Detailed And Expensive Appraisals
One of the most pressing issues that a prospective homebuyer must solve before purchasing a home is to locate the necessary financing. Unless you're part of a very small minority that has the financial ability to purchase a home outright, your ability to purchase a home will be contingent on your eligibility to receive a loan. Conventional financing comes from loan sources such as banks that are used to pay off the remaining sum of the asking price that was not covered by the down payment that you pay to purchase a home. Although conventional financing is highly effective, it is also difficult for some segments of the population to receive. This is because many private loan sources are understandably reluctant to make a financial commitment to individuals that they feel may be at risk or reneging on their fiscal obligations.
Government Programs
However, government programs have existed for more than half a century that are designed to help individuals that want to purchase a home to live in but are unable to obtain conventional financing. VA financing and FHA financing are specialized government programs that are not direct loans but are intermediaries between prospective homebuyers and loan sources. What VA financing and FHA financing is able to do for a prospective homebuyer is to offer their loan source protection from the possibility of you defaulting on your mortgage loan. With this financial risk out of the way, these loan sources will provide you with the financing that you require for purchasing a home.
VA financing is available to the over 29 million veterans and service personnel that are present in the population. Entrenched in law in 1944 in the original Servicemen's Readjustment Act, or the GI Bill of Rights that it is known as, VA financing is designed to aid former military personnel acquire a home who are struggling to meet the financial obligations that is required in conventional financing. VA financing is available to any veteran that did not end their service through a dishonorable discharge that either served for at least 90 days during a period of wartime or who had served at least 181 consecutive days during a period of peacetime. Additional amendments legislate that if a veteran began their service after September 7, 1980 that they have served at least two years of service. For officers that began service after October 16, 1981, they must also have served at least two years in order to be eligible for VA financing. National Guard members or reservists must fulfill a service commitment of at least six years to be eligible for VA financing.
Through VA financing, veterans and other former military personnel will be able to enjoy a variety of benefits that include:
A maximum of 25 percent or $60,000 of the home loan being guaranteed. Being able to receive a maximum loan amount of up to $240,000. Ability to acquire a home loan without having to pay a down payment. Not losing the flexibility to negotiate interest rates with their loans when acquiring VA financing. Being exempt from having to pay a monthly mortgage insurance premium. Having limitations placed on their closing costs obligations. Accessing a variety of repayment options for their loans. Having the option of prepaying the loan without fear of receiving a penalty. Access to personal loan servicing and financing counseling in situations where the borrower finds that they are having temporary financial difficulties that could threaten their homeownership.
In addition to VA financing, another government program is available to any person in America that has a social security number who wants to purchase a home for living purposes. FHA financing has been accessible through the Federal Housing Administration (FHA) since 1934 where it was established under the National Housing Act. A wholly owned government corporation, the purpose of the FHA is to stabilize the mortgage market by offering mortgage insurances that supports an adequate home financing system. Due to its insurance products, the FHA has played an instrumental role in allowing many Americans to fulfill their dreams of purchasing a home. Similar to VA financing, FHA financing is not a direct loan but is rather a supplementary agreement between the FHA, the borrower, and the loan source. What the FHA does is that it offers protection to the lender through its mortgage insurance (MIP) that guarantees that the loan source will not be financially at risk if the homebuyer is unable to fulfill their loan obligations. FHA financing has been popular among minority borrowers, first time homebuyers, individuals with poor credit history, and homebuyers that lack the current finances to pay for a down payment of a home, acquire the means to purchase a home.
FHA Financing
A popular program, FHA financing contains a variety of additional benefits that include:
Lower down payment obligations compared to conventional financing requirements. Allowing homebuyers the options to cover their down payment and closing costs through gifts. Accessibility to the vast majority of the population. The option for individuals that are purchasing condominiums to forego the expense of an upfront mortgage insurance premium. For homebuyers who want to buy one and two family homes, they do not have to meet a cash reserve requirement to obtain FHA financing. Less stringent financial requirements compared to conventional, such as the fact that FHA loans do not factor in 401k loans into the borrower's debt ratio.
Despite these many benefits to acquiring FHA financing and/or VA financing, there are some drawbacks to these plans that are absent from conventional financing. For prospective homebuyers who are accessing either or both of these financial plans, they must state this fact when they are making an offer to purchase a home. The reason for this is that the financial benefits that are tied to both types of financing are assumed by the home seller. As a result, you will find that the home seller will be less flexible when it comes to negotiating a sale price than they would if you were receiving conventional financing.
One way that conventional financing and VA and/or FHA financing will make you different as a prospective homebuyer is the requirements made in the appraisal stage of buying a home. Appraisals are required by your loan source, regardless of the type of your financing you are receiving, while you are purchasing a home. The reason for an appraisal is that it will reveal any potential problems within the house and also will allot a market value estimate that will be used during the negotiation phase of buying a home.
Better Appraisals
Whereas appraisals are generally effective when it is required with a conventional financing, FHA and VA financing dictates a higher standard of appraisals. Although it is not up to the same level of a professional home inspection, FHA and VA financing requires that the appraisal be performed by an appraiser that is either assigned or approved by either government organization. The standards that the appraiser must abide to will be higher than the ones dictated through conventional financing. In addition, the appraiser will evaluate the market value of the property.
As a result of the FHA and/or VA approved appraisal, the prospective homebuyer will be able to enjoy the knowledge that they are receiving a thorough analysis of the home. However, this appraisal is also more expensive than the appraisal performed by appraisers hired for a conventional loan. As FHA and VA financing dictate that the homebuyer is not responsible for the expenditures of these appraisals, the home seller is then financially responsible for these appraisals. Most home sellers do not want to add additional financial costs in their attempt to sell a home so it should be expected by the homebuyer that the home seller will recoup these expenses in the amount that they are going to sell their home for.
Additionally, an FHA and VA appraisal will set a market value to the property. If the appraisal is at a value that is lower than the requested asking price, the homebuyer is faced with two options. Either the homebuyer can request a reconsideration of the appraised value by sending FHA recent comparables that indicate the home's value should be higher or the homebuyer may pay the additional difference.
An additional factor with VA and FHA appraisals are that sometimes repairs may be required before the home purchase is allowed. As a result of these stricter rules, the home seller is required to pay these additional costs of repairs. This is something that they would not have to face if they were selling their home to a homebuyer that had received conventional home financing.
As a result of these factors, a home seller may be reluctant to sell their home to a prospective homebuyer who has acquired VA and/or FHA financing. In order to get around these restrictions, it is recommended that the prospective homebuyer add a clause to their offer regarding the appraisal. For example, the homebuyer should add a dollar amount regarding the maximum figure that the home seller will be responsible for if repairs are required. If repair requirements are found and the home seller must pay for them, a maximum repair amount clause will aid home negotiations. If the maximum repair amount is $500, the homebuyer is aware that they have likely lost $500 in price negotiations. However, after the appraisal has been performed and no repairs are required, the homebuyer now knows that there is an extra $500 of flexibility available regarding the sale price of the home.
