Loan Programs

WHY USE A CONVENTIONAL LOAN TO FINANCE A HOME ?

Conventional mortgages are backed by Fannie Mae (FNMA) and Freddie Mac (FHLMC). Qualifying can be tighter than with government loans like FHA, but the options fit a wider range of buyers and properties.

WHAT IS A CONVENTIONAL MORTGAGE?

Conventional mortgages meet the down payment and income requirements set by FNMA and FHLMC and conform to the loan limits set by the Federal Housing Finance Administration, or FHFA. Those loan limits vary by county where the home is located.

You’ll generally need a credit score of at least 620 to qualify for a conventional loan, though a score that’s above 780 will help you get the best rate. Depending on your financial status and the amount you’re borrowing, you may be able to make a down payment that’s as low as 3% with a conventional loan.

A conventional home loan can be used to buy or refinance single family houses, townhomes, two- to four-unit multifamily homes, condominiums and certain manufactured homes. Specific types of conventional loans can also be used for renovating a home, in conjunction with a purchase or refinance.

ADVANTAGES OF CONVENTIONAL LOANS

Compared with government-backed loans, qualifying for a conventional mortgage may be tighter, but a conventional loan can be a good option for many home buyers.

• More property types: In addition to jumbo loans for pricier homes, conventional loans can be used for a second home or an investment property. Additionally condominium approvals for FNMA or FHLMC are are an easier and cheaper streamlined process then compared to FHA.
• More control over mortgage insurance: If your down payment on a conventional loan is less than 20%, you’ll have to get private mortgage insurance. After your principal loan balance drops to 78% of the home’s original value, however, you can ask to cancel your PMI. In contrast, mortgage insurance premiums on FHA loans may last for the life of the loan.
• More choices in loan structure: Though 30-year fixed-rate conventional mortgages are the most common, you can find other terms (like 10, 15- or 20-year loans) as well as ARM loans (adjustable rate mortgages)

FHA LOAN: WHAT YOU NEED TO KNOW

An FHA loan is a mortgage insured by the Federal Housing Administration. Allowing down payments as low as 3.5% with a 580 FICO, FHA loans are helpful for buyers with limited savings or lower credit scores.

WHAT IS AN FHA LOAN?

An FHA loan is a mortgage insured by the Federal Housing Administration. With a minimum 3.5% down payment for borrowers with a credit score of 580 or higher, FHA loans are popular among first-time home buyers who have little savings or have credit challenges. Although you do not have to be a first-time home buyer to utilize FHA, like Conventional, there is a maximum loan limit based on the county where you purchase. (NOTE: Some lenders allow FHA financing with a credit score as low as 500 and 10% down).
The FHA insures mortgages, and that mortgage insurance protects lenders in case of default, which is why FHA lenders are willing to offer favorable terms to borrowers who might not otherwise qualify for a conventional home loan.
An FHA home loan can be used to buy or refinance single family houses, townhomes, two- to four-unit multifamily homes, condominiums and certain manufactured homes. Specific types of FHA loans can also be used for new construction or for renovating an existing home.

WHAT IS THE FHA?

The Federal Housing Administration — better known as the FHA — has been part of the U.S. Department of Housing and Urban Development since 1965. But the FHA actually began more than 30 years before that, as a component of the New Deal.

In addition to a stock market crash and the Dust Bowl drought, the Great Depression saw a housing market bubble burst. By early 1933, roughly half of American homeowners had defaulted on their mortgages. The FHA was created as part of the National Housing Act of 1934 to stem the tide of foreclosures and help make homeownership more affordable.

It established the 20% down payment as a new norm by insuring mortgages for up to 80% of a home’s value — previously, homeowners had been limited to borrowing 50%-60%. Today, the FHA insures loans for about 8 million homes annually.

WHAT ARE THE PROS AND CONS OF FHA LOANS?

Even if your credit score and monthly budget leave you without other choices, be cognizant that FHA loans involve some trade-offs.
Benefits of FHA loans:

• Lower minimum credit scores than conventional loans.
• Down payments as low as 3.5%.
• Debt-to-income ratios as high as 57% allowed.

