When you place your home on the market, you may not give much thought to the financing possibilities that face potential buyers. While most buyers will opt for a traditional home mortgage loan, it’s a good idea to be aware of other options in the event that a buyer isn’t qualified for a conventional loan.
Once you learn more about the different options available for home buyers, you may decide that it’s a good idea to be open to accepting a variety of financing options. Either way, it’s a good idea to have this knowledge as you move through the home selling process.
Conventional Mortgage Loans
Loans not guaranteed or insured by the government are called conventional loans. Usually, they are the most difficult to obtain for there are several requirements the borrower needs to acquire. Credit scores and the borrower’s capacity to repay the loan are also considered. Before approving a loan, lenders need to be assured borrowers are indeed capable to pay off the loan. For conventional loans, down payments typically equal the 20 percent of the sale price of the home. There are other costs involved like taxes, closing costs, and private insurance premiums to consider.
Conforming and non-conforming are the two types of conventional loans. Those that adhere to the guidelines set by Freddie Mac or Fannie Mae are called conforming loans. Guidelines include loan limits of up to $417,000 for single-family homes. A jumbo loan includes amounts up to $417,000. It usually has a higher interest rate. Non-conforming loans are provided by portfolio lenders and guidelines are set by the lending institutions.
The creditworthiness of the buyer is important to the lenders. They check all three major credit bureaus to determine whether the borrower is qualified for the loan. Buyers who have an excellent credit rating and a good source of income will most likely qualify for the conventional loans.
About 15% of US mortgages are insured by the FHA. They are a US government agency that promotes housing. This type of loan will allow a borrower to own a house with a down payment of as little as 3.5% of the purchase price. Unlike other financing options, the FHA loan is relatively easy to acquire. While not everyone is qualified to get an FHA loan, some buyers with low credit rating may qualify.
The FHA doesn’t lend money to the buyer but serves as a mortgage insurer. When the buyer defaults, the FHA takes care of the losses. Three parties are involved when getting an FHA Loan: The buyer, the FHA, and the lender. Before an FHA loan is approved, the buyer needs to acquire a mortgage insurance as security for the loan. The insurance is used when the buyer defaults on the mortgage.
Apart from the low down payment, an FHA borrower can also take advantage of their home repair programs. The agency has a loan product for borrowers needing extra cash for repairs. If he needs to get his home fixed, he can borrow money from the FHA.
Anyone can apply for an FHA loan, but you will need a source of income to qualify. Borrowers without a source of income will not be approved for the loan. To those who qualify, there are limits to the amount that they can borrow. They would have to consult their state for the amount.
Like conventional loans, FHA loans can be assumed. It’s an advantage to the buyer as interest rates are significantly lower with FHA approved loans.
Also, those who attend a homeowners’ education class are guaranteed to have discounted MIP payments. The counseling lasts for about six hours.
To qualify for this loan, you must meet all the standards required by the Federal Housing Administration’s program. You must be a legal resident of the country with an existing income.
VA loans are guaranteed loans issued by private or approved lenders to the Veterans Administration. These are loans by the Veterans Administration for qualified veterans. No down payment is needed to get an approval. Unlike FHA loans, the veterans don’t need to pay for mortgage insurance premiums. The only fee required is the funding fee which can be added to the loan amount. It’s between 2.15 percent to 3.3 percent. The fee can also be lowered if the veteran is able to pay at least 10% of the loan. First timers get to pay 2.15 percent and 3.3 percent with their succeeding loans. The fee is waived for disabled veterans.
Compared with other home loans, there is greater flexibility with VA loans as it’s government-backed. This means they have lower interest rates. Also, most lenders aren’t strict about their qualifications. For most veterans, this type of loan is easiest to get approved for.
A qualified veteran can purchase a residential home worth $417,100 with no upfront costs. The amount varies depending on the location of the veterans. It can go as high as $625,500. Closing costs are mostly paid by the sellers.
Those eligible for this type of loan are veterans, military, National Guard members and reservists. The spouses may also apply for the loan if the member died while on active duty. To qualify, they will need a certificate of eligibility that would serve as proof that they have indeed served in the military.
While the Veterans Administration doesn’t set a minimum credit score, most lenders do ask for a score of 620 or higher. They may reconsider as long as the veteran has sufficient income to pay for the loan. Also, it would help if the buyer isn’t in serious debt.
