Below is a brief description of your mortgage options and ways to get the process started:
CONVENTIONAL HOME LOANS
Most lenders would consider a conventional mortgage as a loan that conforms to the guidelines set forth by Freddie Mac and Fannie Mae, the two government sponsored enterprises (GSEs) that provide liquidity in the mortgage market.
Technically speaking, a conventional loan is any mortgage that is not guaranteed or insured by the US government, such as VA, FHA and USDA.
Conventional mortgages include portfolio loans, construction loans, and even subprime loans. But again, whenever a lender refers to a “conventional loan” they are most likely referring to conforming mortgages that are eligible for purchase by Fannie Mae and Freddie Mac.
JUMBO MORTGAGE FINANCING
A Jumbo, or non-conforming loan, is required for financing on a mortgage that is higher than the conforming loan limits set by Fannie Mae and Freddie Mac.
HOME EQUITY LOANS
A home equity loan (sometimes abbreviated HELOC) is a type of loan in which the borrower uses the equity in their home as collateral.
FHA MORTGAGE LOANS
The FHA’s goals are to improve housing standards and conditions, provide an adequate home financing system through insurance of mortgage loans and to stabilize the mortgage market.
H.E.C.M. - REVERSE MORTGAGE LOANS
A lifetime loan available to seniors, and is used to release the home equity in the property as one lump sum or multiple payments. The homeowner’s obligation to repay the loan is deferred.
VA Mortgage Loans
A VA (Veterans Administration) guaranteed home loan is the preferred loan program for active, non-active, Reserve, National Guard, and retired military of the armed forces because there is no down payment needed and no private monthly mortgage insurance required.
A VA home loan can be used to purchase a home or refinance an existing mortgage.
We will discuss what role the VA plays in a VA guaranteed mortgage, the benefits of a VA home loan, who is eligible for a VA loan, and the VA documentation you will need to present to your lender.
Did you know that more than 27 million veterans and service personnel are eligible for VA financing, yet most aren’t aware it may be possible for them to buy homes again with VA financing using remaining or restored loan entitlement?
VA Does Not Offer Loans Directly and Does Not Guaranty You Will Qualify.
VA does not actually lend the money to you directly. They offer a guaranty to a lender that if you should default on the loan, they will pay the lender a percentage of the loan balance. The word GUARANTY does not actually guaranty the veteran will qualify for a VA home loan.
Primary Benefits of a VA Home Loan:
Veterans with active duty service, that was not dishonorable, during World War II and later periods, are eligible for VA loan benefits. World War II (September 16, 1940 to July 25, 1947), Korean conflict (June 27, 1950 to January 31, 1955), and Vietnam era (August 5, 1964 to May 7, 1975) veterans must have at least 90 days of service.
Veterans with service only during peacetime periods and active duty military personnel must have had more than 180 days of active service. Veterans of enlisted service which began after September 7, 1980, or officers with service beginning after October 16,1981, must in most cases have served at least 2 years.
VA Documentation Needed:
The three specific pieces of documentation a lender will need to determine your eligibility is a DD214 for discharged veterans, a statement of service for active military personnel, and a certificate of eligibility (COE) to determine you have VA entitlement.
Because each lender has different qualifying guidelines, the next step is to contact your lender to find out if you meet their qualifying criteria such as minimum FICO/credit scores, debt-to-income (DTI) ratios, and find out what your county’s maximum loan amount is. Your lender can help you attain your certificate of eligibility on your behalf.
Frequently Asked Questions:
Q: Are the children of a living or deceased veteran eligible for the home loan benefit?
No, the children of an eligible veteran are not eligible for the home loan benefit.
Q: How can I obtain proof of military service?
Standard Form 180, Request Pertaining to Military Records, is used to apply for proof of military service regardless of whether you served on regular active duty or in the selected reserves. This request form is NOT processed by VA.
Rather, Standard Form 180 is completed and mailed to the appropriate custodian of military service records. Instructions are provided on the reverse of the form to assist in determining the correct forwarding address.
Q: Is the surviving spouse of a deceased veteran eligible for the home loan benefit?
The unmarried surviving spouse of a veteran who died on active duty or as the result of a service-connected disability is eligible for the home loan benefit.
