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10 Financing Options for Your Home Purchase

You have saved sufficient funds and are ready to purchase your dream home. A mortgage financing professional can help you determine how much of your home purchase price you can finance and what type of loan will work best for you. Here are some financing options or loan structures frequently used in the real estate industry.

1. Downpayment Assistance

Multiple State and local down payment assistance programs are available for first-time and repeat home buyers. Like many States, Florida runs its own programs to assist first-time home buyers and renters who have moderate incomes. The Florida Housing Finance Corporation offers a variety of loans and assistance for single family home purchasers, which include 30-year fixed rate mortgages at low interest rates through a network of approved private lenders. There are significant restrictions on eligibility for these loans based on the borrower’s income and the price of the home they want to buy. Generally, it requires that borrowers have a FICO score of at least 620. If you are interested in this program, look into the Florida Housing Finance Corporation Mortgages for your home purchase. There are also special programs for teachers, healthcare workers, military members, and fist time home buyers. A professional mortgage agent can help you locate this helpful financial assistance.

2. FHA Loans

An FHA loan is a Federal Government insured loan. The Federal Housing Administration (FHA) insures loans for single-family and multi-family homes made by approved lenders. A misconception about FHA loans is that they are targeted to lower-income borrowers or first-time homebuyers only, but this is not the case. The FHA does not have income limits to determine who is eligible for their loans. Anyone who is a U. S. citizen, permanent resident or, non-permanent resident with a qualifying work visa, and who meets the lending requirements, can qualify for an FHA-insured loan. The FHA does set a maximum mortgage amount that it will insure.

The FHA is part of the Department of Housing and Urban Development (HUD). HUD issues regulations and establishes guidelines for approving lenders authorized to make FHA loans. Lending institutions that make FHA loans must first be approved. Once approved as an unconditional FHA Direct Endorsement Lender, the lender is authorized to underwrite and close mortgage loans without prior submission for FHA review or approval.

FHA is less stringent when it comes to a borrower’s level of income. While no minimum or maximum income is required for an FHA loan, the borrower must have sufficient income to service the debt on the home mortgage and all their other credit obligations. A borrower’s housing expense ratio (HER), the borrower’s total monthly housing expense to income, must not exceed 31% of gross stable monthly income. FHA’s maximum mortgage payment includes principal, interest, taxes, and insurance (PITI), and it requires mortgage insurance premiums (MIPs). A borrower’s total debt-to-income ratio, the borrower’s total monthly debt obligations to income (DIR), must not exceed 43% of monthly income. Generally, it requires borrowers with a credit score of 580 or higher and a downpayment of a minimum at least 3.5% of the home purchase price. However, HUD authorized additional requirements for borrowers with a credit score between 500 to 579, including a 90% LTV. Borrowers with a credit score under 500 are not eligible for FHA-insured mortgage financing.

HUD regulations prohibit prepayment penalties on FHA loans. A borrower may prepay a mortgage in whole or in part at any time.

A mortgage insurance premium (MIP) is required for all FHA loans, regardless of the downpayment. There is an initial premium, called the upfront mortgage insurance premium (UFMIP) and a monthly premium, which is based on the annual average outstanding loan balance divided into 12 monthly payments. If the UFMIP for a 15-year or 30-year loan is paid in cash at closing, it may be paid by the borrower or by the seller or other third party. However, all of it must be paid in cash, or all of the premiums must be financed. The UFMIP on 15- and 30-year mortgages assigned on or after April 9, 2012, is 1.75 percent of the loan amount. For loans made after January 1, 2001, MIP is automatically cancelled when the LTV reaches 78% of the original value (for 30-year mortgages, the annual MIP must have also been paid for at least five years). Financed MIP cannot be cancelled.

Borrowers with FHA loans are required to establish bona fide occupancy of the property as their principal residence within 60 days of signing a security instrument. (e.g., mortgage, trust deed). Furthermore, they are required to live in the house for at least one year.

3. VA Loans

VA loans are guaranteed by the Federal Government through the Veterans Benefits Administration. The VA’s main purpose in guaranteeing loans is to help meet the housing needs of eligible veterans who have served or are currently serving on active duty in the U.S Armed Forces, which includes the Army, Navy, Air Force, Marine Corps, Coast Guard, Reserves, or National Guard. VA loans are available to eligible veterans for the purchase of owner-occupied single-family homes and for multi-family dwellings up to four units if the veteran intends to occupy one of the units as their primary residence.

The VA rarely loans money directly to borrowers. A veteran must borrow money from a VA-approved lender. Although the lender will examine the borrower’s credit history, amount of income, and other factors before approving the loan, the primary requirement to be approved for a VA loan is the borrower’s military eligibility, which is based a person’s length of continuous active service and other factors such as when he or she enlisted and whether he or she served during war time. Lenders may not process or close a VA loan without verifying the eligibility of the borrower with a Certificate of Eligibility (CE) issued by the VA.

