Nolo's Essential Guide to Buying Your First Home (35 page)

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Authors: Ilona Bray,Alayna Schroeder,Marcia Stewart

Tags: #Law, #Business & Economics, #House buying, #Property, #Real Estate

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Other Developer Financing Incentives
 
Many developers offer special financing deals to new homebuyers who use the developer’s in-house or preferred lender. In some cases, the lender has done a blanket appraisal of all houses in the particular development, so you don’t have to pay for a new appraisal. The lender will probably also offer special mortgage programs, often with faster or easier approval for creditworthy purchasers and simpler closing procedures. To seal the deal, developers may offer to pay closing costs or points; provide upgrades, such as better-quality carpet or countertops; even offer gift certificates for home design stores.
Although the developer may present its in-house financing as the world’s greatest deal or even the only possible deal, don’t cave to the pressure without doing your research. It might seem easier (time- and paper-wise) to go with the developer’s recommendation, but that convenience may come at a price—namely, above-market interest rates. Particularly if the developer is anxious to sell, you might instead get a loan from another lender but negotiate with the developer for another benefit like a lower purchase price (a better deal than most financial incentives); a mortgage buydown; extra features, such as more closets or built-in bookshelves; or upgrades such as higher-quality lighting.
Backed by Uncle Sam: Government-Assisted Loans
 
The government thinks homeownership is a good thing—in fact, the federal Department of Housing and Urban Development (HUD) declares that its mission is “to increase homeownership, support community development, and increase access to affordable housing free from discrimination.” That may translate into some financial help for you, depending on where you live and whether you meet the eligibility requirements for programs administered by the:
• Federal Housing Administration (FHA)
• U.S. Department of Veterans Affairs (VA), or
• state and local housing finance programs.
 
We provide a brief overview of government low-down-payment and insured mortgage programs below, with contact information so you can check the latest offerings and eligibility requirements. New programs spring up all the time, most recently including special loan packages in HUD “revitalization” areas for teachers, firefighters, and law enforcement officers.
The application process for many government loan programs is similar to applying for a conventional loan. Your mortgage broker or lender can tell you what’s available, which lenders participate, and whether or not you qualify based on your income and other eligibility requirements (such as your veteran status) and the price of the house you want to buy. Because the maximum loan amounts for these loans tend to be modest, you’re most likely to benefit if you’re of low to moderate income and buying in a low-priced area, and if your credit makes it difficult to qualify for a competitive rate from institutional lenders.
 
TIP
 
All types of homes qualify.
Government loans are often available for loans for new houses, condominiums, co-ops, and manufactured homes—although there will be a few more hoops to jump through in terms of inspections, warranties, and other requirements.
 
 
CHECK IT OUT
 
Looking for a list of all government housing loan programs?
Check out the “Housing” and “Veteran” Loans sections at
www.govloans.gov
. In addition, be sure to see the sites mentioned below for FHA, VA, and state and local housing finance programs.
 
FHA Financing
 
The Federal Housing Administration, or FHA (an agency of HUD), helps people get into a home using a low down payment. The FHA itself doesn’t provide financing, but it does provide a guaranty for a variety of fixed- and adjustable-rate mortgages. The guaranty means that if you default and the lender forecloses, the FHA covers the entire amount. This reduces the lender’s risk and increases the lender’s willingness to offer low-down-payment plans.
The FHA’s most popular program (Section 203(b)) requires a low down payment—usually about 3.5% of the sales price (an attractive alternative to the 5%-10% down payment most lenders require). This low down payment, coupled with higher loan limits, makes FHA financing more popular with homebuyers now than in previous years. (Maximum loan limits vary by area, but are generally between $271,050 and $625,500 for single-family homes in 2009.) FHA loans are assumable by qualified buyers, which may make your house easier to sell when the time comes. Also, there is no prepayment penalty, should you decide to refinance or pay off your loan early. FHA loans are a particularly good option for buyers with less than stellar credit histories (including bankruptcy), because they’re generally easier to qualify for than conventional loans.
Sound good? Unfortunately, FHA loans don’t work for all buyers, because of:
•
Financial qualification rules that disqualify higher-income families.
•
Restrictions on down payment sources.
In most cases, buyers must use their own funds or loans from family members (not secondary financing) for the down payment.
•
Fees.
FHA loans usually include a loan origination fee that you must pay at closing, plus a higher-than-normal mortgage insurance premium (which can be added to the amount of the mortgage loan).
•
Appraisals.
The FHA will do its own appraisal of the house you want to buy; if this is less than what you pay for the house, you must make up the difference in cash (not with the FHA loan).
•
Ineligibility of major fixer-uppers.
Standard FHA loan programs won’t help you buy properties needing significant repairs; any work recommended by FHA appraisers must be done before the sale closes. (If you’re buying a fixer-upper, check out the FHA’s Rehabilitation Mortgage Program, known as Section 203(k).)
 
 
CHECK IT OUT
 
Looking for current information on local loan limits and approved lenders?
Check out
www.hud.gov
(under “Buying” in the “Homes” section). HUD’s website includes information on all kinds of FHA and other government loan programs, including special programs for Native Americans, homebuyers in rural areas, and more. You can also call the FHA at 800-225-5342.
 
VA Loans
 
The VA provides access to competitive loans, usually with no down payment and no PMI, for men and women currently in military service and to veterans with an honorable discharge. There are specific eligibility rules that primarily relate to the length of service. For example, service personnel now on active duty are eligible after serving 181 days of continuous duty, regardless of when the service began.
Eligible veterans must have a good credit history, proof of employment during the past two years, enough cash to cover any down payment plus the closing costs, and enough income to meet monthly mortgage payments.
The VA doesn’t actually make these loans but, similar to the FHA, guarantees repayment of certain loans (available from participating private lenders, such as mortgage companies, banks, and savings and loans). The most common offerings are 30-year fixed rate mortgages or ARMs.
The VA itself doesn’t set a maximum loan amount, but its rules effectively set limits:
• The amount of the loan the VA will repay is based on the size of the loan—for example, the VA will guarantee 50% of loans of $45,000 or less, and 25% of loans between $144,000 and $417,000. For loans over $417,000, the VA’s maximum guaranty amount for 2009 is the greater of 25% of $417,000 or 125% of the area median price for a single-family home (as long as this doesn’t exceed 175% of the Freddie Mac loan limit for a single-family home in the county in which the property securing the loan is located). In some cases, the maximum guarantee could be as high as $1 million. VA maximum guaranty amounts are adjusted annually.
• The loan amount may not exceed the VA’s Certificate of Reasonable Value (CRV), based on the VA’s appraisal of the property.
 
You must pay the VA an administrative (“funding”) fee for the loan, typically ranging from 1% to 3% of the total borrowed (depending on the amount of the down payment). Also, the VA places certain limits on what closing costs you may be charged for.
To avoid making a cash down payment, your loan must be at or below the VA’s appraised value for the house. Of course, despite the VA providing backup, you’re still expected to repay the whole loan.
 
CHECK IT OUT
 
To apply for the VA’s “Certificate of Eligibility” (which may take several weeks) and see lists of participating lenders, contact the VA.
See its website,
www.homeloans.va.gov
, or call 800-827-1000. Check out VA publications such as
VA-Guaranteed Home Loans for Veterans
. Regional VA offices (listed on the main VA site) may also provide loan information.

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