SHOPPING FOR A HOME 101 CONVENTIONAL LOANS
MORTGAGE TRANSLATOR FHA LOANS
HOME INSPECTIONS USDA & VA LOANS
PREQUALIFICATION & PRE-APPROVAL MORTGAGE INSURANCE
OFFER TO PURCHASE PURCHASE & SALE AGREEMENT
RADON LEAD PAINT
APPRAISAL TITLE INSURANCE
MARTHA'S VINEYARD LAND BANK FEE SEPTIC INSPECTIONS (TITLE V)
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10 years ago Buyers had more options than ever before to finance their home purchase. Today, the
programs offered to prospective homeowners are fewer, simpler and safer but nonetheless obscure
for those who do not deal with mortgage financing programs on a daily basis. Below, we will take a
look at the fundamentals of 4 of the most popular mortgage programs available. The 2 most
common mortgage loan programs used by prospective homeowners today are the Conventional and FHA programs. A brief summary of 2 other popular mortgage programs - USDA and VA - appears at the end of this section. We hope this section will clarify the differences between these programs and provide you with the necessary foundation to consider your mortgage finance options.
For more information check out our Credit Do's and Don't's page or our Closing Tips page. Feel free to call us at (774) 392-1295 with any questions you may have. We are here to help you.
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MORTGAGE TRANSLATOR
Now, let's look at some of the terminology you will encounter in the process of purchasing and financing your new home:
PRINCIPAL AND INTEREST: The amount you borrow to finance your home purchase is called the "principal". The rate charged to you for borrowing this amount will be stated in terms of percentage points and is called the "interest rate". Each month you will pay principal and interest in an amount sufficient to pay back the principal you borrowed by the end of the term of your mortgage. (i.e. 30 years or 15 years)
AMORTIZATION: The lender will determine how much money you will have to pay each month in order to pay back the amount you borrowed by the end of your mortgage term based on the interest rate you are being charged to borrow that money. This is called "amortization". At the beginning of your mortgage term most of your monthly payment will go towards interest and less will go towards paying principal. However, as you get further into your mortgage term, more and more of your monthly payment will be applied to principal. The longer your amortization term, the lower your monthly payment will be. This is why people were using 40 year mortgages at the height of the real estate boom. Of course, you will also pay more interest with a longer term amortization. Today, most
lenders limit their mortgage terms to no longer than 30 years.
FIXED RATE MORTGAGE: With a fixed rate mortgage your monthly payments of principal and interest will remain the same until the end of your mortgage term when your loan will be paid in full.
ADJUSTABLE RATE MORTGAGE: With an adjustable rate mortgage your interest rate and therefore your monthly payments of principal and interest will usually remain fixed for an agreed period of time. At the end of that agreed period of time your interest rate will change and the lender will amortize your monthly mortgage payments based on that new interest rate over the remaining term of the mortgage. (Most adjustable rate mortgages have a 30 year total amortization period.) You will then make your monthly mortgage payments in an amount sufficient to pay off your loan by the end of your mortgage term based on that new interest rate - until your interest rate changes again. This type of mortgage is commonly referred to as an "ARM".
For example, a 3/1 ARM would give the borrower fixed monthly payments of principal and interest at the same interest rate for 3 years. Then in year 4 the interest rate would change and the borrower would make fixed monthly payments of principal and interest for 12 months based on an amortization using the new or 'adjusted' interest rate. These adjustments would continue every year until year 30 when the loan would be paid in full. A 3/6 ARM would be the same except that in year 4, the adjustments would continue every 6 months until year 30.
The benefit to an ARM is that the interest rate will be lower for that initial fixed period of time. The downside to an ARM is not knowing what your monthly mortgage payment will be at the end of the initial fixed rate period and beyond. Although the market has scaled back on the variations of adjustable rate mortgages there are still a number of different ARM products being offered to home buyers. If you are considering an ARM to finance your home purchase you should consult with an attorney or trusted financial advisor to be sure you understand when and how your monthly mortgage payment can change.
