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Home Mortgage Loan Financing:
Resources To Help You Understand How To Finance
Your Home Purchase.
What Should YOU
Expect Here?
SUMMARY
Of This PAGE
Home Mortgage Loan Financing Resources to help you understand how to finance your home purchase.
How to apply for FHA Insured Mortgage with 3.5 down; VA loans GUARANTY made easy; Conventional mortgage loans explained; conventional mortgage with 5% down. Understanding Down Payment Assistance (DPA)
Insights of a REALTOR 18 years helping clients to navigate financing their homes.
Your home mortgage loan financing is the most critical decision.
It is the make-or-break point of it! Nowadays, no offer is accepted without showing where the funds to pay for the house will come from.
Either you have cash on hand OR you need to show a ‘Pre-qualification letter’ from a reputable lender saying that you have already started the process to attain a mortgage loan.
Let’s see how to do it all!
TYPES OF HOME MORTGAGE LOANS
FHA Mortgage Loans
(Federal Housing Authority)
FHA mortgage loans guarantee lenders full payment. It requires the lowest down payment – 3.5%; it is lenient with its credit requirements, virtually all FHA mortgage loan are approved - helping countless homebuyers in the low-to-mid income bracket and first-time homebuyers. USA mortgage lenders and banks everywhere will generate FHA loans.
No wonder FHA loans are one of the most popular types of mortgages with mortgage loan officers and consumers alike
Here are five main advantages of FHA Mortgage Loans:
1) The Federal Housing Finance Agency (FHA) guarantees lenders full payment on FHA mortgage loans.
2) FHA Mortgage loans will require low down payments (3.5%) So more folks will qualify
3) Lenient credit requirements: Will help a wider range of people, specially, those in the low-or mid-income bracket and first-time homebuyers
4) Virtually all FHA loans are approved.
5) Most mortgage lending institutions and banks everywhere will work with FHA loans so it is convenient to apply
It is worth noting that the Federal Housing Finance Agency (FHA) does NOT loan directly – it acts as guarantor of the loans which in turn will be handled by countless finance institutions and many banks all across the USA.
As it says above – FHA guarantees the loan; they serve as ‘insurer’ for the mortgage loan.
There is more scrutiny of the conditions of the house like the age of the roof, conditions of the flooring – it has to be in ‘move in ready condition’ - determined by an FHA approved home inspector.
FHA 203K rehab mortgage loan – another good option is, if the house needs a reasonable number of repairs, there is another possibility which allows an additional amount – beyond the house purchased – to be added to the same mortgage loan.
It is called 203(K) – other government lending institutions have it, so does FHA.
The FHA 203(K) it will involve a home improvement expert – prior approved by the FHA – to come to the house and give an estimate for the scope of work which will be required and set a budget.
At closing, the 203K amount will be put in escrow. The FHA home improvement expert will be paid a certain fee to inspect and approve each phase of the home improvement.
The home improvement expert is not the one who will do the work. It has to be a licensed contractor for whatever job they will do.
I find it to be a bit of bureaucracy, but it works!
FHA Mortgage Fees
Important to know that FHA mortgage loans carry two fees:
I) Upfront fee of 1.75% on the total amount of the loan. But is wrapped into the loan
II) They also require that the borrower pay an annual loan insurance called Private Mortgage Insurance (PMI). Currently [November 2023] it is set at .55% of the total amount of the loan. It is then divided by 12 – and that amount is added to the borrower’s monthly payment.
PMI will NOT be waived as long it is backed by FHA.
Home owner will have to make a refinance to a conventional loan when home ‘loan to value’ (LTV) comes to 78% - with a combination of payments + home value appreciation
PMI – insures the loan. If home owner defaults, the insurance will cover the deficit and make the lender whole
It is ‘private’ because private insurance companies will carry it – NOT the government
Do NOT confuse PMI with your ‘hazard insure’ many time called ‘home insurance – you have to have both, for an FHA loan
Neither the Upfront fee nor the PMI payments count towards the loan amount payment
These guidelines apply for any type of property: detached homes, condos and town home. These last two are put through additional scrutiny.
