FINANCING OPTIONS 

 

It’s smart to get your pre-approval process started before you before you begin to look. It

gives you plenty of time to shop around for the best deal and it defines exactly what your

shopping budget will be. All offers, whether they’re for a foreclosure or a normal sale

must include a pre-approval letter. The old “no money down” and “80/20” loans (80%

from one lender and 20% from another) are long gone due to the meltdown in the

mortgage industry. Conventional financing with less than 20% down is available, but you

will need to pay PMI (Private Mortgage Insurance). There are some great government

programs now through FHA, Fannie Mae, VA and USDA (yes the USDA…they’re more

than just meat inspectors!). These programs will allow you to buy a home with little or no

money down and even fold in your closing costs and, in the case of Rural Development

loans, even fold in appliances. And if you find a home that needs rehab there are loans

thru FHA and Fannie Mae that will provide financing to buy the home and fold in rehab

costs as well.

 

 

FHA

Traditional FHA:

Requires a home that is “mortgagable” by conventional terms. That means the home has

heat, water, a functioning hot water tank, a roof with at least 3 years life expectancy, no

major repairs, and no unfinished spaces above grade. It’s a 30 year fixed loan at current

market rates, 3.5% down payment required with a minimum credit score of 580. The

maximum about of the loan in Michigan is $270,000. You may fold your closing costs into

the loan. This is a “guaranteed” loan. That means you’re not getting your money from FHA,

you’re getting it from a participating bank, FHA is just insuring the note.

What that means is this; normally if you put less than 20%  down on a mortgage, that’s

considered a riskier loan and you must buy PMI (Private Mortgage Insurance) which

insures the lender against default if you walk away from the loan. If that happens the PMI

will pay the lender in full for the balance of what you owe. However, since the meltdown

in the mortgage industry (remember AIG? They were the largest providers of PMI in the

county.) PMI is expensive now. FHA is government subsidized mortgage insurance, so

the mortgage insurance premium is much lower. There’s an upfront premium that’s

2.25% of the loan amount. After that, FHA charges an annual premium of .85% of the

loan amount spread over 12 monthly payments each year. There are no income limits on

these loans.

 

 

FHA 203K: (Rehab loan)

This is also a 30 year fixed rate, and the same terms apply as the traditional FHA. Like

traditional FHA, the maximum amount of the loan (including rehab costs) is $270,000.

But this type of loan is for any home that’s considered unmortgageable by the conventional

standards lenders use, and “uninsurable” by traditional FHA standards. It has nothing to do

with homeowners insurance What it means is, a bank will not write a conventional mortgage

on the home and FHA will not insure the note against default, because the home has one or

more of the following issues; no heat, no water, no electricservice, no functioning hot water

tank, missing plumbing or HVAC, a roof with less than 3 years life expectancy, major repairs,

or unfinished spaces above grade. You decide how much rehab you want to do and have a

contractor give an estimate for rehab costs. It’s entirely up to you what kind of rehab you

want to do. However, FHA will require that at least the first $5,000 of rehab money is spent

on any repair items mentioned above to make the property FHA compliant. The contractors

estimate is given to your FHA lender, who will send an FHA appraiser to appraise the home

in its rehabbed condition, (as if the work had already been done). It only needs to appraise

for the amount you’re paying for the home plus rehab costs. You can even fold in your

closing costs. The loan is a hybrid of two things; a mortgage to buy the home, and a

separate rehab loan which is treated as a construction loan. That means the money

for rehab is escrowed at the title company when you close and you draw on it during the rehab.

 

 

FANNIE MAE

HOMESTYLE RENOVATION LOANS

These loans are available from Fannie Mae lenders. Fannie Mae HomeStyle is a 30 year

fixed rate with a little as 3% down (depending on your credit score). It works the same

way as the FHA203K rehab loan, but there’s no limit to the amount of money you can

borrow to buy the home or fix it up, and the home need not be FHA compliant. It’s

cheaper than FHA and a little easier to navigate the loan process. Like FHA, you may

also fold your closing costs into these loans.