PITI: This acronym describes the 4 items that make up your total monthly mortgage payment. It stands for "principal, interest, taxes and insurance". In addition to the principal and interest you pay to the lender each month, you will also have to pay annual property taxes to the town or city you live in and an annual homeowner's insurance premium to cover the property against loss caused by fire or other hazards. The lender will usually require that they make these payments on your behalf and will collect the money necessary to pay your tax and insurance bills by adding 1/12th of the annual property tax bill and 1/12 of the annual homeowner's insurance bill to your monthly morgage payment. These are called "escrow" payments.
When deciding how much house you can afford you want to be sure you take the property tax bill and homeowner's insurance bill into consideration. Your realtor will be able to provide you with the annual tax bill for any house or condominium you are looking at. You will have to estimate your homeowner's insurance bill. Work with a trusted insurance agent to get a reasonable estimate of what your annual homeowner's insurance premium will be.
HOMEOWNER'S INSURANCE: Also called Fire & Hazard Insurance. As noted in the previous section, you will be required to purchase a homeowner's insurance policy covering your new home agianst losses caused by fire and other hazards. You may choose your own insurance agent and company. The minimum coverage you must obtain is called "100% guaranteed replacement cost coverage" or "full replacement cost coverage". One full year's premium must be paid in advance and a paid receipt with a binder showing the coverage is in place will be required at least one week prior to scheduling the closing.
FLOOD INSURANCE: Flood Insurance is generally not part of your homeowner's insurance policy. If you want coverage for damage caused by flooding you will have to obtain a separate policy. If your home is located in certain flood zones the lender will require you to obtain flood insurance. If your home is not located in one of these zones then flood insurance coverage is optional.
ESCROWS: As discussed above, the lender will be making property tax and homeowner's insurance bill payments on your behalf. In order to be sure they have enough money to pay these bills on the next due date, the lender will set up an escrow account for these items. They will do this by collecting approximately 3 months worth of homeowner's insurance premiums and between 4 and 8 months worth of property taxes from you at the closing. This sum of money is called "escrows" and you will have to pay this in addition to the closing costs described above.
The lender will also collect prepaid interest from you at the closing. The amount of prepaid interest collected will depend on what day of the month you close. For example, if you close on April 16th, the lender will collect 15 days interest from you at the closing. However, you will not have to make your first mortgage payment until June 1. This is because mortgage interest is always paid in arrears. (Or just the opposite of your monthly cable bill.)
**Remember that prepaid interest and escrows for taxes and insurance are different from closing costs. Don't be fooled by lenders quoting you 1 day of prepaid interest, 1 month of property taxes and 1 month of homeowner's insurance on the Good Faith Estimate in order to make their closing costs seem lower. At the closing the lender will always escrow enough money to pay any interest due and to pay the next property tax and homeowner's insurance bills - no matter what the Good Faith Estimate said.
CONDOMINIUMS: If you are purchasing a condominium, you will have to pay monthly condominium fees to your condominium association. These fees usually cover maintenance costs for common areas as well as insurance for the building(s) in which your unit is located. Condominium fees are not part of your monthly mortgage payment. They will be paid directly by you. In other words, the lender will not "escrow" for monthly condominium fees.
You will also be required to obtain what is called an "HO-6 insurance policy" to provide coverage for the interior of your unit. The minimum required coverage for the HO-6 policy is 20% of the appraised value of the condominium unit. The premiums for these policies are usually much less than the premiums paid for homeowner's insurance on a single family residence. This is because the condominium association carries a master policy that generally covers the exterior of your unit and the common areas. An HO-6 policy covers only the interior of your unit. The lender will usually escrow for your annual HO-6 premium by adding 1/12th of the premium to your monthly mortgage payment. Although not required, it is a good idea to add coverage to your HO-6 policy for your personal property. (**NOTE: Some condominium associations carry enhanced coverage as part of their master policy so that you will not have to pay for a separate HO-6 policy to cover the interior of your unit. However, even in this case it is a good idea to get your own HO-6 policy to cover your personal belongings.)
LTV: This is the acronym for "Loan to Value Ratio". It is a measure of the value or purchase price of your home against the mortgage amount. If you are buying a home for $100,000 and you are financing your purchase with an $80,000 mortgage then you have an '80 LTV'. If you are buying a home for $300,000 and you are putting down $30,000 then you have a 90 LTV because your $270,000 mortgage is 90% of $300,000. One of the most important things to remember about LTV when shopping for a home is that the LTV will be determined by the fair market value stated in the
appraisal - or the purchase price - whichever is less. As such, an appraisal which states that the fair market value of your prospective home is less than the purchase price may cause you to be ineligible for your mortgage or require you to come up with more money down. When this happens the Buyer and Seller will often negotiate a new purchase price. But not always! Therefore, you should discuss this with your attorney before you sign the purchase contracts so that appropriate language is added to protect you in this event.