Most Townhomes will be approved, not all the condos will.
Check with your REALTOR® or the seller if the condominium you are looking at is “FHA Approved.”
Phew! These all being equal, you can put your foot in the door with as little as 3.5% down payment of the purchase price if you get approved for an FHA mortgage loan.
Home Buzz Tips:
PMI -FHA mortgage insurance protects the lender against loss in the event of default
It is NOT the ‘hazard insurance’ more commonly know as ’home insurance’ which you will still have to carry, separately! …AND in addition to MIP!
FHA Mortgage Loans SUMMARY
FHA (Federal Housing Authority)
Designed to provide mortgage loans to low-to-mid-income (LMI) homebuyers as well as first time buyers
3.5% down payment is about the lowest you can get
Sustained by the Insurance fees paid by the homebuyer
The FHA insurance has two fees:
1) Upfront Mortgage Insurance Premium (UFMIP) now set at 1.75% of the amount of the loan
As the name suggests, it is charged at the time loan is generated AND, typically, it is wrapped into the loan in order to keep with the spirit of 3.5% down payment
2) Mortgage Insurance Premium (MIP) now set at .55% of the amount of the loan which is divided by 12 and added to the monthly payments
NOTICE: Previously the homebuyer could ask for the MIP to removed after a combination of the payments plus increased value of the home reached 78% of the purchase price.
That’s NO longer the case.
On ‘new loans’ homeowners will continue to pay for MIP until such point the mortgage loan is completely paid off…
OR it is refinanced into a conventional loan! ☹Because mortgage loans are Insured by government programs FHA financing is a bit more lenient on the homebuyer’s credit situation
To be clear: FHA does NOT make the loans directly. FHA is more like an insurer to the lenders in case the buyer fails to pay
Private lenders like banks, mortgage companies, credit unions will effectively make the loans to the public
Because of the ‘insurance’ there are plenty of institutions (banks, mortgages companies and credit unions) eager to issue FHA mortgage loans
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Conventional Mortgage Loans
Conventional mortgage loans are those loans which do NOT have any government participation in the form of insuring like in an FHA loan or guaranteeing like the VA loans.
The Lender can be an institutional lender, a private party or even a bank financial
The loan is ‘conventional’ in the sense that it conforms to the accepted standards and that the lender relies solely to credit worthiness of the home owner and the security of the property to ensure payments of the loan.
Well, almost!
Conventional mortgage loans will – in most cases – require a 20% down payment …In many, many cases it is a deal breaker.
Why Conventional Loans Require 20% Down
Nor the banks [or any mortgage lending] nor the government are set up to manage real estate – be it single family residence, town homes or condos.
Having 20% down payment there is a clear equity on it.
In case the homeowner comes to default, the lender can resale the property quickly, for less than it is held in the books and still come whole!
Remember there are several expenses to repossess the property: lawyers, handyman to rekey, winterize, tax does not stop accruing – yes, counties and municipalities want that piece of the pie;
In any case, conventional mortgage loans are wildly used. In fact, there are ways much more conventional mortgage transactions than all others combined.
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5% down Conventional Mortgage Loans With Mortgage Insurance
Although very recently, I have encountered some banks offering convention mortgage loans with 5% down payment …with a Mortgage Insurance (MI).
I was pleasantly surprised when I learned about it.
It is more like a hybrid product: It is a ‘conventional loan’ in the sense that it does NOT any government insurance or guarantees; it does carry a ‘mortgage insurance’ (MI) but again, NO government involvement.
