Low or No Down Government Loans

Introduction

The Federal Government through the Federal Housing Administration (FHA) has various types of loans it makes available for buyers who will become owner occupants but they are particularly attractive to first-time home buyers. Three of these loan programs are explained below.

1. Federal Housing Administration (FHA)

An FHA loan is a government loan, available to anyone who can meet FHA requirements. It is issued by the bank or any other lender approved by the agency and requires a much lower down payment than any other conventional loan. The bottom line is that people with low income or low credit scores will be considered for a home loan.

Loan Requirements

FHA loan criteria are less rigid than traditional loan criteria. Your lender will evaluate the following things like your qualifications, valid social security number, if living in the U.S. lawfully, your legal age and your financial history.

Credit Score

  • If the credit score is between 500 and 579, you can secure an FHA loan, needing a down payment of 10%. But if your credit score exceeds 580, your down payment will be 3.5%.
  • With a bank, applicants typically need a credit score of at least 620 to qualify for a conventional mortgage, and down payment will vary between 3% and 20%.

History of Honouring Debts

  • A lender will require your work history and your payment history of two years. So, to qualify for an FHA loan, at least two or three years must have passed since the borrower experienced bankruptcy or foreclosure.

Steady Employment

  • The lender will review your tax returns, and if you are self-employed, your balance sheet and profit-and-loss statement will be reviewed. This will be done to determine if the borrower can pay back the mortgage.

Sufficient income

  • Your mortgage payment, HOA fees, property taxes, mortgage insurance, and homeowners' insurance should be less than 31% of your gross income. Banks call this the front-end ratio. And your back-end ratio, which consists of your mortgage payment and all other monthly consumer debts, should be less than 43% of your gross income.

FHA Mortgage Insurance

  • In case you might default on your FHA loan, you must pay an FHA mortgage insurance premium (MIP). So, the borrowers need to pay two insurance premiums: one is upfront at closing, and another is annually for as long as you repay the loan.

Pros and Cons of FHA loans

  • Lower credit scores are not a hindrance to qualifying for a loan
  • You may qualify with more debt
  • Your purchase can be for two, three and fourplexes as long as you live in one of the units
  • There is no need to be a first-time homebuyer

Downside –

  • You will pay higher mortgage insurance costs
  • Little borrowing power

2. USDA Loan (U.S. Department of Agriculture)

USDA loans are mortgages backed by the Department of Agriculture as part of its Rural Development Guaranteed Housing Loan program. This loan is for those homebuyers in rural areas who have low-to-average income. It offers no down payment, reduced mortgage insurance, and below-market mortgage rates.

You can use USDA to buy a new home or refinance your current owned home at a low rate.

USDA Loan Requirements

Homebuyers must meet two basic requirements.

1. The home must be in an eligible rural area, which USDA typically defines as a population of less than 20,000.

2. The buyer must meet USDA monthly income caps.

Also, you can't earn more than 15% of the local median income, and the house your purchase must be your primary residence.

Other than that, the buyer should meet ”ability to repay” standards, including:

  • Income eligibility: Requires steady job and a monthly income
  • Credit Requirements: At least 640 FICO credit score
  • Existing Debt Ratio: Debt-to-income ratio of 41% or less in most cases

How USDA Loan Works

There are three types of USDA loans, and each type of loan works a little differently.

  1. Direct Loans: Through its Single-Family Housing Loans program, the USDA lends money directly to homebuyers. This loan can be used to buy an existing home or build a new home. In this case, you don't need to pay a down payment. It has a fixed interest rate that's determined by the market rate. The duration of the loan is almost 33 years. And the loan amount is determined by your income, assets, debt-to-income ratio, and other financial details. And this loan can't be used to convert your home into luxury or for business purposes.
  2. USDA-Guaranteed Loans: The USDA guarantees some loans offered by private lenders through its Single-Family Housing Guaranteed Loan program. This loan can also be used to buy an existing home, cover the repairing costs, build a new home, or refinance another USDA-guaranteed loan. It also doesn't require a down payment, but you must pay the ”yearly-guarantee fee”. The participating private lenders decide the fixed interest rate and to get this loan, you must meet the standards set by the Department of Housing and Urban Development.
  3. USDA-housing repair loan: This loan can only be used to bring your home up to date, make needed repairs, eliminate health hazards and safety risks. The loan amount can't be more than $20,000, and borrowers have 20 years to repay the loan. The interest rate is 1%.

