Financing

Government Backed Loans (FHA/VA)

Excerpt from portal.hud.gov:
The Federal Housing Administration, generally known as "FHA", is the largest government insurer of mortgages in the world. A part of the United States Department of Housing and Urban Development (HUD), FHA provides mortgage insurance on single-family, multifamily, manufactured homes and hospital loans made by FHA-approved lenders throughout the United States and its territories. While borrowers must meet certain requirements established by FHA to qualify for the insurance, lenders bear less risk because FHA will pay the lender if a homeowner defaults on his or her loan. FHA has insured over 37 million home mortgages and 47,205 multifamily project mortgages since 1934. Currently, FHA has 5.2 million insured single-family mortgages and 13,000 insured multifamily projects in its portfolio. Clearly, FHA provides a huge economic boost to the country in the form of home and community development, particularly in today's challenging financial climate.

Excerpt from Department of Veterans Affairs:
The law authorizes VA to guarantee loans made to eligible veterans only for the following purposes:

• To purchase or construct a residence, including a condominium or cooperative unit, to be owned and occupied by the veteran as a home
• No down payment is required by VA unless the purchase price exceeds the reasonable value of the property, or the loan is a Graduated Payment Mortgage (GPM). The lender may require a down payment if necessary to meet secondary market requirements.
• Guaranty is the amount VA may pay a lender in the event of loss due to foreclosure.
• The veteran must certify that he or she intends to personally occupy the property as his or her home.

Conventional Loans

A conventional loan is a mortgage that is not guaranteed or issued by the federal government. Conventional loans were the first type of traditional mortgages made by local lenders/ credit unions. Loans of this type were held in the lender's investment portfolio or packaged with other loans and sold on the secondary market. These are the important points to know as a home buyer when considering conventional loans:

• If your down payment is less than 20% your loan will most likely require PMI (Private Mortgage Insurance) to be paid every month as part of your mortgage payment - this fee is removed after a certain percentage of the loan is paid off - or, a trial period set forth by the lender expires.
• Interest rates/point/collateral/down payments are not regulated by the government and can therefore be set to any standard that the lender requires: These clauses can vary between states and often do
• Since the loan is not regulated by the federal government there are many opportunities for creative financing, assumption, and other options for home buyers that may not exist under standard guidelines.
• In today's bank owned/foreclosure market, offers backed by cash or conventional loans have a much higher chance of acceptance by the seller.

Fixed Rate vs. ARM (Adjustable Rate Mortgages)

A fixed rate loan is typically based on a payment plan of 15 or 30 years. During that time the interest rate and mortgage payment are fixed. There are no increases, regardless of economic factors, unless the borrower decides to refinance the loan. A borrower may refinance their loan if interest rates are lower than their loans rate - however the borrow restarts the 30 year cycle at payment one.

An adjustable rate mortgage (ARM) is similarly based on a payment plan of 15 or 30 years, however this loan's interest rate has the ability to adjust on a certain scale set forth in the loan documents. ARM's are attractive to buyers because they offer very low initial mortgage payments. ARM adjustments are specified well before they occur so plan your financials accordingly.