I was also pleasantly surprised for another couple of features:
1) The percentage of the mortgage insurance is lower than that of the FHA;
2) It comes already with a ‘sunset clause’ indicating to the homeowner when they should expect the MI to go away and/or the homeowner should ask for it to be taken out …which the FHA PMI no longer does
Naturally this product creates another huge venue for those aspiring homebuyers in the lower-to-mid income bracket and first-time homebuyers.
Please notice that ‘MI’ – Mortgage Insurance is different from ‘PMI’ – Private Mortgage Insurance. Although they both serve identical purposes, they are in fact two separated programs.
FHA is run by government entity and Conventional is run by private companies.
Conventional Mortgage Loans SUMMARY
Designed for those who can afford to put a larger down payment
This program is the most widely used for mortgage loans.
Conventional loan may require 20% down payment
With 20% down – it cuts the need for mortgage insurance
So, at this level of down payment, there is NO insurance premium either
However, there is a ‘new’ Conventional Mortgage loan with 5% down +Private Mortgage Insurance (PMI)
The PMI is a bit lower than the FHA’s MIP
The Conventional PMI already comes with a predictable ‘sunset schedule’ of when the homeowner should expect that PMI will be removed
Which is when there a combined value of payments and the increased value of the home.
VA Mortgages Loans (Veterans Administration Mortgage Loans)
VA Mortgages Loans (Veterans Administration Mortgage Loans)
VA Mortgage Loans are issued by private lenders who receive a Veteran Administration guaranty
The Veteran Administration (VA) will guaranty a portion of the VA mortgage loans. Repeat: It is a guaranty! Not an insurance.
VA mortgage loans are dedicated to those women and men who are in active duty OR served in any branch of the US armed forces, National Guard reserves and unmarried spouses of the deceased veterans as well as POWs and MIAs.
VA mortgages allow the veterans buy a home with Zero% down payment and there is no requirement for mortgage insurance.
VA mortgage loans are a small token of gratitude from the nation honoring those men and women who have served this country honorably.
They are unique in this sense because all other programs will require some money upfront and/or require mortgage insurance.
Lenders everywhere love making VA loans.
First-time military homebuyers often have difficulty qualifying for traditional loans – especially those just returning home after deployment – for veterans a VA mortgage loan is a great alternative and sometimes it is the difference of having a place to call home or not to have one.
VA Loan Guaranty
VA Loan Guaranty
VA does things differently from other institutions: It is NOT a loan insurance program like FHA is.
VA will guaranty a portion of the loan.
VA mortgage loans will guaranty lenders in the market place a substantial amount that will make lenders comfortable to compete for home loans for veterans.
The guarantee is usually about 20 to 25% (or more) of the property value.
It is a huge guarantee! In real estate that is gravy.
Having that cushion i.e., ‘guaranty’, any lender across the country will feel extremely comfortable to make a loan …and offer their best rate!
The actual amount guaranteed will change from time to time – so to keep pace with inflation and home prices; as well as to reflect the markets reality where you decided to buy.
Please keep in touch with your loan consultant s/he will have the actual figure that will apply to you – at the time of your application.
NOTE: The Veteran Administration does NOT allow any kind of home improvement post-closing! Which is to say they do not allow 203(K).
Actually, they are very strict and the house/TH/ condo has to be in ‘move-in’ condition – nothing missing. If not, the VA inspector will object to it.
FUNDING FEE – VA does charge a “Funding Fee” which also can be wrapped into the loan. There is no reason to pay for it when you having a Zero down payment kind of loan.
VA Mortgage Loans SUMMARY
Designed to provide mortgage loans GUARANTY to active service men and women, veterans of all branches of the US armed forces as well as National Guard reserves and unmarried spouses of the deceased veterans as well as POWs and MIAs.
Veterans have a guaranty up to 25% which makes plenty of lenders to be eager to generate these loans.
VA mortgage loans guaranty is a government-backed program for the veterans and active duty personally in all branches of the US armed forces, National Guard reserves and unmarried spouses of the deceased veterans as well as POWs and MIAs.
