Here is an overview of the different loan programs, their benefits and restrictions, to help you decide what might be the best program for you.
Conventional – in our world a conventional loan is usually a fixed-rate instrument with a term of 15 – 30 years. Conventional loans require a minimum of 5% down and allow as much down as you have available, although at some point the required fees may make a smaller loan balance not very attractive. Conventional loans are backed by Fannie Mae or Freddie Mac, government sponsored entities (GSE). Most loans with less than 20% equity, i.e. you put less than 20% down, require an upfront Mortgage Insurance (MI), these rates can vary. Be sure to ask your lender to explain the options available to you with a conventional mortgage product – shorter term, larger payment; longer term, smaller payment; adjustable rate options; mortgage insurance and how to get it removed once you have at least 20% equity.
Conventional loans can be conforming or non-conforming. Fannie and Freddie establish borrower credit and income requirements, down payment and property standards. Each year they also determine a maximum loan amount, in some high cost areas the conforming loan amount is higher than it is in other parts of the country. California has many of those areas. If you are buying a property that is priced above the conforming loan limit, ask your lender to explain to you other options so that your first mortgage can meet the conforming limit. This usually will get you a more competitive rate and lower fees.
For every county and county-equivalent in the country, maximum loan limits for mortgages can be found at: http://www.fhfa.gov/Default.aspx?Page=185
FHA – the product many first time buyers use is the FHA loan. This product is backed by the Federal Housing Administration. Does that mean the government loans you the funds? NO, but it does mean that the government provides the guy who does lend you the funds with an insurance policy which removes or minimizes the risk that the lender is taking by lending with less than 20% down. Buyers who purchase using the FHA loan need only 3.5% down, and that down payment doesn’t even have to be their own money. You can use a gift from grandma!
In addition to the lower down payment option, FHA loans are easier to qualify for than conventional loans. But don’t take that to mean anybody qualifies, there are still borrower credit and income requirements, they just may not be quite as tough. FHA also has a minimum property standard, this standard used to be very difficult and you may hear many seasoned Realtors® complain about FHA inspections. Be sure to ask your lender to explain to you how this property standard has dramatically changed in the past few years. FHA also has a maximum loan amount which varies by state and region and will require you to pay Mortgage Insurance. Ask your lender to really explain FHA and mortgage insurance since their changes in early 2013, you really need to understand this to make a good decision.
One of the benefits of the FHA mortgage is the ability to ‘add on,’ for example there is a product called the Energy Efficient Mortgage which allows the borrower to improve the heating and air conditioning of the property by adding the cost of that improvement to the FHA loan at the current interest rate. This does not require the borrower to qualify at a higher amount and does not require the property to appraise at the higher value once the improvement is completed. Ask your lender how this might help you.
FHA – 203(K) -FHA also insures loans for home improvements — 203(k) loans. Also called the ‘fixer-upper’ loan. Section 203(k) mortgages allow you to purchase or refinance and rehabilitate a home at least 1 year old. A portion of the loan proceeds are used to pay off the existing mortgage, and the remaining funds are placed in an escrow account and released as rehabilitation is completed. The improvements financed with Section 203(k) mortgage proceeds must comply with HUD’s Minimum Property Standards and all local codes and ordinances.
Remember those property standards? Well with the 203(K) you must fix those items that the appraiser details as sub-standard BEFORE you plan that beautiful kitchen with granite countertops. It pays to work with a qualified and experienced 203(K) contractor who knows how to coordinate everything needed in a 203(K). Ask your lender if they have closed a 203(K) recently and if they have a contractor recommendation.
USDA – The US Dept. of Agriculture has a great loan that is available to help you purchase properties in rural or outlying areas. The best thing about this loan is that some income qualified individuals can use this program to purchase with no money down! The property standard that’s most important here is identifying if the property is located in a coverage area. There are credit and income requirements for this property as well.
To determine if a property you are looking at is eligible for the USDA program click here: http://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do?pageAction=sfp&NavKey=property@11
CalHFA – in California our state housing agency, the California Housing Finance Agency (CalHFA), offers a few first mortgage options similar to FHA. They also have down-payment assistance options which can be combined with either the CalHFA FHA first mortgage or any other FHA first mortgage. The down payment assistance programs, one that you qualify for by meeting an income standard and one that is available to teachers, administrators, classified employees and staff members working in high priority schools in California, both can help ‘off-set’ the 3.5% down payment needed for an FHA loan. In addition, as of Oct. 2, 2013, they both can also be used for some approved closing costs, making it possible to purchase in California with very little out-of-pocket costs.
VA/CalVet – sometimes called the VA NO NO – no down payment, no closing costs, the actual availability for 100% financing varies by county in California for the VA product. There are several differences between the VA home loan program and the CalVet home loan program. California veterans should take the time to learn about both programs to determine what is best for them. There are times when the CalVet program is better and other times when the VA program is better.
Just like FHA – the Veterans Administration is not lending the money, they are insuring the loan made by banks and mortgage banks. Ask your lender to explain the difference between VA and CalVet so you can understand, but the biggest difference at least in the last few years, has been rates. The VA rates are lower than CalVet. The other difference is in holding actual title to the property, under the CalVet Contract of Sale, CalVet actually owns the property until you pay it off. Be sure to have your lender clarify this difference so you can make a good decision.
Reverse Mortgage – if you are 62 or older, Reverse Mortgages are a way to borrow against the equity in your home to provide what may be tax-free income. You continue to own and live-in/occupy your home for the term of the loan, generally defined to be when the last borrower permanently leaves or sells the home. You must continue to maintain the home, keep your homeowner’s insurance current, pay property taxes and pay any affiliated Homeowner’s Association Dues. There are many advantages and disadvantages to choosing a Reverse Mortgage, individual interested in finding out more about a Reverse Mortgage can contact their lender or a HUD approved Reverse Mortgage counselor. Counseling is required before you apply.