VA loans are only for primary homes. A loan of this type can’t be used for vacation or commercial homes.
In cases where a veteran can no longer pay the mortgage, the VA assists him by making negotiations with the lender. They can ask for repayment plans or other payment options.
Department of Agriculture Loans
Also called the USDA Rural Development mortgage, this type of loan doesn’t require a down payment. The only fees needed to obtain the loan are taxes and homeowners insurance. To qualify for this loan, the house should be located in an area considered rural by the USDA. There is no limit to the loan amount so long as the place is declared rural. Other lender requirements still apply like a good credit score and your capacity to pay the loan.
The first step would be to look for a lender that offers this type of financing. Next step would be for the buyer to acquire a preapproval letter by the USDA. Find a house in a rural area and submit all the home requirements to the USDA for the final approval. You can move in so long as the process is completed.
USDA loans are for primary homes only. They shouldn’t be in any way used for investment purposes.
Owner Financing is also known as a purchase-money mortgage. For this type of financing, a bigger down payment may be required by the seller. It is usually more than 20% of the purchase price. Part of the purchase price can come from small bank loans. The rest would be payable depending on the agreement between the buyer and the seller. There is a stipulation for this type of financing: The deed will be transferred only upon full payment of the property.
The terms are negotiable between the buyer and the seller. The buyer saves on closing costs while the seller gets monthly cash flows. A promissory note with the terms of the agreement must be signed by both parties. The deed, which is the security, should be recorded in public records to protect both the buyer and the seller.
This type of loan is only for Navy Federal Credit Union members. They offer 100% financing to their qualified members provided the home they purchase will be their primary residence.
Members of the military and their family members are not eligible for this loan.
There is no down payment necessary for this loan. The buyer also doesn’t need to pay for mortgage premiums. It’s best to get prequalified for the loan first before shopping for a home. That way the buyer is prepared to make an offer.
Prequalification can be done in two business days after the buyer has submitted all requirements for the loan.
There are other credit unions that help their members who want to purchase a home. A few benefits include lower fees compared to banks. Unlike banks, these institutions help their members. Their members are their stockholders. Banks, on the other hand, help their investors. Also, if your credit score isn’t that good, there is a chance you will still qualify for a credit union loan. Banks will never lend you money unless you have a good to excellent credit rating.
Freddie Mac Home Buying Programs
Freddie Mac works with lenders to help first time home buyers. This loan is available for low and moderate-income borrowers, first-time homebuyers and retirees. They can take advantage of a minimum of only 3 percent down payment through Home Possible Advantage. Eligible property types include primary residences, condos and PUD.
State-by-state/ City and County Home Buyer Programs
There are US states that help first time qualified home buyers to purchase a home. This varies from state to state. In New York, some home buyers may take advantage of an assistance of up to 3 percent of their loans. The buyer needs to consult with the county or the city’s housing department to find out what programs are offered for home buyers.
Good Neighbor Next Door
This option was originally created for teachers. It was only recently when they decided to extend this program to law enforcement, EMTs and firefighters. Sponsored by the HUD, this program will give those who qualify up to 50% discount off the purchase price of the loan. The only requirement is they need to be living in their primary residence for at least 3 years.
Native American Direct Loan
The Native American Veteran Direct Loan started this program in 1992. With VA Loans, loans are through private lenders. For this program, the VA serves as the actual lender. Those eligible aren’t required to pay any down payment or pay the mortgage premiums. First-time home buyers are offered extremely low closings costs and a fixed mortgage.
Various cities also offer different grants and programs for first-time home buyers. What you can do as a real estate broker or agent, is consult with the state for a list of these programs that may benefit your buyers. Keep educating yourself as to what else you need to know regarding financing options for home buyers. It pays to be educated.
It’s always better to review each financing option to find out which one can benefit the buyer more. As a seller, you need to discuss these options with all your buyers. With the lending companies becoming strict with their qualifications, these other options will give you more chances of closing the sale. This will also help you build credibility as a seller. So as much as possible, keep yourself educated. Read real estate news and anything about the industry. Your knowledge will come in handy one day.
This information is provided courtesy of The Eastside Real Estate Team. Keep us in mind for all your real estate needs. Call us today at 425-200-4093.