Veterans may qualify for a mortgage loan with ZERO down payment without mortgage insurance whatsoever
Lenders all across the USA love to help veterans to finance their homes
VA Mortgage Loans SUMMARY
Designed to provide mortgage loans GUARANTY to active service men and women, veterans of all branches of the US armed forces as well as National Guard reserves and unmarried spouses of the deceased veterans as well as POWs and MIAs.
Veterans have a guaranty up to 25% which makes plenty of lenders to be eager to generate these loans.
VA mortgage loans guaranty is a government-backed program for the veterans and active duty personally in all branches of the US armed forces, National Guard reserves and unmarried spouses of the deceased veterans as well as POWs and MIAs.
Veterans may qualify for a mortgage loan with ZERO down payment without mortgage insurance whatsoever
Lenders all across the USA love to help veterans to finance their homes
Please take a minute to write us a review: short, sweet, and to the point.
YOUR Opinion Does Matter!
Home Mortgage Loan Financing SUMMARY
VALUABE ADDITIONAL INTEL
Home Mortgage Loan Financing
VALUABE ADDITIONAL INTEL
Please continue to read – there are quiet a few important intel which you need to know related to Home Mortgage Loans Financing
Mortgage Interest Deduction [MID]: Home ownership has a lot of advantages, along with its liability, of course. However, to my humble thinking, the best one is that of the interest payments that you make through the years, it is all, 100% deducted from your income tax.
PAYING ALL CASH WILL LOSE
MORTGAGE INTEREST DEDUCTION (MID)
If you have saved enough and/or in some other ways have enough money set aside to buy your home outright, with no need to finance it: Congratulations!
My humble hat goes off to you! Ways off!
In that case, you probably do not need most of this page about the home buying financing process – except, perhaps the paragraph on mortgage interest deduction (MID) above.
However, if you are among the most of us that will be financing the purchase of your home, we have a lot of ground to cover.
It almost goes without saying, that to get a home mortgage loan, you must have an established credit. Some kind of purchase that you have made on credit with any companies that report to credit bureaus.
There are three major credit bureaus: Equifax®, Transunion® and Experian®.
The Fair Credit Act
And Free Credit Reports
The Fair Credit Act of 1970 gives you the right to obtain “Credit records” at least once a year – from each of the bureaus – for FREE! In Georgia you can attain you credit records twice a year! Please check around to see how it is in your State.
Please do not mistake “credit records” “ with “credit scores:”
Credit records: is a file with all entries about you on each of the credit bureaus. It can stay there for quite some time – so it is mighty important that you monitor it careful and diligently.
Request your credit records as often as it is allowed in the state that you live.
Dispute and have the credit bureaus to correct any data that is NOT correct OR anything that is derogatory but it is now too old and it should no longer to be in your records.
It is of your highest interest.
Credit Scores (FICO®)
FICO Credit Scores - It is the proprietary algorithm formula invented by Fair-Isaac Company = FICO®. It is a rather secretive endeavor. It is based on your credit record and several other factors on your financial situation in one given moment in time: It can go up or it can go down - sometime in a matter of a day or two.
It is “the pulse” of your home mortgage financing process – you need to “check it” when it is in the up-swing.
Also, please be aware that each of the credit bureaus will give different weight to different factors and therefore they will always vary …translation: “Your credit” will always have a “different score” for each of the bureaus…
Confused? It beats me too! But that is how the system works, do not lose sleep over the different scores.
For now, however, here is what is an important rule to know: To be in the ball game of your home buying financing process you will need 620 Middle credit scores.
What exactly is “middle” credit scores?
Given that each of the bureaus will give you a different score, home lenders will not use the highest nor will they consider the lowest… Which one is the winner? You guessed it! the one that is still left: let the middle score step to the plate!
Since 2009 – the minimum middle credit scores required to attain home financing has been 620.
I hear that there are some lenders which will arrange FHA mortgage loans – even if your credit score is bit lower …other will not!