The basic intention of the VA direct home loan program is to supply home financing to eligible veterans in areas where private financing is not generally available and to help veterans...
VA Funding FEE
Why Do I Need To Pay A VA Funding Fee?
The VA Funding Fee is an essential component of the VA home loan programs and is a requirement of any Veteran taking advantage of this zero down payment government loan program.
This fee ranges from 1.25% to 3.3% of the loan amount, depending upon the circumstances.
On a $150,000 loan that’s an additional $1,875 to almost $5,000 in cost just for the benefit of using the VA home loan.
The good news is that the VA allows borrowers to finance this cost into the home loan without having to include it as part of the closing costs.
For buyers using their VA loan guarantee for the first time on a zero down loan, the Funding Fee would be 2.15%.
For example, on a $150,000 loan amount, the VA Funding Fee could total $3,225, which would increase the monthly mortgage payment by $18 if it were financed into the new loan.
So basically, the incremental increase to a monthly payment is not very much if you choose to finance the Funding Fee.
Under VA’s founding law in 1944 there was no Funding Fee; the guaranty VA offered lenders was limited to 50 percent of the loan, not to exceed $2,000; loans were limited to a maximum 20 years, and the interest rate was capped at 4 percent.
The VA loan was originally designed to be readjustment aid to returning veterans from WWII and they had 2 years from the war’s official end before their eligibility expired. The program was meant to help them catch up for the lost years they sacrificed.
However, the program has obviously evolved to a long term housing benefit for veterans.
The first Funding Fee was ½% and was enacted in 1966 for the sole purpose of building a reserve fund for defaults. This remained in place only until 1970. The Funding Fee of ½% was re-instituted in 1982 and has been in place ever since.
The Amount Of Funding Fee A Borrower Pays Depends On:
*Disabled veterans are exempt from paying a Funding Fee
The table of Funding Fees can be accessed via VA’s website – CLICK HERE
The main reason for a Veteran to select the VA home loan instead of another program is due to the zero down payment feature.
However, if the Veteran plans on making a 20% or more down payment, the VA loan might not be the best choice because a conventional loan would have a similar interest rate, but without the Funding Fee expense.
The best way to view the VA Funding Fee is that it is a small cost to pay for the benefit of not needing to part with thousands of dollars in down payment.
* Disclaimer – all information is accurate as of the time this article was written *
203K REHAB LOANS
Have you found that “almost perfect” home in the right location that is selling at a reduced price because it needs a little rehab work?
Unfortunately, most mortgage loan programs require homes “in need of work” to be complete before the financing can be secured for the purchase transaction. Whether the property needs a little or a lot of work, most First Time Homebuyers simply don’t have the up-front cash to invest in a property prior to actually securing the financing.
However, the FHA 203(k) Rehab Loan may be your answer to turning that “fixer-upper” into your dream home.
The FHA 203(k) Rehab Loan is a popular mortgage program designed for buyers that want to finance the cost of home improvements into a new loan.
The financing for this loan will include the purchase price, as well as the improvements you are either required to do to be able to live in the home, or that you want to do, such as upgrade the kitchen, bathroom, etc.
This is also a great loan program for agents trying to sell homes that need repair. Buyers will have an option to complete those repairs and upgrades without a large upfront financial commitment. Think of this as a one-time close construction loan. At closing, the seller receives their money and the rest is put into an escrow account for the buyer to use for rehabbing the property.
Advantages of 203k Rehab Loans:
Repairs on a fixer-upper can be expensive, and the 203k Rehab Loan allows borrowers to finance the improvements into the new loan vs having to pay for the upgrades prior to closing.
Historically, FHA Mortgage Loans have lower than average rates when compared to commercial or conventional financing programs.
Great Property Deals:
Since Rehab Loans are designed for “fixer-uppers,” buyers can qualify for a loan on a home that needs work, and actually finance the construction costs / repairs up front.
FHA Rehab Loan Background:
The Federal Housing Administration (FHA), which is part of the Department of Housing and Urban Development (HUD), offers this loan program to provide for the rehabilitation and repair of single family properties. One single loan is used to pay for the purchase (or refinance) and the cost of rehabilitation or updating of the home. Those properties include condominiums, town homes and single family homes. This loan is only available for homebuyers purchasing a primary residence that they will occupy. Unfortunately, it is not a program for investors to purchase a home – fix it up – and then sell.
