Home shoppers are constantly hunting for the best deal available. They have to prioritize their must-haves to find a reasonable balance of size, location, property condition and price. With all of these home details to consider, buyers don’t always take the time to evaluate loan program options. First-time home buyers who are new to loans may not be aware of the financial benefits and burdens of their selection. Multiple mortgage options cater to smaller down payments or lower interest rates. For buyers to purchase the best home for their money, they need to balance their wish list and choose the right loan program.
First-time home buyers often ask about no-money-down mortgages. Saving up for a large down payment can be challenging. When closing costs are accounted for, and moving trucks and furniture are budgeted in, that lump sum has generally decreased substantially. Fortunately, there are loan options available for buyers with little or no down payment.
Veterans Affairs Home Loan (VA Loan)
One loan program that offers 100 percent financing is a Veterans Affairs Home Loan (VA). These loans are available for veterans, military service members and surviving spouses. To qualify, veterans must obtain a Certificate of Eligibility (COE) through the U.S. Department of Veterans Affairs. The certificate indicates that the department will guarantee a portion of the loan. Veterans work with private lenders to apply for a VA loan using their COE.
The terms of a VA loan are generally more favorable and easier to qualify for than a conventional loan. No down payment or private mortgage insurance are required. The funding fee from the U.S. Department of Veterans Affairs is wrapped into the loan, rather than paid upfront. VA loans can be 15- or 30-year fixed mortgages, or adjustable-rate mortgages. One limitation to this loan program is that the total loan amount is capped. The maximum loan amount varies by location. The VA loan is a great option for military service members who don’t have much money upfront and are comfortable buying a home within the price range of the max loan amount.
USDA Rural Development Single Family Housing Guaranteed Loan (USDA/RHS Loan)
Another no-money-down loan program is available specifically for rural residents. The U.S. Department of Agriculture (USDA) offers a Rural Development Single Family Housing Guaranteed Loan (RHS) for buyers looking for homes within designated rural areas. These RHS loans have lenient qualification guidelines focusing on buyers with stable income rather than high credit scores. RHS loans are 30-year fixed mortgages with 100 percent financing. The closing costs, lender fees and even the USDA’s guarantee fee can be rolled into the loan. One limitation with an RHS loan is that the borrower’s income must not exceed 115 percent of the median income of his county. USDA RHS loans are great opportunities for low- to moderate-income buyers who are interested in living in rural areas.
Federal Housing Administration Loan (FHA Loan)
Another affordable loan to consider is a Federal Housing Administration Loan (FHA). These loans are offered by lenders but insured by the government. The Federal Housing Administration is the largest insurer of mortgages in the world. An FHA loan program only requires a down payment of 3.5 percent of the total cost of the home. Compared with a conventional loan, which can require up to 20 percent, the FHA is a far less expensive program upfront. Buyers with moderate credit scores are still likely to qualify for FHA loans. Another benefit is most of the closing costs and fees can be rolled into the loan.
Although FHA loans allow buyers to invest smaller amounts upfront, buyers must pay an additional charge called private mortgage insurance (PMI). If buyers offer a down payment of 20 percent of the total cost of the home, they are not required to pay PMI. This insurance protects the lender’s investment because the buyer invests little upfront. The buyer’s credit score and other terms of the loan determine the cost of PMI, which is generally rolled into monthly mortgage payments and continues for the first five years of a loan or until the buyer owns 20 percent of the home.
Adjustable-Rate Mortgage (ARM)
Buyers looking for reasonable upfront costs could also consider the benefits of adjustable-rate mortgages (ARM). Mortgages can have fixed interest rates where the rate is locked for the life of the loan or adjustable rates that vary throughout periods of the loan. As a buyer, the benefit of selecting an ARM is to receive lower initial interest rates. Throughout the life of the mortgage, the interest rate increases, causing monthly payments and total loan costs to rise. Buyers who are expecting an increase in their income throughout the next few years may benefit from an ARM. These are particularly valuable during times when interest rates are very high. Agreeing to long-term loans with adjustable rates can be risky because the cost of interest continually rises, but ARMs generally include a term that caps the interest rate.
Other Affordable Programs
Most local and state governments provide programs to assist first-time home buyers or lower-income buyers in purchasing homes. These programs are designed to be attainable for most buyers, and favorable with lower than market interest rates. For example, a Mortgage Credit Certificate (MCC) is a loan assistance program that provides a tax credit issued to qualified applicants by state or local governments. Instead of a tax deduction, the MCC is a tax credit for a portion of the new mortgage’s interest. Lenders often include the credit as part of the buyer’s income, allowing the buyer to qualify for a loan. Look into the local programs offered to assist with down payments, financing and lower upfront fees.
Buyers have numerous choices to consider when it’s time to purchase a home. It’s important to be informed about all of the loan programs available, including their benefits and risks. Buyers should take advantage of the beneficial assistance options available. Remember, signing a mortgage agreement is a long-term commitment. Be thoughtful and save money wherever possible, while avoiding long-term financial burdens.
By Tali Wee at Zillow