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FHA and VA financing – how it affects your offer
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.
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.
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.
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