Buying a home might be a pretty conventional act, but financing one doesn’t have to be. Loans backed by federal agencies can be a big help if you’re low on cash or your credit score isn’t where you or a conventional lender would like it to be. There’s even a loan that can help you buy a genuine fixer-upper that many lenders won’t touch. So who qualifies, and what are the benefits of these special programs? One thing to note is that the following mortgages are only for the purchase of owner-occupied homes, not investment or rental properties. Beyond that, the requirements vary depending upon the program. Here are some answers to non-conventional mortgage questions.
FHA loans
Despite the name, an FHA loan isn’t issued by the Federal Housing Authority, but it is backed by the federal government. Because your lender knows that the government is guaranteeing the loan, the credit requirements aren’t quite as strict as with a conventional loan. Rates are as good or better than with conventional loans, and you can get an FHA loan with as little as 3.5 percent down. Not every lender offers FHA loans, but you can find several on Zillow by simply getting a rate quote for a mortgage with less than 20 percent down. How much can you borrow with an FHA loan? That varies by state and county, but it’s easy to check the limit for your location.
So why doesn’t everyone get an FHA loan? Because there are some costs. You won’t have to pay for private mortgage insurance as you would with a conventional loan when you put less than 20 percent down, but you will be paying in other ways. FHA loans require an upfront mortgage insurance premium (MIP) of 1.75 percent of the loan. Despite the name, you can roll that into your monthly payments. In addition, your annual MIP is paid each month, and the rate for that varies.
If you pay less than 10 percent down, and your loan was originatedon or after June 3, 2013, that monthly MIP never goes away. To stop paying it, you’ll have to refinance to a conventional loan. If you put more than 10 percent down, your are required to pay the MIP for 11 years. You can check out the schedule here.
VA loans
One way to get a zero-down mortgage is through a VA loan. So what is a VA loan? Like the FHA, the U.S. Department of Veterans Affairs doesn’t actually make loans, but it does guarantee them. To get a VA-backed loan, you need qualify for the benefit and to go to an approved lender. You can find a VA lender easily here.
Although eligibility is determined by the VA, you may qualify if you are an honorably discharged veteran or an active member of any branch of the U.S. armed service, or if you are the spouse of either a veteran killed in the line of duty or an active duty member who is listed as MIA or POW.
The service thresholds vary, particularly for those who served in the National Guard or Reserves. You can find them on the Zillow VA loan FAQ page. You will also need a Certificate of Eligibility. You can either ask your lender to obtain your COE or you can get it for yourself from the VA’s ebenefits portal online.
How much house can you buy with a VA loan? In most areas, the VA puts a limit of $417,000 on its loans. But in certain high-cost parts of the country the limit is higher. You can find the limit in your county here.
In addition to the zero-down option, VA loans do not require you to pay any kind of mortgage insurance, even when borrowing 100 percent of your home’s value. As with many things, there is a catch — but it’s relatively small. In addition to the closing costs associated with every home loan, there is a VA funding fee. However, that can be financed or rolled into your monthly payment, and some veterans may even be exempt.
FHA 203k (fixer-upper loans)
Buying a fixer-upper that’s seen better days and turning it into your dream home can become a nightmare if you don’t have a good chunk of cash for repairs stashed away. That’s where the FHA 203k loan can help. You have to meet the usual FHA requirements, but with this loan you can get extra cash upfront to finance everything from new floors to a new roof.
You can get a loan for either the as-is value of the property plus repair costs or 110 percent of the estimated value of the home once repairs are complete, whichever is less. If your fixer-upper needs more modest repairs, you can get a streamlined 203k. This loan will get you the purchase price plus up to $35,000 for things like new appliances or carpets. But don’t get too fancy. You can’t use it to add luxuries like a swimming pool.
The catch? Not all properties will qualify and the application process isn’t as easy as slapping on a fresh coat of paint. You can find more details on the HUD site.
USDA loans
The other zero-down option is a loan backed by the U.S. Department of Agriculture. These loans are for low- to moderate-income buyers looking to purchase a home in rural area. The applicant may not exceed income limits and the dwelling must be “modest, decent, safe and sanitary.”
Also, as always, you must demonstrate an adequate ability to repay the loan. The USDA website will help you determine if you or the area you want to purchase will qualify.