MORTGAGE INSURANCE: If you don't put down at least 20% of the purchase price you will be paying mortgage insurance in one form or another. In other words, you need to have an 80 LTV or less in order to avoid mortgage insurance. This insurance protects the lender against losses in case you default on your mortgage loan. Like property taxes and homeowner's insurance, the mortgage insurance will be added to your monthly mortgage payment. The amount of mortgage insurance you pay can be determined by your down payment, your credit score, the term of your loan and the mortgage program you have chosen. (i.e. Conventional or FHA) You can opt out of mortgage insurance by choosing what is called "Lender Paid Mortgage Insurance" or 'LPMI'. With LPMI you will pay a higher interest rate in return for not paying the monthly mortgage insurance.
POINTS: Points are up front fees charged to the borrower by the lender for the loan. They are quoted in percentage points. For example a $300,000 loan charging 1 point would require the borrower to pay $3,000. Points may also be charged in return for a lower interest rate. 1 point paid will usually reduce the interest rate by .125%.
CLOSING COSTS: Also referred to as settlement costs. These are the out of pocket costs to the borrower incurred as part of securing the mortgage loan. Closing costs can include points, up front mortgage insurance charged by FHA, funding fees charged by USDA, (See below for more information on the FHA and USDA programs.) loan origination fees, rate lock or application fees,
appraisal, credit report, attorney fees, title examination, title insurance, plot plan survey and registry recording fees. Although you will also pay for a home and pest inspection, these fees are usually
considered voluntary and therefore will not be included in your closing costs.
The only fees paid for prior to the closing are the appraisal and credit report. Some lenders will also require you to pay in advance for an application fee or rate lock fee. In a purchase transaction (instead of a refinance) you will also pay in advance for the pest and home inspection. The remaining
fees will be paid at the closing. An estimate of your closing costs will be given to you by the lender on a form called the "Good Faith Estimate" within 3 days of completing your loan application.
PRE-QUALIFICATION & PRE-APPROVAL: Before you begin your home search it is a good idea to determine how much of a mortgage loan a lender will give you and - much more importantly - how much you are comfortable paying. Both a pre-qualification and pre-approval should give you a good idea of how much house you can finance. In order to obtain either, you will be required to provide all of your employment, income, debt and asset information by completing a loan application usually over the phone or in person. A credit report will then be requested and reviewed in comparison with the information on your loan application. At this point your loan application may be submitted to Fannie Mae's online underwriting system for approval. Based on all of this information a pre-qualification letter may be issued on your behalf stating the amount of the mortgage loan for which you qualify. A pre-approval will require all of the foregoing plus submission of documentation to the lender which supports your loan application such as pay stubs, W-2's, bank statements, tax returns and verification of employment.
Both pre-qualifications and pre-approvals will always be subject to further documentation such as the appraisal, title examination and condominium review and will likely require further income, employment or asset verifcation. Neither a pre-qualification or pre-approval is binding on the lender. Why bother then? A good loan officer or mortgage broker will be able to anticipate most problems in advance and get you a meaningful pre-qualification or pre-approval. Having one will also give you more credibility with the Seller or Realtor as it shows you are serious about your home purchase and have enough of a credit background to reach this stage of your mortgage loan application.
OFFER TO PURCHASE: Commonly referred to as the "Offer", this document is signed by you and submitted to the Seller stating the purchase price you are offering to pay for the property. You will usually be required to include a check for $500 - $1,000 with the Offer. In the past, the Offer was a 1 or 2 page document that was considered a mere formality leading up to the much more detailed "Purchase and Sale Agreement" discussed below. However, with recent changes to Massachusetts law, Offers are becoming more detailed and will now include provisions for mortgage contingency dates, pest and home inspections, condominium document and budget review as well as lender approval of the purchase price in the case of short sales. Despite this added detail, it is still the customary practice for both the Buyer and Seller to agree on a purchase price, sign the offer and then negotiate and sign the Purchase and Sale Agreement.
