to help creditworthy low-income and moderate-income families who do not meet requirements for conventional loans. FHA loan programs are particularly beneficial to those buyers who don’t have much cash available.
For more information on the FHA and how you can obtain an FHA loan, visit the HUD web site at: http://www. hud.gov or call a HUD-approved counseling agency at 1-800-569-4287. You can also look in the phone book “blue pages” for a listing of the HUD office near you.
FHA loan benefits:
• Only requires a 3 percent down payment
• Ability to finance closing costs
• FHA has set limits on the amount lenders can charge for some closing cost fees (e.g. origination no more than 1 percent of mortgage).
• Maximum mortgage amount can vary significantly by area. FHA adjusts this amount periodically. You should check with your local FHA office or approved lender to determine your maximum mortgage amount.
• Under certain conditions, automatic cancellation of the FHA mortgage insurance premium.
Department of Veteran Affairs (VA) Loans
VA loan programs are available to eligible veterans for the purchase of a home. The VA guaranty loans encourage lenders to offer loans to veterans by protecting lenders against loss if the borrower cannot make the payments. VA loans are particularly beneficial to those veterans who do not have much cash available. VA guidelines allow higher front-end and debt ratios compared to other loan programs. If you are a veteran, contact your local or regional VA office for more details or talk to your lender.
VA loan benefits:
• No down payment requirement
• More favorable interest rates are frequently offered by lenders because of the VA’s guarantee backing
• No mortgage insurance premiums
• Maximum loan amount may be 100 percent of appraised value of home, determined by a VA-approved appraiser or up to four times the VA eligibility entitlement (currently $50,750 with a maximum loan amount of $200,300)