Extra Cost For Seller
One of the most pressing concerns for individuals interested in purchasing a home is locating the necessary financing. Although home ownership is one of the most stable investments that an individual can make in their lifetime, there are considerable short-term costs involved. For example, there are down payment and closing costs that need to be factored in. Additionally, after buying a home, there is the major issue of regular mortgage payments. However, the real estate market has been booming and the annual national home sale price average has not dropped since the end of World War Two, which shows that more and more people are buying homes. This is because there are a couple of government programs that provide the necessary incentives for individuals, who may not usually be able to afford to buy a home, to make their home ownership dreams come true.
FHA Loan
The FHA loan has been accessible to all Americans since 1934, the year that the Federal Housing Administration (FHA) was established as a wholly owned government corporation under the National Housing Act. The purpose of the FHA is to provide an adequate home financing system with mortgage insurances that will stabilize the mortgage market. Although the FHA does not provide loans directly to prospective homebuyers, they provide financing that protects lenders from the possibility of the homebuyer defaulting on their loan obligations. By providing loan sources with protection through its mortgage insurance plan (MIP), the FHA is able to convince traditional loan sources in providing home loans to anybody that has been approved for an FHA loan.
As a result of this promise, FHA financing has made it possible for segments of the population (minority borrowers, first time homebuyers, prospective homebuyers with a poor credit rating, individuals that do not have the upfront capital required for a down payment) that would not be able to obtain conventional financing to purchase a home fulfill their dreams of buying a home.
FHA financing also come with a variety of additional benefits that include: a less rigid financial requirement for a down payment; the ability of the homebuyer to cover down payment and/or closing costs through gifts; the option of not having to pay an upfront mortgage insurance premium when purchasing a condominium; the ability to purchase one and two family homes without worry about cash reserve requirements; the knowledge that FHA credit analysts do not factor in 401k loans when determining the prospective homebuyer's debt ratio; and the presence of innovative programs that support real estate projects like acquisition and rehabilitation of turn of the century homes.
VA Loans
In addition to FHA financing, another government program is available to help make it easier for another segment of the population to purchase a home. VA financing is designed to aid veterans and other military personnel who want to purchase a home but are unable to due to fiscal concerns. Entrenched in the Serviceman's Readjustment Act (otherwise known as the GI Bill of Rights) since 1944, VA loans have been designed to assist former members of the military attain a home to live in, particularly if they require some form of financial assistance.
VA financing is available for the over 29 million veterans and military personnel in the country. However, acquiring VA financing is not automatic for veterans. Rather individuals that are eligible for VA financing must: have served on active duty and not have been dishonorably discharged; if the veteran served their time during wartime, they must have served for a minimum of 90 days of service; if the veteran served their time during a period of peace, they must have served for a minimum of 181 straight days of service; if the veteran had begun their service at any date after September 7, 1980, they must fulfill a two-year requirement of service time before being eligible for VA financing; these same terms apply to officers who began their service any date after October 16, 1981; and a six-year requirement of service time is needed for National Guard members or reservists to become eligible in receiving VA financing.
Through VA financing, the prospective homebuyer is able to enjoy a number of benefits that they would not be able to obtain through conventional home financing. Similar to an FHA loan, a VA loan is not given directly through a government agency but through a private loan source. However, VA financing provides insurances to the loan source that protects the lender from the possibility of the homebuyer not being able to fulfill the financial obligations of regular mortgage payments. As VA financing provides a guarantee to the lender that they do not financially have to worry about the prospect of you not being able to make mortgage payments, you will be able to enjoy the benefit of not having to put a down payment when purchasing a home.
Other benefits of receiving VA financing to purchase a home include: knowing that up to 25 percent (up to a maximum amount of $60,000) of your home loan is guaranteed; feeling the financial freedom that you are not required to leave a down payment when acquiring a home, being able to have a large amount of flexibility while negotiating interest rates with your lender, not having to pay a monthly mortgage insurance premium, being able to bypass the numerous closing costs that are usually the homebuyer's responsibility when acquiring conventional financing, enjoying an appraisal of the property that is more extensive than the appraisal made if you were receiving conventional financing, having a number of repayment options of your VA loan open to you, knowing that you will not be penalized if you decided to prepay the loan, and knowing that there are numerous economic counseling resources and services that are accessible to you if you find yourself in financial difficulty.
Considering these great benefits that are provided through VA and/or FHA financing, it would seem that anybody that was able to obtain this type of financing would acquire it when purchasing a home. However, there is a flipside to the benefits provided by VA and/or FHA financing. This is that these added benefits that the homebuyer enjoys through a government mandate are offset by the added obligations that the home seller must undertake. This is most evident in the extra costs for the seller that they must endure when selling a home to a homebuyer who is using VA and/or FHA financing.
The home seller knows whether or not a homebuyer is receiving VA and/or FHA financing because the homebuyer is required by law to state where they receive their financing from in a property offer. Although most home sellers are not particularly opposed to selling their home to individuals that are accessing VA and/or FHA financing, they are going to be less flexible over certain financial areas of the home sale to compensate for the extra costs that are going to be imposed on them.
The extra costs that home sellers are now responsible for are known as non-allowable fees. As a government program, VA and FHA loans prohibit individuals that use their financing from paying for certain types of fees involved in the sale of a home. Most of these fees are charged for services from outside companies that are required in a property transaction. Fees charged by lenders, escrow companies, settlement agents, and title companies cannot be avoided. However, if you are receiving VA and/or FHA financing, you will not be able to pay for them. This, of course, does not mean that these charges are not paid, but rather that the home seller is required to pay them.
As most of these non-allowable fees can be traced back to requirements made by your loan source, it is easy to understand why many home sellers are going to be less flexible on the sale price of their home. If a prospective homebuyer who receives financing through traditional means were to purchase that home seller's home, the home seller would at least be able to negotiate how these non-allowable fees would be divided between both parties. As they are unable to do this with a potential homebuyer who is receiving FHA and/or VA financing, the home seller would strategically recoup their costs through the price that they sell their home for.
For this reason, it is important that you understand the amount of extra costs that the home seller is responsible for and the market value of the home. By using a highly qualified real estate agent, you should be able to determine the amount of these extra costs, as a way to receive a fair sale price on a home. When you have reached the stage in your home search where you are ready to make an officer to buy a home, you should have already received pre-qualification from your loan source. Your loan source will be able to provide you with the information of how much the non-allowable fees will amount to. Additionally, an experienced agent will also have an understanding of how much fees charged by a settlement agent and title insurance company will be, based on their past experiences. By understanding the extent of non-allowable fees will be charged to the home seller, you will be able to increase your bargaining leverage when buying a home by understanding the true amount that the home seller is actually responsible for.
