A Breakdown of Loan Programs
There are a lot of different loan programs to choose from when purchasing a home. Your loan officer will narrow down which programs you qualify for during your pre-qualification, and will often times recommend the program that will get you the best bang for your buck, but don’t be afraid to ask about multiple programs. In the end, you are the ultimate decision maker, so knowing about the programs is important.
Below is a simple breakdown of the most common programs that you’ll hear about:
The Conventional program is the most common program. It requires a minimum credit score of 640, and allows as little as 5% down payments. As with any program, by putting less than 20% down, you will be required to pay mortgage insurance, but with a Conventional program, once you get to 22% equity in a house, the mortgage insurance will automatically drop off. Home appraisals are more lenient, and as long as the house does not have any major structural issues and meets code, you shouldn’t have to worry about “fixer upper” type houses.
The MassHousing program is an especially great program for First Time Buyers with strong credit. It is a Massachusetts specific program that allows a low 3% down payment with a credit score of 680 or higher. The MassHousing program does have an income limit, and requires that First Time Homebuyers take the First Time Homebuyer class, but otherwise follows Conventional guidelines.
The FHA program is a great program offered by the Federal Housing Administration. This is a good program for buyers with lower credit and a small down payment. The minimum credit score required is a 600, and it allows for a low down payment of 3.5%.
Since you would be putting less than 20% down, there is an FHA Mortgage Insurance that needs to be paid, though this one is a little different than the Conventional model. Part of the Mortgage Insurance Premium will be paid at closing, and part of it is broken down into your monthly payment. Unlike the Conventional program, FHA buyers would need to refinance to get the mortgage insurance taken off their monthly payment. FHA is a great program for first time homebuyers.
There are also some appraisal restrictions. FHA is a little stricter when it comes to safety standards in a house, and requires that the property condition cannot pose a threat to health and safety of the occupant or jeopardize the soundness and structural integrity of the property. Some examples that we often see are chipping paint or missing handrails. If something like this was found, then they would be reported on the appraisal report and would have to be fixed and verified by the appraiser prior to closing. Ultimately, the property must meet the Department of Housing and Urban Development’s (HUD) minimum property standards per the HUD Handbook 4150.2.
The VA program is offered by the Department of Veterans Affairs for military Veterans, Active Duty military, National Guard or Reserve Members, and/or Spouses of Veterans that may have home loan eligibility. VA borrowers will also need to get a copy of their Certificate of Eligibility (COE), which can be done either on their own or through their lender.
The VA program offers competitive rates, requires no private mortgage insurance, as well as a zero down policy. It also allows for a low minimum credit score of 600.
In regards to the appraisal, the requirements are similar to the FHA program. The property must be safe, structurally sound and sanitary, and meet the local building codes. In addition to regular inspections, VA properties could also require pest and/or water inspections, among other things. The VA calls these requirements the Minimum Property Requirements (MPRs).
The USDA program is a great program offered by the United States Department of Agriculture in an effort to promote rural living. It is a zero down program, though it does have income limitations and the property must be in an eligible area. The minimum FICO score required is a 640.
While there is no mortgage insurance, borrowers will pay what is called a guarantee or funding fee, similar to FHA. The guarantee fee is what helps pay for the programs to exist. The guarantee fee for 2018 is 1%, and the additional annual fee is .35%. The funding fee is added to the loan amount, while the annual fee is broken down and added into your monthly payment.
Per the USDA requirements, properties must meet community standards regarding utilities, including water and wastewater systems; meet street and road access and maintenance requirements; and contain other amenities essential to continued marketability of the home.
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