Mortgage Insurance on USDA Loan

USDA loans require the payment of mortgage insurance. This includes a 1% upfront guarantee fee, which is added to your loan balance at closing, and an annual fee of 0.35%, which is paid monthly and added to your mortgage payments.

Pros and Cons

  • No down payment options
  • No cash reserved required
  • Flexible credit and qualifying guidelines
  • The seller can pay closing costs.
  • Low fixed interest rate
  • No prepayment penalty
  • Finance repairs and your closing costs into the loan
  • Suitable for purchase or refinance
  • Suitable for building a new home

On the flip side –

  • Geographic restrictions
  • Mortgage insurance included
  • Income limits
  • Single-family, owner-occupied only – no duplex homes

3. VA Loan (U.S. Department of Veterans Affairs)

A VA loan is available through a program established by the U.S. Department of Veterans Affairs. This loan is for veterans, service members, and their surviving spouses. They can purchase a home with zero down payment, zero private mortgage, and zero prepayment penalties through this loan. They also get a competitive interest rate. This loan is issued by private lenders but backed up by the federal government.

There are Four Types of VA Loan

  • VA Purchase Loan

This loan allows veterans and service members to purchase new or existing homes with zero down payment. VA purchase loan also allows veterans to buy single-family homes, condominiums, manufactured homes, multi-unit properties like a duplex, and even new construction. Policies and guidelines vary slightly with each lender.

  • VA IRRRL

The VA Interest Rate Reduction Refinance Loan (IRRRL) is one of the VA loans programs for refinancing and the one most veteran homeowners choose. It is also known as VA Streamlines because it is a low-cost and straightforward refinance loan. In some cases, it doesn't require credit underwriting, income verification, or an appraisal. The VA IRRRL is only for those veterans who currently have a VA loan. Their new rate is smaller than their old rate and limits the time it takes to recoup the costs and fees.

  • VA Cash-Out Refinance

It allows qualified homeowners to refinance their mortgage and take out cash from their home’s equity. They can refinance up to 90% of their home’s value. However, guidelines and loan-to-value requirements can vary by lender. And homeowners are not required to take out cash with these loans, which means those veterans with non-VA mortgages can use this option as a basic rate-and-term refinance.

  • VA Energy Efficient Mortgage

This VA allows the veterans to get additional money to pay for energy efficiency improvements to a home. Finance can be up to an extra $6,000 to cover the cost of improvements like thermal windows and solar heating and cooling systems. The loan can’t be used to purchase anything like home appliances, air conditioning units, etc.

VA Loan Terms

Terms are very generous compared to other mortgages.

  • You don't need any down payment unless the purchase price is higher than the established property value
  • Mortgage insurance is not needed
  • Closing costs are paid by the seller most of the time
  • There is no prepayment penalty

Credit score requirements can vary between lenders. The VA's only credit requirement is for the borrower to be considered a reasonable credit risk by a lender.

Pros and Cons of VA Loan

  • No down payment
  • No PMI
  • Higher Allowable DTI
  • Credit Flexibility
  • Better than the average interest rate
  • Multiple refinance option
  • No prepayment penalty
  • VA loans are assumable

But

  • VA funding fee, which increases after the first use
  • Only for primary residences

CONCLUSION

There are various other Government Loans to check out but the three outlined in this report will suit those on lower incomes and/or without much savings.

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