As you can imagine, there are vastly different degrees of just how much work it would take to bring a house up to your standards.
Sometimes it may only require minor cosmetic work, like new flooring, upgrade a kitchen or bath, put on a new roof or install new windows…you get the idea. Or it could be that you find a home that is the perfect price and location, but inside it needs a complete gut job.
You like the shell of the house but want to blow out the walls to change the floor plan, need to totally re-do plumbing, electrical…major stuff! Maybe the bones of the house are terrific but it is just too small…you need to add an extra bedroom or even an entire new level!
The FHA 203(k) Rehabilitation program, (we’ll call it…the K) is designed to address all of these circumstances. Another great thing about this loan program is that it is originated and underwritten just like a standard FHA loan program. So you can purchase the home with the same 3.5% down payment of a regular FHA loan, depending on your loan amount. In some high cost areas the down payment may be 5%, but there is no larger down payment required on a 203(k) than there is on the regular FHA loan program. And the seller can also still assist you with your closing cost as well…just like with a regular FHA loan.
203(k) Rehab Loans Eligible Property Types:
The property has to have been completed for at least one year, and it has to be a one- to four- family dwelling.
You can use the program to convert a one family dwelling to a two-, three-, or a maximum of four family dwelling.
Eligible property types are single family detached homes, single family attached (like row houses) town homes and condominiums. Cooperatives (Co-ops) are not allowed.
The program will let you “pop the top”…find a single story home and add a new level, take a home…demolish it (at least a portion of the foundation must remain) and build a brand new home in its place, and even take an existing house (or modular unit) from one location and move it to a new location.
That’s pretty cool!!
Let’s take a look at a perfect scenario:
You find this great house that is in the perfect location, close to transportation, great school district, excellent floor plan and the yard you always wanted. It’s the lowest price in the neighborhood.
So what’s not to like?
It’s a foreclosure.
And, the last occupant decided to just destroy the house before they left – taking all the appliances, ripped up the carpet, punched holes in the walls, broke windows…. They even took a toilet with them! Who takes a toilet?
Can you imagine fixing all of that?
Most first-time home buyers just turn around and walk out the door because they believe they couldn’t possibly come up with the money or the time to fix all of this.
So, a really great house goes unsold.
Two Types of FHA 203(k) Loans:
A Streamlined 203(k) allows minimum or limited repairs to be done…basically “cosmetic” repairs, improvements or updates.
It also eliminates most of the paperwork required of a full 203(k) and simplifies the process to obtain rehab funds.
Under the Streamlined program, there is a minimum of $5,000 and a maximum of $35,000 to be financed in the mortgage amount to improve or upgrade the home.
No “structural repairs” are allowed under a Streamlined K, however, making or correcting any structural items is not considered to be minor.
The minimum of $5,000 of required and substantial improvements that will increase the marketability and value of the home must first be included. Any repairs and improvements must comply with HUD’s Minimum Property Standards and must meet all local building, zoning and other codes.
Minimum required repairs include any health and safety repairs like peeling lead paint or replacing missing railings. Whether you want those items included or not, all health and safety issues must be addressed first. Smoke detectors must also be added if missing.
Type of work for Streamlined 203(k):
Find the home you’ll want to purchase and determine what improvements need to be made to the property.
The purchase contract offer is written the same as any other, accept you’ll want to make sure that there is language stating the purchase is contingent upon borrower acquiring an FHA 203(k) Loan.
In order to complete the financing of the improvements, you will need to meet with a contractor to determine what kind of work you are planning and how much it will cost.
The contractor will give you a copy of the contract, which you’ll need to pass on to the lender.
The lender will order an appraisal to determine what the value of the house will be once all of this work is completed.
Keep in mind, you’ll also need to be qualified for the full loan amount which is based on the purchase price plus the additional cost of repairs.
Once the loan is approved, you will go to closing like you normally would.
The amount that will be needed to do all of these repairs or improvements will be placed into an escrow account held by the lender.
As the work is being completed, there will be draws from the account to pay the contractor.
What does the Contractor you select need to do?
Say you need $20,000 to do all the improvements to the house. Most lenders will require a 10-20% contingency reserve account to be set up. This is money they will set aside for any “surprises” that may happen during the rehab. You don’t want to have something come up that you didn’t expect and then have no money to fix it.