PURCHASE AND SALE AGREEMENT: Commonly referred to as the "P&S", this document is the contract that memorializes all of the terms between the Buyer and the Seller. Once signed, the P&S will determine the rights and responsiblities between the parties. The P&S will also contain
some of the contingencies that were in the Offer along with many others that were not. It is important to note that some of the contingencies in the Offer will expire before you sign the P&S. For example, the Offer may have given you an opportunity to inspect the property for pests and structural/mechanical soundness by a certain date whereas the P&S will have no such contingency. However, you may want the P&S to contain a clause requiring the Seller to remedy certain defects found in the home/pest inspection by a specific date and give you the opportunity to inspect to make sure those conditions have been remedied.
Note: The recent economic crisis has lead to a wave of regulatory influence over mortgage financing that directly - and many times awkwardly - affects the contingency timelines of every residential real estate transaction today. Because there are many other contingencies such as mortgage financing and title contingencies that may be needed in the P&S in order to protect your interests, it is imperative that you engage an attorney to advise and assist you when negogiating these contracts and then help you navigate the timelines laid out in them.
TITLE INSURANCE: Lender's Title Insurance is required on every mortgage loan transaction. The premium is $2.50/thousand of your mortgage loan amount and is part of your closing costs. This insurance protects the lender in the event the lender forecloses on your home but is unable to sell the property at or after the foreclosure due to a defect in the title to your property. This insurance does not provide any protection to the homeowner.
Owner's Title Insurance will protect the homeowner in the event there is a covered defect in the title to their property and they are unable to sell their home due to this defect or in the event the title to their home is challenged by a 3rd party (such as an heir of a prior owner). Due to market demand, the coverage provided by Owner's Title Insurance has been expanded in recent years to address a variety of problems a homeowner may face - even many years after the closing. Owner's Title Insurance is optional but it is highly recommended. Like all insurance you will certainly wish you had it should the need ever arise for it. It is a one time premium and the policy includes automatic inflation adjustments to cover appreciation in the value of your property. The premium for Owner's Title Insurance will be quoted as a separate line item on your Good Faith Estimate. The best time to purchase Owner's Title Insurance is at the time you purchase your property since you will be credited with the cost of the mandatory Lender's Title Insurance towards your Owner's Title inurance
premium. Because you can use the title exam performed by the lender's attorney you will also avoid the cost of having to pay for another title examination that would be required should you subsequently choose to purchase Owner's Title Insurance. The lender's attorney will issue the Owner's Title Insurance Policy for you.
APPRAISAL: An appraiser will go to your house or condominium to evaluate your property and take pictures. They will then research other similar type properties in the area to see what those properties sold for in the most recent past and compare these properties to yours. These other properties are referred to as 'comps'. After evaluating all of this information the appraiser will issue a report with their opinon of the fair market value of your home. In order to determine your LTV the lender will use either the fair market value stated in this report - or the purchase price - whichever is less. (If you are refinancing, the lender will only look to the fair market value stated in the appraisal report to determine your LTV.) So, if you have agreed to purchase a home for $300,000 and have been approved to put 5% down then the lender will loan you 95% of the purchase price or $285,000. In other words, the lender has pre-qualified or pre-approved you for a 95 LTV loan. But if the appraisal report states that the fair market value of the home is $295,000 then the lender will only lend you $280,250. ($295,000 x 95% = $280,250) It will then be up to the Buyer to come up with the extra money or for the Seller to reduce the purchase price - or a combination of both.
The appraisal is for the lender's use only. However, you have a right to recieve a copy of the appraisal. (Which is nice - since you are paying for it.) Make sure you get a copy of the appraisal. It is an interesting read and shows you how the value of your home is determined against similar homes in your area.
NOTE: It is not uncommon for the appraiser to determine that the fair market value of the home is less than the purchase price you have negotiated with the Seller(s). This does not automatically result in the purchase price being lowered. Often, all parties can get together and negotiate so that the sale can proceed. However, your contract(s) much provide for such a contingency. Again, it is therefore essential that you engage an attorney to assist you in drafting and negotiating the purchase contracts.