Disadvantages of FHA loans:

• FHA mortgage insurance lasts the full term of the loan with a down payment of less than 10%.
• Property must meet slightly stricter health and safety standards.
• No jumbo loans: The loan amount cannot exceed the conforming limit for the area.
• Condominiums have to be FHA approved by HUD. Spot approvals, now known as Single Unit Approvals, are permitted in condo projects. This means a one time FHA loan can be considered for financing even though the entire condo complex is not approved for FHA financing.

VA LOANS: HOW THEY WORK, WHO QUALIFIES

VA loans are for current and veteran service members, and eligible spouses. VA mortgages have competitive interest rates and usually require no down payment.

*If you’ve served in the military and need a mortgage, then a VA loan might be right for you, whether you’re buying a home or refinancing. Here’s what to know.

What Is A VA Mortgage?

A VA loan is a mortgage guaranteed by the U.S. Department of Veterans Affairs and issued by a private lender, such as a mortgage company, bank, or credit union. A VA loan can make it easier to buy a home because it typically doesn’t require a down payment.

The VA’s guarantee means the government will repay the lender a portion of a VA loan if the borrower doesn’t make payments. This assurance reduces the risk for lenders, which makes it possible for them to offer favorable terms and require no down payment.

Only qualified U.S. veterans, active-duty military personnel and some surviving spouses are eligible for VA loans. The GI Bill of Rights created the VA home loan program in 1944 to help veterans get a foothold in civilian life after World War II.

VA LOAN ELIGIBILITY

You are likely eligible for a VA mortgage if:

• You’re an active-duty military member or veteran who meets length-of-service requirements.
• You’re the surviving spouse of a service member who died while on active duty or from a service-connected disability and you have not remarried or remarried after age 57 or Dec. 16, 2003. Spouses of prisoners of war or service members missing in action are also eligible.

BENEFITS OF VA LOANS

Here are the biggest advantages of VA loans compared with conventional and FHA loans:

• No down payment or mortgage insurance required: Other loan types require down payments and can include an extra cost for monthly mortgage insurance. FHA loans require mortgage insurance regardless of the down payment amount and conventional loans usually require mortgage insurance if the down payment is less than 20%.
• Competitive interest rates: Average 30-year mortgage rates can run lower for VA home loans than Conventional mortgages with the same credit characteristics.
• Limited closing costs: Closing costs are the various fees and expenses you pay to get a mortgage. The Department of Veterans Affairs limits the lender’s origination fee to no more than 1% of the loan amount and prohibits lenders from charging some other closing costs.

DISADVANTAGES OF VA LOANS

Every type of loan has drawbacks for some borrowers. Here are potential disadvantages of a VA loan.

VA loan funding fee: Although VA loans don’t require mortgage insurance, they come with an extra cost called a funding fee. The fee is set by the federal government and covers the cost of foreclosing if a borrower defaults. The fee ranges from 1.4% to 3.6% of the loan, depending on your down payment and whether it’s your first VA loan. You can pay the fee upfront but most veterans fold it into the loan.

Purchase loans only for primary homes: You can’t use a VA loan to buy an investment property or a vacation home.

How many times can you use a VA loan?

Getting a VA loan isn’t a one-time deal. After using a VA mortgage to purchase a home, you can get another VA loan if:

• You sell the house and pay off the VA loan.
• You sell the house, and a qualified veteran buyer agrees to assume the VA loan.
• You repay the VA loan in full and keep the house. For one time only, you can get another VA loan to purchase an additional home as your primary residence.

JUMBO LOANS: WHEN A REGULAR MORTGAGE ISN’T ENOUGH

You may need a jumbo loan for when you purchase a higher priced home and need a loan larger than the conventional loan limt. Jumbo loans have stricter qualification rules.

WHAT IS A JUMBO LOAN?

A jumbo loan is a mortgage used to finance properties that are too expensive for a conventional conforming loan. The maximum amount for a conforming loan(as of December 2024) is $806,500 in most counties. Home loans that exceed the local conventional loan limit require a jumbo loan.

Also called non-conforming mortgage, jumbo loans are considered riskier for lenders because these loans can’t be guaranteed by FNMA and FHLMC, meaning the lender is not protected from losses if a borrower defaults. Jumbo loans are typically available with a fixed interest rate or an adjustable interest rate.

