How to purchase a home with no money down - VA Loan: The government VA loan program is set up to help those who have served in the military purchase homes. Here are some noteworthy items about the program:
1.) Protection for the Bank
2.) Cap on the Loan Amount
3.) Straight Forward Credit Requirements
4.) Stricter Inspection and Appraisal Guidelines
The benefit to banks that participate, the money they lend under the VA program in the event of a default to some extent is guaranteed by the government or more specific the veteran administration. It is often thought that the guarantee is 100% of the loan amount but this is not the case. To some extent buyers who are eligible have an advantage over non VA participants all other financial circumstance being equal. For the simple fact that a portion of the debt in the event of default is government guaranteed.
Currently there are no restrictions on how much an individual can borrow. However there is a cap on the loan amount for no money down purchases which is $417,000. There is caveat because this dollar amount is generally thought of as the minimum because the cap is county and state specific. In the case of Honolulu the cap is $729,000. It is greater than most because the cost of the average home in Hawaii is usually higher. However, the guaranteed amount in both cases is $100,000. Which means in the event of default the borrower may be responsible for the deficiency.
Credit requirement’s are subject to lender guidelines and to some extent is a moving target. The last bit of information regarding the minimum FICO score with respect to buyer qualifying for a loan was listed at 620. Loan to debt ratios are reasonable at 41%. The funding fee for no money down is about 2.15% of the loan amount.
Also with respect to home inspectors and appraisers, the VA holds all to a high standard. The program will not lend on a property that does meet certain conditions. The dwelling must be above average quality and any recommended fixes must be done prior to loan approval. Further, with respect to the appraisal the VA will normally not except into the program properties that appraise for less than the purchase price even if the buyer agrees to offset the discrepancy with a large down payment. Interesting enough all condominium projects are not approved to participate in the program. For a list of buildings eligible for such loans check with the local VA administration.
One of the more attractive aspects about the United States Department of Agriculture, the USDA lending program the loans are placed in government insured products and are excellent alternatives for individuals with good credit who live in rural areas and do not have military experience. The USDA money has been set aside by the government to help farmers and people living in non urban communities with modest incomes compete with other home owners on a national scale. The following items help define the program.
1.) Owner Occupancy
2.) Property type
3.) Good Credit
4.) Income Limits
5.) Debt to Equity ratios
The properties that qualify for the program must be quality Single Family Homes of modest construction in rural areas only where buyer intends to live in the premises. The counties defined as a rural area may vary from state to state. In some cases counties that satisfy the rural designation have become well developed communities but are still considered non urban because of traditional historic reasons. In all cases the structure must meet all building codes before the loan will be ratified. The financial institutions view these customers favorably because the risk in the event of defaulting on the loan has been minimized due to government involvement in the form of loan guarantees. In the case of USDA the government insures 100% of the appraised value.
With respect to credit, due to the current financial crisis spurred on by the climate in the real estate industry lending institutions strongly encouraged by the government have tightened FICO score requirements. However these loan programs are specifically set up for low and moderate income earning families. The fact is the definition for low to moderate income changes from state to state and also from county to county. For example the below table, is a breakdown of income limits by family size for those in Hawaii wishing to participate in the program.
Ratios regarding the cost to sustain a new mortgage, including taxes, insurance and principle and interest can not exceed 29% of monthly income. Also, the debt to income ratio can not exceed 41% for the above table.
The 80/20 programs are Portfolio loans. Which means the loan will be held and managed by private investors. As a result there are lots of restrictions. For example the program is structured around the following items:
1.) Owner Occupant
2.) Single family, condominium and townhouses qualify
3.) No mortgage insurance requirements
4.) No income eligibility restrictions
5.) Excellent Credit Needed
There are a lot of first time home buyers who take advantage of this type of program. The profile for first time home buyers is somewhat misleading in one case it means buyers who have never purchased a home. In another case it means a buyer who has not purchase a home in the past three years. In either case they may have very little savings or do not wish to use their savings for a down payment to purchase a home but in all cases they have good credit and good future earnings potential.
With respect to owner occupants, the buyer must live in the dwelling. In some cases where the buyer moves out before a given time period a prepayment penalty can be assessed. Mortgage insurance is generally required when a buyer puts less than 20% down on the purchase price. Mortgage insurance called PMI, private mortgage insurance. It is written by a private company and protects the lender from losses in the event the borrower defaults. However in these loan programs the lender makes an exception.
There are no income restrictions but because it is a portfolio loan program the borrower is going to be scrutinized heavily. They will need to have:
1.) Super credit
2.) Great debt to income ratios
3.) 3 to 6 months reserves after closing
4.) The loan may require higher than market value interest rates especially for the second, 20% portion of the purchase price.
5.) The loan will be serviced by the issuing lender and there is no selling to the secondary market.
The 80/20 loans are also lender and state specific. In some cases where a credit union or financial institution is marketing the product they may require the borrower to open an account at the bank.
The three no money down programs mentioned VA, USDA and the 80/20 are very helpful in assisting renters to become buyers. In all cases it can helps those seeking to take part in the program to transition from renting into to home ownership by allowing the no money down option as a part of the financing. Customarily tenants are use to coming up with the first and last months rent.
The key to these three mortgage programs outlined, for example, take a tenant in today’s market where the rent is $1,100.oo per month. With interest rates at an all time low a 30 year mortgage at 5.25% calculates to a home purchasing power of $200,000. Even in Hawaii $200,000 dollars can buy the first time home owner a respectable condominium or townhouse.
By putting together the equivalent of the first and last months, $2,200, a renter can become a borrower. These two months can be used for closing cost but and where the appraisal warrants a portion of closing cost can be rolled over into the loan. Keep in mind the renter will need a good employment history, reasonably good credit and may be three months reserves. Monthly income with a debt to income ratio of about 41%, with this the principal and interest of $1,100 per month, add about $300 per month for taxes and insurance brings the monthly housing budget up to $1,400. Annual income will have to be at lease $58,000 or about $4,830 a month with no or very little debt. Thus with the no money down scenario it is a great opportunity for renters with good credit and modest income to become buyers in today’s real estate environment.