HOME/PEST INSPECTION: Before you sign the Purchase and Sale Agreement you should have
an inspection done by a licensed home inspector. Because this is your last chance to discover any major defects or understand what repairs may be coming in the near future, it is one of the most important elements of the transaction. Be sure to do your research and find a good home inspector. You should attend the home inspection personally so that you will have a better understanding of any issues that the home inspector finds. This will also help both you and the Seller(s) reach a specific agreement as to how you will resolve any issue(s) that may be found.
You should also have a pest inspection done as part of your home inspection. This inspection will look for signs of termite infestation and should also suggest remedial measures. The inspection may also include a determination of mold or fungus or other insect infestation. Be sure to discuss the scope of the inspection with the pest inspection company to determine how thorough the examination of your home will be.
NOTE: The discovery of minor defects will not allow you to cancel the purchase contract. Most Offers and Purchase & Sale Agreements include language stating that the cost to cure discovered defects must exceed $1,000 - $2,000 before you can terminate the purchase contract and receive a refund of your deposit.
RADON: Radon is an oderless, invisible radioactive gas that, when present in sufficient quantities, has been linked to lung cancer. It forms from the natural decay of uranium present in the soil. As part of your home inspection testing must be done in order to determine the presence of radon gas. The EPA considers tests showing the presence of radon gas at "4 pCi per liter, or higher" to warrant remediation. The cost to remedy radon gas is usually a simple ventilation fix and is not cost prohibitive. Nontheless, if the tests show unnacceptable levels of radon then you will want to be sure it is effectively remedied by the Seller.
LEAD PAINT: Homes built before 1978 often used lead based paint products on walls, windows and floors. Lead paint poisoning is especially dangerous to young children who may breathe in or swallow lead paint chips and dust. To comply with both state and federal requirements, sellers and real estate agents must provide the Property Transfer Lead Paint Notification to a prospective buyer before signing a purchase and sale agreement, a lease with an option to purchase, or a memorandum of agreement used in foreclosure sales. In addition, they must:
MARTHA'S VINEYARD LAND BANK FEE: All properties on Martha's Vineyard are subject to a Land Bank Fee equal to 2% of the purchase price. This fee is paid for by the Buyer. There are some exceptions whereby the Land Bank Fee will be waived. The most common exception is the so-called "Section (m) exemption". It is for 1st time homebuyers and provides that the fee will be waived up to a purchase price of $400,000. Under this exemption the Buyer(s) must intend to make the home their "actual domicile within two years of the Time of Transfer; and shall domicile permanently or for an indefinite period of time and without any certain purpose to return to a former place of abode." In other words, you have to intend to occupy the property as your primary place of residence and do so within two years. If you sell the property within five years then you have to pay the Land Bank Fee together with penalties and interest. You will have to fill out Form LB1 with all purchases. The Section (m) exemption will also require Form LB2. Other exemptions can be found on Form LB5. Be sure to consult with your attorney regarding your responsiblities with regard to the Land Bank Fee and all exemptions.
TITLE V INSPECTIONS: Septic systems that are not functioning properly can pollute our coastal waters, rivers and water supplies. They are therefore regulated by the Department of Environmental Protection and your local Board of Health. If the property you are purchasing uses a septic system, the Seller will be required to have a Title V inspection done within 2 years of selling the property. (Some towns require that the inspection be done within 1 year of the property transfer.) The Title V Inspection Report must show that the system passes state and local regulations and is sufficient to serve the number of bedrooms in your home. The Seller will also have to submit this report to the Town Board of Health.
It is important to note that the Title V Inspection Report is a snapshot in time. It simply states that on the date the inspection was done the septic system was functioning properly. If the septic system fails the inspection the Seller must repair the system within two (2) years but is not obligated to repair the system and bring it into compliance on behalf of the Buyer(s) unless this was previously contemplated and agreed upon by the parties. Usually, the Title V Inspection has been done before an Offer has been made on the property. If not, Buyers and Sellers can agree in the Offer or Purchase and Sale Agreement that one or both of them will have the option to repair the septic system within a certain period of time if it does fail to pass the inspection. Be sure to consult with your attorney as to the proper agreement on this issue.
