(CNN) – Like house prices keep going up, the payment of a deposit has become a major obstacle for potential home buyers. But there are a few options that can help: government guaranteed loans that allow borrowers to buy a home with little or no down payment.
The US government does not lend money directly to borrowers. But three government agencies – the Federal Housing Administration, the US Department of Agriculture and the US Department of Veterans Affairs – insure loans to protect lenders against losses. This insurance reduces the risk for the lender, so that they feel more comfortable offering low or no-down loans and reducing credit requirements.
Despite the overheated and competitive housing market from last year, fewer buyers have opted for this type of loans. In January, 9% of closed loans were FHA-backed, 5% were VA-backed and 84% were conventional, according to ICE Mortgage Technology. The year before, in January 2020, 16% were FHA, 8% VA and 71% conventional.
For those who qualify, these products can make the difference in whether or not they can become owners.
“The goal of all of these programs is to help people get into housing, knowing that homeownership is a key factor in closing the wealth gap,” said Ed Barry, Managing Director of Capital Bank, a Rockville, Maryland-based bank that manages Capital Bank Mortgage Loans. “These programs exist, but a lot of people don’t even know they qualify.”
For example, you don’t have to be a farmer to get a USDA loan. A tax that may keep some veterans away from a VA loan is waived for disabled veterans. And while many people with poor credit may think they can’t get a mortgage, borrowers with credit scores as low as 500 are eligible for FHA loans.
Here is what you need to know about government guaranteed loans:
It is easier to qualify for an FHA loan than for a conventional mortgage. Borrowers can get loans with lower credit scores, higher debt-to-income ratios, and lower down payments.
You can qualify for an FHA loan with a score of 580 and a down payment of 3.5%. With a credit score like 500, a borrower will have to put in more money. These guidelines are set by the FHA and individual lenders approved by the FHA may impose different requirements, including higher credit scores.
Regardless of your credit score or the size of your down payment, there are limits to the amount you can borrow on an FHA loan. These limits vary between $ 356,362 and $ 822,375 for 2021 and are determined by your location. You can search for the limit in your area on the Department of Housing and Urban Development website.
For many people, the low down payment on an FHA guaranteed loan is not the biggest draw since some conventional loans already allow as little as 3% down payment. The big advantage is that you can qualify for the loan with a lower credit score and a higher debt to income ratio.
“But these things aren’t always the best for the buyer,” said Jordan Nietzel, a certified financial planner and founder of Trek Wealth Planning in Kansas City. “You can go over your head.”
He said that the lower rate you might get with an FHA loan could be offset by the insurance you will have to pay over the life of the loan.
While the private mortgage insurance that is required for borrowers with conventional loans who deposit less than 20% wears off when the homeowner gains some equity, mortgage insurance is required for all FHA loans for longer periods, regardless. home equity.
Borrowers with an FHA loan and a down payment of less than 10% will pay for FHA mortgage loan insurance for the life of the loan. Those who deposit 10% or more will pay the insurance for 11 years on a 30-year mortgage.
According to him, depending on your credit score, it may make more sense to take the time to improve your score and get a more conventional loan.
“You want to look at the picture as a whole, make sure you’re ready,” Nietzel said. “Don’t let the fact that you can get a 20% no-down loan and your current credit score be the reason you do it.”
VA loans are only available to veterans, with a some exceptions, such as the surviving spouses of veterans.
Borrowers will still need to have the credit and income required for the loan, but a VA loan may offer better terms than a conventional loan, including 100% financing.
“The advantage of the VA loan is the option of not making a down payment,” Nietzel said. “The thing people need to watch out for is the debt-to-income ratio, which can be higher with a VA loan than a conventional loan. It may qualify you for a loan that is higher than what you are willing to accept. “
For some veterans, the decisive solution is VA financing fees, which can reach up to 2.3% of the amount borrowed when the down payment is less than 5% and decreases from there for larger down payments.
For example, if you get a loan guaranteed by VA and you buy a house for $ 200,000 with a 5% down payment of $ 10,000, you will pay a fee of $ 3,135, or 1.65% of the loan amount. of $ 190,000. Fees are waived for people with a service-related disability.
But often, a lower interest rate on a VA loan will offset VA financing costs, Nietzel said.
The USDA loan program offers 100% financing, requires no down payment, and helps low- and middle-income households buy in rural areas.
To be eligible, the buyer’s household income should not exceed 115% of the median income of the local area and he should purchase a primary residence.
In addition, there are also eligibility requirements for property, determined by population density. Buyers can search for eligible areas on the USDA website.
“People tend to think of a USDA loan as being for farmers,” Barry said. “It’s not. It’s designed for rural shopping. But that’s defined by population density, not agricultural use. So you have eligible areas even 30 miles from Washington DC.”
He said he saw people using these loans to buy affordable homes further out of town.
If both the borrower and the property are eligible, a USDA loan could be a path to home ownership for those who are struggling to find a down payment or whose credit rating is too low to qualify for a traditional mortgage. .
Barry’s advice to those looking for one of these government guaranteed loans is to look for a lender who has a proven track record in running these programs as the application process can be more complex than conventional mortgages.
“The challenge is finding someone who is familiar with this area,” Barry said. Not only on the type of loan, but on the areas in which you are looking. “Usually, it’s more than just a transaction. It can be a very complicated process. A little grip helps.”