So, in this example another $2,000 would be financed to establish your reserve fund.
A total of $22,000 is now available to be placed into the rehab escrow account.
Once you have completed settlement and own the house, the rehab account will be established and you will be able to start the work.
The contractor will request the first draw of up to 50% of his contract, which in this example is $10,000.
Once the work has been fully completed, he can request his final draw and receive the balance of his contract.
The money in the contingency reserve account is for emergency work. If down the road there was no need to use it and you decided to do some additional work to the house…you could then request a change order and spend that money, but it would not be paid out to the contractor until the final draw.
The reason this program is called a Streamline is because there are fewer draws, less paperwork and only cosmetic, minor repairs involved.
All work should be completed in 6 months or less.
Advantages of Streamlined 203(k):
A great advantage of the Streamlined 203(k) vs the Standard FHA 203(k) is that there is less paperwork.
Under the streamline, there is a maximum of two draws per contractor. It is easier if you have only one contractor, but a maximum of two contractors to do this level of work is allowed.
After you have gone to settlement and your loan has closed, the contractor will receive the first of two draws. They are usually permitted to get up to 50% of the materials (sometimes 50% of the total work amount) in this draw.
The remaining monies are given out once the project is completed and the work has been inspected.
Standard FHA 203(k):
If you have a larger project that needs a full gut job or additional rooms, the Standard FHA 203(k) is the right program.
This is what we refer to as the “full blown K”.
Under this section of the program, much more extensive repairs or remodeling can be accomplished.
The full K allows you to make “structural” changes to enlarge a house, build a new home on an existing foundation and even take an existing house and move it.
Unlike the Streamlined K, where the improvements are “cosmetic”, under the full blown K the repairs or improvements can be and usually are “substantial”.
So, you can imagine that the process is a bit more involved.
Think of it as a mini construction loan program where your contractor can ask for as many as 5 draws, and each draw request will need to have an inspector come out to make sure the work has been completed for that draw request prior to any monies being paid.
Because it is more involved than a standard loan, there are more costs involved.
Type of work for a Standard 203(k):
What is different from the Streamlined K and the full FHA 203(k)?
The full K requires a HUD Consultant (selected from HUD’s approved consultant list) to be retained by you.
They will come to the property and meet with you to discuss the anticipated improvements you want to make to the house. They will inspect the property for any health and safety issues required to be included in the rehab and will then provide you with a “Work Write-up” for the project based on the work you would like to have done.
The HUD consultant is someone that is knowledgeable about construction and/ or rehab and who knows the 203(k) program.
What is the role of the HUD 203(k) consultant?
What are these studies, write-ups (what’s included) that the consultant provides and what does this cost?
It is only a rough estimate of the work that needs to be done and what the cost should approximate. It costs $100 and can be one of the items you finance.
Not every property or borrower needs a feasibility study.
There is no up-front money to the contractor on the full K vs the Streamlined. He receives his first draw check only after the work to be done under the draw schedule has been completed.
Contractors can have a maximum of 5 draws altogether. The HUD consultant will divide the work into draws depending on the scope of work to be done.
You may do the framing first, then the heating and electric, then the drywall for example. If each of those were in separate draw schedules, the contractor would get paid for each of those as they are completed and depending upon which draw they were to be counted in.
The consultant will go out to see that the work described under the first draw has been completed and will submit a request for that draw. For each of these draws a 10% contingency is held. Again, this is just to be sure there are no surprises and that all of the work is completed correctly.
So you can see that there is a difference in whether you use a Streamlined K or the standard FHA 203(k) loan.
Most foreclosed properties only require minor cosmetic repairs, so the Streamline is the way to go in most of those instances. Just make sure you have no structural improvements that need to be made if you are thinking of using the streamlined K. Even if the repair would cost say $5,000 which falls into the less than $35,000 max for the streamline, you would have to go with the standard K just because the work is “structural”. So make sure you know which repairs you are planning to do before you decide which 203(k) would work best for you.
These are both great loans to use to find that “almost perfect” home and truly make it into your Dream Home. Not all lenders are able to do this loan however, as you can see they require a bit more attention once the loan has closed. So, be sure to ask for a lender that is well versed in Rehab Loans.