At this writing, mortgage rates are at bouncing around in the 5%-6% range, and we can expect them to rise again in late September.
This is why, if you’re hoping to buy a home this year, the time to do so may be right now. Yes, rates have gone up, but don’t let that fact frighten you off. 6% interest rates are still considered historically low…
If you don’t have 20% to put down on a conventional loan, ask you’r lender if you’re eligible for a lower downpayment mortgage loan that is guaranteed or insured by the government.
These loans are custom-made for Americans on a low budget that need a modest interest rate loan in order to buy a home.
Other benefits of these loans is that qualification is easier and the loans don’t require a high credit score.
Let’s take a look at three government-backed loan programs; one of which may just put you in a home.
FHA-backed mortgages
Overseen by the United States Department of Housing and Urban Development (HUD), the Federal Housing Administration (FHA) doesn’t make loans to homebuyers but instead, it guarantees the repayment of the loan should the borrower default.
Will you qualify for an FHA loan?
Homebuyers who intend to live in the home as their primary residence and are able to make the down payment, the monthly mortgage payments and meet other eligibility and credit requirements can apply.
The down payment requirement is largely determined by your credit risk, represented by your credit score. Typically, you’ll need a credit score of at least 620 for the 3.5% of the purchase price down payment. If your credit score is below that, plan on coming in with a 10% down payment.
Although FHA will insure loans for applicants with credit scores as low as 500 (which may change, so speak with your lender), most lenders won’t approve an applicant with a score lower than 620. Again, these numbers change occasionally, so speak with a lender.
The FHA mandates that borrowers who pay less than 20 percent down pay a Mortgage Insurance Premium (MIP) in addition to their mortgage payment every month.
While private mortgage insurance is required by most lenders of borrowers in similar circumstances, the insurance can be cancelled in the future. Not so with MIP – it remains for the life of the loan.
To apply for an FHA-backed mortgage, visit a FHA-approved lender. Find one near you at HUD.gov.
Rural Development Loan
The United States Department of Agriculture (USDA) offers approved borrowers a no-down payment loan. Most refer to this as the “USDA loan,” but the official title is the Single-Family Housing Direct Home Loan, also known as the 502 Direct program.
As with anything government-related, however, there are strings attached. The most important of these is that both the property and the borrower must qualify.
Get all the details about the Direct program at HUD.com.
The USDA also offers another loan, the Single-Family Housing loan program which is a guaranteed loan.
Loans are made directly by USDA Rural Development and for a period of up to 38 years, depending on the applicant’s income. To qualify for the guaranteed loan, borrowers must:
- Meet income criteria.
- Plan on living in the home as their full-time residence.
- Hold U.S. citizenship or be what is known as a Qualified Alien or a U.S. non-citizen national.
- Prove that they can make the payments on time.
- The home must meet the USDA’s guidelines.
Properties financed with the guaranteed loan program must be located in an “eligible area.” You can find these areas online at HUD.gov.
To apply for this program, contact a local mortgage broker or lender or an approved lender from the USDA’s list.
VA Home Loans
The U.S. Department of Veterans Affairs offers a home-loan guaranty benefit. The no-down payment loans are offered to qualified, actively serving members of the military, veterans and their surviving spouses.
As with the FHA mortgage, private lenders provide VA loans and the Department of Veterans Affairs guarantees the repayment of a portion of the loan should the veteran be unable to meet his or her obligation.
This guarantee enables the lender to provide loans with no down payment required and more favorable terms.
Additional benefits of the VA-backed loan include:
- There is no private mortgage insurance required
- The VA dictates the amount the borrower pays in closing costs
- There is no pre-payment penalty
- Closing costs can be paid by the seller
Find out if you’re eligible for a VA-backed loan at benefits.va.gov.
You will need a Certificate of Eligibility (COE) and you can get one online or your lender can obtain it for you.
The best first step after learning your eligibility for any of these programs is to contact a lender.
