For those who meet the requirements, these products can make a difference in whether or not they can become owners.
“The goal of all of these programs is to help people get home, knowing that ownership is a key engine in eliminating the wealth division,” said Ed Barry, chief executive of Capital Bank, a Rockville-based bank. , Maryland, which operates Capital Home Bank Loans. “These programs are there, but a lot of people don’t even know they meet the requirements.”
For example, you do not need to be a farmer to get a USDA loan. Disabled veterans waive a fee that can take some veterans away from a VA loan. And while many people with poor credit may think they can’t get a mortgage, borrowers with credit scores of up to 500 are eligible for FHA loans.
Here’s what you need to know about government-guaranteed loans:
FHA loan
It is easier to apply for an FHA loan than a conventional mortgage. Borrowers can get loans with lower credit scores, higher debt / income ratios and lower down payments.
You can qualify for an FHA loan with a score of 580 and a down payment of 3.5%. With a credit score of 500, the borrower will have to leave more money. These guidelines are set by the FHA and individual lenders approved by the FHA may impose different requirements, including higher credit scores.
For many people, the low down payment on an FHA secured loan is not the biggest draw, as some conventional loans already allow for a 3% discount. The big advantage is that you can qualify for the loan with a lower credit score and a higher debt-to-income ratio.
“But these things aren’t always the best for the buyer,” said Jordan Nietzel, a certified financial planner and founder of Trek Wealth Planning in Kansas City. “You can get in over your head.”
He said the lowest rate you could get with an FHA loan could be offset by the insurance you will have to pay over the life of the loan.
Although the private mortgage insurance required for borrowers with conventional loans that pay less than 20% disappears when the homeowner obtains a certain amount of equity, mortgage insurance is required for all FHA loans for periods longer, regardless of housing equity.
Borrowers with an FHA loan and a down payment of less than 10% will pay FHA mortgage insurance throughout the life of the loan. Those who leave 10% or more will pay for insurance for 11 years on a 30-year mortgage.
He said that depending on your credit score, it may make more sense to take the time to improve it and get a more conventional loan.
“You want to see the whole picture, make sure you’re ready,” Nietzel said. “Don’t let them get you a loan without a 20% discount and let your current credit score be the reason you do it.”
VA Loans
Borrowers will still need to have the necessary credit and income for the loan, but a VA loan can offer better terms than a conventional loan, including 100% financing.
“The advantage of the VA loan is the option of not making any down payments,” Nietzel said. “What people need to keep in mind is the debt-to-income ratio, which can increase on a VA loan than on a conventional loan. You can get a higher loan than you are willing to manage. ”
For example, if you get a VA-backed loan and buy a $ 200,000 home with a 5% down payment of $ 10,000, you will pay a $ 3,135 installment, or 1.65% of the $ 190,000 loan amount. dollars. The fee is waived for those with a service-related disability.
But often a lower interest rate on a VA loan will offset the VA financing commission, Nietzel said.
USDA Loans
The USDA loan program provides 100% financing, requires no down payment, and helps low- and moderate-income families in rural areas.
“People tend to think that a USDA loan is for farmers,” Barry said. “That’s not the case. It’s designed for rural shopping. But that’s defined by population density, not agricultural use. So you have eligible areas even 30 miles from Washington DC.”
He said he has seen people using these loans to buy an affordable home further from a city.
If the borrower and the property are eligible, a USDA loan may be a path to the property for people who are struggling to get a down payment or the credit score is too low to qualify for a traditional mortgage.
Barry’s advice to those seeking any of these loans with government support is to look around for a lender who has a proven track record in managing these programs, as the application process may involve is more than conventional mortgages.
“The challenge is to find someone who has knowledge in this space,” Barry said. Not just about the type of loan, but also about the areas you are looking for. “Normally, this is more than a simple transaction. It can be a super complicated process. It’s helpful to have a little hand.”