CONVENTIONAL VS. FHA
CONVENTIONAL LOANS: A conventional loan is a loan that is underwritten using the guidelines required by Fannie Mae or Freddie Mac and are therefore referred to as a 'Fannie' or 'Freddie' loan. These are the most common loans in the mortgage marketplace and no matter what bank or lender you use, you can take some comfort in knowing that the loan documents you will be signing are similar among all banks or lenders who offer Fannie Mae or Freddie Mac mortgage loans. This is because the bank or lender will be using what are called "Fannie Mae/Freddie Mac Uniform Instruments".
A conventional mortgage loan will allow the borrower to put down as little as 3% depending on the borrower's credit score and the type of home they are purchasing. For example, if the home is a condominium you will likely have to put down at least 5%. If it is a single family residence you may be able to put down only 3% if you have sufficient credit and income. Again, no matter what type of home you are buying and no matter what your credit score is, if you put down less than 20% you will have to pay mortgage insurance commonly referred to as "PMI".
Mortgage Insurance with Conventional Loans: The 4 most common ways to pay PMI are as follows:
1.) Monthly: Here the borrower pays PMI every month until they have reached 20% equity in their home at which point the borrower can cancel their PMI payments by requesting cancellation from the PMI company.
2.) Borrower Paid Up Front Mortgage Insurance: Here the borrower can pay for their mortgage insurance in one lump sum payment and avoid the monthly mortgage insurance altogether. If you choose this option the PMI company will quote you the amount you have to pay in advance so you can decide if you prefer this option. This will often result in savings over the long term but will require that you come up with more money at the closing.
3.) Financed Up Front Mortgage Insurance: Here again the borrower can pay for their mortgage insurance in one lump sum payment and avoid monthly mortgage insurance altogether. But rather than pay for it out of their own pocket, the borrower can finance the lump sum amount by adding it to the mortgage loan principal. In certain instances the lender will only allow you to finance a portion of the lump sum amount and require you to pay the difference at the closing. This will often happen when financing all of the Up Front Mortgage Insurance causes the total loan amount to exceed 97% of the home's value or purchase price. Or, when doing so causes the total loan amount to exceed 95% of the home's value when the home is a condominium.
4.) Lender Paid Mortgage Insurance: Commonly referred to as "LPMI" this allows you to opt out of paying mortgage insurance altogether in return for paying a higher interest rate.
NOTE: When PMI is required, the lender not only has to follow Fannie Mae or Freddie Mac's underwriting guidelines, they also have to follow the underwriting guidelines of the company providing the PMI. PMI company guidelines are often more stringent and may require the borrower to show more income and less debt or require more money down than required by Fannie Mae or Freddie Mac underwriting guidelines.
PMI guidelines may also be more or less stringent than those required by the underwriting guidelines of a different mortgage program such as FHA. For example, PMI underwriting guidelines only require a 3% down payment on a single family residence. FHA underwriting guidelines require a minimum 3.5% down payment. But PMI guidelines also require that the minimum 3% down payment must come from the borrower's own funds. However, the FHA mortgage program does not require any minimum investment from the borrower. Therefore, while FHA underwriting guidelines do require a slightly higher minimum down payment of 3.5%, FHA will allow all of that 3.5% to be given to the borrower as a gift from relatives.
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FHA LOANS: These are loans in which the lender is insured against loss by the Federal Housing Administration. Therefore, a borrower using the FHA program will not have to comply with PMI underwriting guidelines or Fannie Mae/Freddie Mac underwriting guidelines. Instead, the borrower (and the property) will have to meet the standards required by FHA underwriting guidelines. FHA loans are only available on 1-4 family properties that are to be used as the borrower's primary residence. Condominium units are eligible but the condominium project must be approved by FHA.
Mortgage Insurance with FHA Loans: FHA requires 2 types of mortgage insurance. The amounts charged for both types are mandatory amounts set by FHA and will not vary with each lender. Unless you put down 22% and your loan term is 15 years or less, you must pay the following 2 forms of mortgage insurance on every FHA loan:
1.) Up Front Mortgage Insurance Premium: Also called "UFMIP", this is paid in one lump sum at the closing by the borrower and is usually financed by just adding it to the mortgage loan. The total cost of UFMIP is currently 1.75% of the loan amount.