 

 

USDA RURAL DEVELOPMENT PROGRAM

USDA Rural Development Guaranteed:

This loan functions exactly the same way as the traditional FHA. You’re not getting your

money from the USDA, you’re getting it from a participating bank, they’re just proving

the mortgage insurance. But the beauty of USDA is that they don’t require any down

payment like FHA does. It’s a no money down loan, the only 100% financing available

today. You may also fold in all your closing costs and even money for appliances,

flooring and paint. Like FHA they charge a mortgagee insurance premium. You are

required to pay a higher premium up front 3.5% vs. FHA 1%. But you can fold it into

your loan and unlike FHA you don’t have to pay any additional monthly premium. The

USDA started the Rural Development Program years ago to encourage people to move to

the country. So the home must also be located in an area that USDA has defined as

“Rural” Not all areas will qualify. All of Livingston County qualifies, but some parts of

Washtenaw, Ingham, Genesee, Oakland, Wayne and Macomb don’t.  When looking at a

home that you’re considering, just go to the USDA Rural Development  website and enter

the address. It will tell you right away of it’s in a qualifying area There are also income

limitations. A single person cannot make more than the median income of the county in

which the home is located. The income limit rises with the number of people in the

family. Also, you must have a credit score of at least 640, and you can’t own another

home. Investors are also barred from the program.

 

 

USDA Rural Development Direct Loan:

This type of loan is different than the ones above. With FHA and USDA Guaranteed

loans, you’re not getting the money from them, you’re getting it from a participating

bank. They’re just guaranteeing the note against default so you get a better interest rate

without having to put 20% down. In the case of the USDA Direct loan you’re getting the

money directly from the USDA. It’s geared towards low income buyers. The lower your

income falls below the median income of your county, the better your interest rate will

be. But remember, they will only subsidize your interest rate, not actually give you the

gift of a lower rate. You will have to pay them back someday, For example; let’s say the

current rate is 4%. But your income falls so far below the median income of the county

you’re in, they’ll subsidize 3% so your rate is only 1%. Eventually you will have to pay

back that 3% in the form of a balloon payment when you sell the home. Every year you

must provide new proof of income, and if it rises, your subsidy will be reduced

accordingly and so your portion of the interest rate will rise. It’s a loan that works well

for someone who’s making a low income now, but knows they’ll be doing much better in

a few years, like pre-med students. It also helps to be in an area where homes are

appreciating well so that balloon payment will be easier to bear when they sell. This loan

is also a little tougher to get due to funding issues at the USDA. The government sends

them their funding every quarter. Let’s say you’ve done all your paperwork, jumped

though all the hoops and you’re pre-approved for $150,000, you’ve put in an offer on a

home and it’s been accepted. Now you get in line with everyone else at the USDA

waiting for their funds to buy their homes. The money arrives from Washington and they

start handing it out. But just before they get to you, the money runs out. Now you have to

wait for the next quarter. Often the seller will not be willing to wait that long, especially

if it’s a foreclosure, so you lose. That’s the big downside to these loans.

 

 

HOW DO I APPLY?

When applying for a USDA, Fanne Mae or FHA loan you must go through a USDA,

Fannie Mae or FHA approved loan officer. They can also do conventional loans of

course. But it’s good to go with a loan officer who can do more types of loans than

average to broaden your options. After reviewing your finances, they can help you make

a decision as to which type of loan program is best for you. Be sure to ask each one for a

“Good Faith Estimate”. That way you’re comparing apples to apples because you’ll see

all their costs. One may quote you a better interest rate than another, but charge much

higher up front fees. With a “Good Faith Estimate” you see exactly what’s going on so

you can make a good choice.

 

Just email me at cblight@comcast.net for a current list of Conventional, FHA, USDA

and Fannie Mae HomePath approved lenders.

 

 

 

Cathy Blight, GRI, ePro, SFR, HSR

ReMax Platinum • 6870 Grand River • Brighton, MI 48114

www.CathyBlight.com

Direct: 810-844-2294

Cell: 517-505-8958

cblight@comcast.net