The VA does not limit the price a veteran can pay for a home (provided the home appraises for the loan amount), but the VA does limit the amount it will guarantee in case of default to 25% of the purchase price or the established reasonable value, whichever is less. A veteran’s maximum guaranty amount, known as entitlement, represents the portion of the loan that the VA guarantees in the event of default by the borrowing veteran. Generally, veterans can purchase a home priced up to four times the amount of their entitlement with no down payment. VA loans require no downpayment and do not generally consider the housing expense ratio. The lender will require that a potential borrower’s total debt to income ratio (DTI) not exceed 41%. In addition to the DTI, an underwriter must ensure that an eligible borrower’s remaining cash flow after mortgage payments is sufficient for family support. There is no upfront or monthly mortgage insurance premiums required for VA loans. Borrowers must pay a non-refundable one-time variable funding fee at closing for guaranteeing the loan. The funding fee may be financed or paid in cash. VA loans do not allow clauses for prepayment penalties, but they do require the borrower to occupy the property as his or her home.

4. USDA Rural Development Loans

One mission of USDA’s Rural Development Agency is to provide financial support to low-income home buyers in qualifying rural areas nationwide. This USDA loan program guarantees loans made by approved private lenders or makes direct loans if no local lender is available. It requires little or no cash for a down payment or closing expenses. There is no maximum purchase price for houses and no maximum mortgage limit. The house must be located in an area designated as eligible for this type of guaranteed housing loan, and the buyer’s income must not exceed 115% of the local area median income. The permissible loan amount is 100% of the appraised value of the house plus the upfront guarantee fee of about 2% of the price of the property discussed below. As a rough guide, many lenders expect applicants to have a FICO score of at least 640. The standing rule is 29% of gross household income for monthly mortgage payments and 41% of household income for total recurring debts. Under a policy change made during 2011, the USDA began charging upfront guarantee fees of 2% of the loan amount to be paid at closing. Loans must be used to purchase, build, or repair a single-family home that the borrower intends to occupy. The property must be located in a community that has been designated for USDA rural development financing. It specifically rules out houses with inground swimming pools or income-producing land or buildings associated with the house.

For very low-income homeowners, USDA provides financial assistance for repairs and upgrades intended to make a home safe and sanitary and to remove health hazards such as lead-based paint. Repair and rehabilitation loans of up to $20,000 at 1% interest for 20 years are available to qualified borrowers. Outright grants of money are also available up to $7,500 for homeowners 62 years or older. For borrowers who can afford to pay part of the cost, combined loan-grants are available up to $27,500.

5. Conventional Loans

A conventional loan is usually made by a bank or institutional lender and is not insured or guaranteed by a government entity or agency, such as FHA or VA. However, most conventional loans are written to comply with guidelines set by government sponsored entities (GSEs), such as Freddie Mac and Fannie Mae, so that they may be sold in the secondary market. When a loan meets the criteria necessary to be sold in the secondary market, it is considered a conforming loan. Conventional loans may be conforming loans or nonconforming loans. Traditional conventional loans are typically long-term, fully amortizing, fixed rate real estate loans. The most common loans are 15-year or 30-year fixed rate mortgages. Amortizing loans have payments applied to principal and interest. A fully amortizing loan is one in which total payments over the life of the loan pay off the entire balance of principal and interest due at the end of the term. Negative amortization occurs anytime the monthly payment is not sufficient to cover the accrued interest from the previous month. An interest only loan is one in which the monthly payment only covers the interest on the loan. Lenders often give a borrower a better interest rate on a 15-year mortgage because the shorter term means less risk for the lender. Conforming convention loans meet Fannie Mae/Freddie Mac standards, which require a 28% total housing expense ratio and a 36% total debt to income ratio.

Nonconforming conventional loans do not meet Fannie Mae/Freddie Mac standards. For example, the size of the loan may exceed the maximum loan amount established by Fannie Mae and Freddie Mac for conforming mortgage loans. These loans are often called Jumbo loans. Another reason that a loan would be nonconforming is that the borrower’s credit quality does not meet the minimum standards established by Fannie Mae/Freddie Mac.

Standard fixed rate mortgages come with terms ranging from 8 to 30 years with a maximum loan to value ratio of 95%. 97% loan to value loans are available when certain restrictions are met. This means that buyers can make a down payment as little as 3% or 5% of the purchase price. However, an 80% conventional loan with at 20% down payment is required if borrowers would like to avoid PMI payments. Loans that exceed the standard 80% LTV ration require payment of private mortgage insurance (PMI) or UFPMI. Because qualifying guidelines for conventional loans are stricter than with government-backed loans, the interest rate could be vary based upon the borrower’s credit score and loan to value ratios. The property may be occupied by the buyer after closing or may be a rental investment property.

6. Adjustable Rate Mortgages (ARMs)

An ARM is an adjustable-rate mortgage which frees lenders from being locked into a fixed interest rate for the entire life of the loan. Many lenders like ARMs because they can pass the risk of fluctuating interest rates on to borrowers. ARMs are popular alternative financial tools as they may help borrowers qualify more easily for a home loan or for a loan to finance the purchase a more expensive home. Lenders like to offer ARM loans on commercial buildings to limit their risk. Lenders normally charge a lower starting rate for an ARM than for a fixed rate loan because ARM shifts the risk of interest rate fluctuations to the borrower. Terms, rate changes, and many other aspects of ARMs are regulated by several agencies, depending on the type of lender. Any applicable guidelines or requirements of Fannie Mae, Freddie Mac, FHA, and/or private mortgage insurers must be followed as well.

There are several components to an adjustable-rate mortgage:

Index: It is often referred to as cost of money. It is an interest rate that fluctuates over the term of the loan based upon market conditions. When the index interest rate goes up or down, the mortgage interest rate goes up or down as well. The index is usually a specific interest rate that is published by a bank or financial institution from time to time.

Margin: A margin is re