2.) Annual Mortgage Insurance: Like PMI, it is paid by the borrower each month. The amount is determined by adding 1/12th of the annual premium to the monthly mortgage payment. The amount or percentage charged for annual insurance under the FHA program will be affected by your down payment amount and whether your loan term is 15 or 30 years. Your credit score will have no effect on the amount of annual mortgage insurance you pay with the FHA mortgage program. Currently, FHA Annual Mortgage Insurance must be paid for a minimum of 5 years. However, effective June 3, 2013 FHA loan applicants will be required to keep paying the annual mortgage insurance for the life of the loan unless they are able to put down more than 10% of the purchase price of their home. (Borrowers who applied for their FHA loan prior to June 3, 2013 will still be eligible to cancel their annual mortgage insurance after 5 years or when their LTV reaches 78% - whichever is later.)
FHA offers excellent interest rates, flexible underwriting guidelines and requires only a 3.5% down payment. Gift funds from relatives can be used to make 100% of the down payment and to cover all of your closing costs while Sellers can contribute up to 6% of the purchase price towards the Buyer's closing costs.
USDA AND VA MORTGAGE PROGRAMS
Two other mortgage programs are offered by the United States Department of Agriculture and the Veteran's Administration. These programs have their own separate and unique property, income and individual status requirements that must be met in order to be eligible. For the prospective homeowner seeking to put zero down on their home purchase, these are likely the only programs available to you. What follows is a brief summary of each program. Even though you may qualify for either or both programs, a comparison with the FHA and Conventional loan programs discussed above is still warranted.
THE VA LOAN PROGRAM: Just as the name suggests, the VA loan program is available to current or former military service men and women including National Guard Reserves. Like FHA loans, the lender will be insured against loss by the Veteran's Administration and therefore the lender will be following VA underwriting guidelines when determining your eligibility for the VA loan program. VA loans are only available on 1-4 family properties that are to be used as the borrower's primary residence. Condominiums must be approved by VA.
A major benefit of the VA loan program is that it allows you to purchase a home with no money down and you will not be charged any monthly mortgage insurance. Like FHA however, you will be charged an up front mortgage insurance premium which can be financed by adding it to the mortgage loan amount. VA uses the term "Funding Fee" for their up front premium. The amount of the premium charged will depend on the amount of money (if any) you put down, the loan purpose (i.e. purchase or refinance), the type of military service you engaged in and whether this is the first or subsequent use of your VA entitlement. There are also exemptions to the Funding Fee requirement for certain veterans or unmarried surviving spouses of veterans.
NOTE: Because all VA lenders require that 25% of the loan be guaranteed, you will be using some or all of your VA Entitlement to contribute to this mandatory guaranty. Therefore, whether you ultimately have to put any money down for the home purchase will depend on the amount remaining in your VA Entitlement.
THE USDA LOAN PROGRAM: The United States Department Of Agriculture offers their own mortgage loan program but it is only offered on homes that appear on USDA's map of eligible properties. The program is also known as the Guaranteed Rural Housing Program. As the name suggests, the properties on the USDA map are usually located in rural areas. Like FHA and VA loans, the lender will be insured against loss by a branch of the federal government; in this case the United States Department of Agriculture and therefore the lender will be following USDA underwriting guidelines. However, condominiums must meet Fannie Mae or Freddie Mac guidelines or be HUD or VA approved. The program is limited to 1 family residences that will be occupied by the borrower as their primary residence.
A major benefit of the USDA loan program is that it allows you to purchase a home with no money down. Unlike the VA program you will be charged monthly mortgage insurance. However, the monthly amount is much less than that required by the Conventional and FHA programs. Like FHA and VA you will also be charged an up front mortgage insurance premium which can be financed by adding it to the mortgage loan amount. USDA also uses the term "Funding Fee" for their up front premium. The amount of the Funding Fee is 2% of the loan amount for all purchases and 1.5% for all refinances.
Unlike the Conventional, VA and FHA programs, USDA imposes income restrictions that vary depending on the county where the property is located. These income restrictions will also be determined by the number of people in the household and the income of those people - even if they are not applying for the mortgage loan. Certain deductions are allowed for children, uninsured medical expenses, and care of the disabled or elderly. Also, if you are able to put down 20% but have just chosen not to, and you have little debt as compared to your income, then it is unlikely you will qualify for a USDA loan.
The USDA program offers excellent interest rates and flexible underwriting guidelines. The only type of mortgage offered is a 30 year fixed rate.