Do NOT give up!
Ask the mortgage loan officer:
- What they would recommend that you could do to improve your scores. It is their interest to help you
Ask if they know of any who might help
Lending criteria change all the time, they do not do the same thing 100% of the time
Very important many lenders will arrange a VA mortgage loan to a vet with 580.
Ask around! Do NOT give up easily!
Make sure that everything in credit records is correct and updated!
Again, that is why I call home mortgage financing process the make-or-break side of home purchasing.
Mortgage Down Payment
The vast majority of Mortgage Loans will require that a down payment percentage of the home purchase price to be paid at closing.
It will be 3.5 for FHA programs, 20% down payment for a Conventional loan OR 5% on a Conventional with Mortgage Insurance (MI).
Unless you are a veteran using your DD 214, OR buying you home via a USDA mortgage loan, you will need to come up with a percentage of your home purchase price up front.
How much of the down payment will determined by the type of loan you will be using.
This is also mighty important in the home buying financing process – you most likely will need to have some reserve and use it for down payment:
3.5 % of the purchase price, if both you and the property you intend to buy qualify for an FHA loan.
20% down payment on a Conventional mortgage loan
5% down payment Conventional loan with private mortgage insurance (PMI)
NOTE: VA mortgage loans – by the nature of the VA Guaranty, therefore it can be ZERO down payment and there should have no loan insurance whatsoever.
- I have never worked with a USDA loan (conceptually designed to finance homes in the rural areas), but their programs also do not require down payment 😊
I keep saying ‘if you and/or the house qualify’ because there can be that you might not qualify – as explained above. However, given that many FHA lender may be lenient with your finance qualifications, I have more concerns that the house may have issues and the FHA approved inspector may ‘vote it down.’
FHA does have a program called 203(K) which allows you to tie an additional loan to repair the house. The ‘second’ loan is seamlessly tide together in the same loan package.
While that I am at it, VA lenders are also required to be strict on the condition of the home. There should be no “after Closing Repairs!”
If you are going to use a VA loan, select a house that is completely ‘move in ready!’
Be mindful of it!
Please see more details on FHA loans article above.
Intel Worth Knowing
Home Buzz Tip: Seasoning by and in large, the down payment money will be scrutinized for how long it has been in your possession, its origin AND to have a reasonable certainty it will not cause a hardship for the new minted homebuyer.
It is called “seasoning.”
Funds must be under your name (the buyer/s) or it has to proceed from assets you own for a while, before it is converted into cash.
Moneys must show in your bank account for the last 90 days or three statement cycle.
Home Buzz Tip: Down Payment Gift Funds
A ‘gift fund down payment’ is allowed. Please talk with your mortgage loan officer upfront so it goes smoothly and timely!
Down Payment Assistance (DPA)
All fifty states, counties, municipalities and indeed, sometimes small area of a city / county, have some type of down payment assistance (DPA) available to help you buy you home.
It does vary a lot. Try to inform yourself on what is available in your area.
A case in point is NYC they have a program called HomeFirst Down Payment Assistance which provides the upwards of $100,000 …this is NOT a typo!
Georgia Dream
Georgia Dream down payment assistance DPA program: It offer a bit smaller sum but then again, our home prices around here are also much lower! 😊
Georgia has a strong Down Payment Assistance (DPA) program that covers all counties - and the are happy to make your life a little bit ‘peachier’ by provide some funds for down payment AND some guidance on home buying as well as on how to keep you house after purchasing.
Your home buying financing process does require some homework, creativity and diligence: With the right blend of these elements along with the money you have saved, the good credit you have built will go long ways in making your home ownership a reality!
Phew! Who said the home mortgage loan financing process was easy?!
And this is only the financial side of it! :-)
Now let’s move to other equally exciting stuff!
Is there anything you still need
to know about which is not in this Home Mortgage Loan Financing?
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