FHA and VA financing
While you are trying to obtain the necessary financing to purchase a home you may be interested to know that there are alternative financial sources that you can turn to for a mortgage loan. Rather than deal with banks that have high mortgage rates, you may be interested to learn of government programs that are designed to help individuals purchase homes by offering savings.
FHA financing refers to financing provided by the Federal Housing Administration (FHA), which has existed as a wholly owned government corporation since 1934. Established under the National Housing Act, the goal of the FHA is to stabilize the mortgage market by providing an adequate home financing system through mortgage insurances. Through their insurance products, the FHA has been instrumental in the national home ownership explosion of the last fifty years. Although the FHA does not loan money out to borrowers, it provides lenders protection through mortgage insurance (MIP) that protects lenders from the prospective homebuyer defaulting on their loan obligations. FHA financing has been critical for those groups that frequently have trouble attaining mortgage loans like minority borrowers, first time homebuyers, individuals with a poor credit history, and prospective homebuyers that lack the required money to make a substantial down payment on their home, attain the necessary financing to purchase a home.
Benefits
In addition to empowering segments of the population who are often marginalized when it comes to buying a home, FHA financing has these other benefits:
Lower down payment, with an average down payment of just 3 percent compared to conventional mortgage requirements of a down payment between 15 percent and 20 percent. Down payments and closing costs can be partially or completely covered through gifts. These loans are also accessible for all homebuyers and not just those prospective homebuyers who fit in the above listed categories. FHA loans are accessible for individuals with poor credit history. Individuals who are purchasing condominiums do not have to pay an upfront mortgage insurance premium. There are no cash reserve requirements for a FHA loan related to one and two family homes. When analyzing borrower's debt ratios, the FHA loans do not factor in 401k loans. Innovative and fair FHA loans are offered for acquisition and rehabilitation projects, which will be of definite interest for homebuyers who consider themselves urban pioneers that want to buy and fix-up old homes.
In addition to FHA financing, the government also offers VA financing, which provides mortgage financing to veterans. Over 29 million veterans and service personnel are eligible for VA financing and although many of these people have used their loan benefits, they are still able to use VA financing to purchase a home by using the remaining loan entitlement. The VA loan became enshrined in law in 1944 as part of the original Servicemen's Readjustment Act, which is popularly known as the GI Bill of Rights. Designed to aid veterans and their family fulfill their dreams of homeownership, VA financing is a great option for former military personnel who are struggling to reach the financial commitments required to purchasing a home.
Eligiblity
In order to be eligible for VA financing, there are a few requirements that are:
A veteran must have served on active duty and must not have been dishonorably discharged. The veteran must have served for a minimum of 90 days of service during wartime or at least 181 consecutive days during peacetime. If the veteran began service after September 7, 1980 or if an officer began service after October 16, 1981, they must fulfill a two-year requirement. For National Guard members or reservists, there is a six-year requirement for service time.
It should be noted that VA loans do not come from a government agency but though a private loan source. However, a VA loan is eligible to veterans who are purchasing a home for their personal occupancy. Through the VA loan, the prospective homebuyer is given a program that protects their loan source from financial losses caused by missed loan payments. The guarantee that the VA loan provides replaces the guarantee that the loan source would usually receive through a down payment. Through VA financing, veterans are able to enjoy a variety of benefits that other members of the population do not get to enjoy. The advantages of VA financing include:
Through a VA loan, the prospective homebuyer enjoys the freedom of knowing that a maximum of 25 percent of their home loan (with a maximum amount being $60,000) will be guaranteed. Generally, there are no down payments required to access a VA loan, with the maximum loan amount being $240,000. The prospective homebuyer will enjoy considerable flexibility in negotiating interest rates with their loan source. The homebuyer will not have to pay a monthly mortgage insurance premium. Limitations are made on the amount of closing costs that the homebuyer is responsible for. Homebuyers will enjoy an extensive appraisal from a qualified appraiser that will provide them an accurate assessment of the prospective home's property value. Prospective homebuyers are able to attain thirty year loans that contain a variety of repayment options such as: Traditional fixed payment: a fixed principal and interest amount although increases or decreases can occur in property taxes and homeowner's insurance coverage. Graduated Payment Mortgage (GPM): a loan plan that begins with low initial payments that rise gradually to a standard level payment beginning in the sixth year of the plan. Growing Equity Mortgages (GEMs): a loan plan in which the loan will be paid off earlier due to gradually increasing payments with all of the increase being used to pay off the principal loan debt. The homebuyer will be able to enjoy the right to prepay the loan without receiving a penalty. Personal loan servicing and financial counseling are accessible for veterans that need help during temporary financial difficulties that may endanger the ownership of their home.
Although FHA and VA financing have numerous benefits for individuals purchasing a home, it is important that prospective homebuyers who are interested in attaining either type of financing understand the different ways that these loans will affect their attempts to buy a home. The most immediate way that FHA and/or VHA financing will impact a prospective homebuyers attempt to purchase a home is how it affects your offer.
When attempting to purchase a home, a prospective homebuyer that is receiving either FHA and/or VA financing must state that they are receiving these programs in the offer. The reason for this is simple, the benefits that the prospective homebuyer receives through this financing is offset by the additional burdens that are placed on the seller.
These government loans place additional financial and performance obligations on behalf of the seller that may affect the way you would make an offer. For example, FHA and VA loans prohibit the prospective homebuyer from paying for certain fees that are usually charged by lenders, escrow companies, settlement agencies, and title companies. These fees are categorized as non-allowable fees that do not disappear during the home purchase but the responsibility for paying these fees rests solely on the home seller. The reason for this shift in financial responsibility is that FHA and VA financing is designed to help prospective homebuyers who may not have the financial leverage to purchase a home through conventional financing. Although most home sellers are aware of their obligations in selling their home to a prospective homebuyer who is receiving FHA and/or VA financing, it is important for the prospective homebuyer to know that the home seller is less likely to be flexible about the selling price due to their added financial burden.
In addition to these non-allowable fees is the fact that FHA and VA financing utilize more detailed and expensive appraisals compared to conventional financing. Although these appraisals are to the prospective homebuyer's benefit, the appraiser may recommend repairs that the home seller would be responsible for. As a result of these appraisals, you should expect that the home seller may not be as flexible negotiating the sale price of their home to homebuyers that receive FHA and/or VA financing.