QUALIFYING FOR A JUMBO LOAN:

• Credit score: Lenders may require your FICO score to be higher than 680, and sometimes as high as 720, to qualify for a jumbo loan.
• Debt-to-income ratio: Lenders will also consider your  DTI to ensure you don’t become over-leveraged, though they may be more flexible if you have plentiful cash reserves. Some lenders have a hard cap of 45% DTI, however.
• Cash reserves: You’re more likely to be approved for a jumbo loan if you have ample cash in the bank. It’s not uncommon for lenders to ask jumbo loan borrowers to show they have enough cash reserves to cover 6 months of mortgage payments.  This will vary from lender to lender.

WHAT IS A USDA LOAN? AM I ELIGIBLE FOR ONE?

USDA loans are zero-down-payment mortgages for rural homebuyers.

Perhaps you feel more at home surrounded by pastures than pavement. If so, buying a home might be well within reach, thanks to the U.S. Department of Agriculture (USDA) mortgage program. In fact, the USDA might have one of the government’s least-known mortgage assistance programs.
With all types of mortgage loans to choose from, how do you know whether a USDA loan is right for you?

Here’s an overview of who qualifies:

Income limits to qualify for a home loan guarantee vary by location and depend on household size. To find the loan guarantee income limit for you, click here input your area of purchase and note the income limit associated to Moderate Income – Guaranteed Loan.

USDA guaranteed home loans can fund only owner-occupied primary residences, such as single family homes, townhomes, condominiums and manufactured homes. Other eligibility requirements include:

• Payment Debt ratio not exceeding 29% of gross monthly income.
• All debt not exceeding 41% of gross monthly income
• Stable income over 24 months
• Minimum fico of 640

Eligible home locations

Metropolitan areas are generally excluded from USDA programs, but pockets of opportunity can exist in suburbs. Rural locations are always eligible.

Reverse Loan: How Seniors Use It

After retirement, without regular income, you may sometimes struggle with finances. If you’re a homeowner, a reverse mortgage is one option that may help you manage your financial challenges.

WHAT IS A REVERSE MORTGAGE?

A reverse mortgage is a home loan that allows homeowners 62 and older to withdraw some of their home equity and convert it into cash. You don’t have to pay taxes on the proceeds or make monthly mortgage payments.

You can also convert a forward mortgage into a reverse mortgage.  A forward mortgage is simply a traditional mortgage where you make a Principal and Interest payment and your principal is REDUCED each month with that payment.  A reverse mortgage means a principal payment is not required and the principal balance will INCREASE each month with the accrued interest.

HOW PEOPLE USE REVERSE MORTGAGES

You can use reverse mortgage proceeds however you like. They’re often earmarked for expenses such as:

• Convert Forward Mortgage to Reverse Mortgage
• Debt consolidation
• Living expenses
• Home improvements
• Helping grand children with college
• Financing the purchase of another home that might better meet your needs as you age

BENEFITS OF A REVERSE MORTGAGE

• Your heirs won’t have to repay the loan
• The loan gives you financial wiggle room
• An eligible surviving spouse can stay in the home

DISADVANTAGES OF A REVERSE MORTGAGE

• There is mortgage insurance, however it is financed into the loan
• The loan reduces the equity in your home
• You could lose your home if you do not pay property taxes and insurance

HOW MUCH CAN I BORROWER ON A REVERSE MORTGAGE?

The sum you receive in a reverse mortgage is based on a sliding scale of life expectancy and loan to value. The older you are, the more home equity you can pull out. The lower the loan-to-value, the more home equity you can pull out.

AM I ELIGIBLE FOR A REVERSE MORTGAGE?

To apply for a reverse mortgage, you must meet the following:

• You’re 62 or older
• You have no delinquent federal debts
• You have considerable equity in your home or own your home outright.
• You complete a counseling session with a home equity conversion mortgages (HECM) counselor approved by the Department of Housing and Urban Development.
• Your home meets all FHA property standards and flood requirements
• You continue paying all property taxes, homeowners insurance and other household maintenance fees as long as you live in the home

WHAT ELSE YOU NEED TO KNOW

Before issuing a reverse mortgage, a lender will check your credit history, verify your monthly income versus your monthly financial obligations and order an appraisal on your home.

The Consumer Financial Protection Bureau recommends waiting until you’re older to obtain a reverse mortgage so you don’t run out of money too early into retirement.

Consulting with Kathy Nau on more than one occasion is typical and including feedback from adult children is often a part of the decision making process.

For more information, visit Kathy’s website www.ReverseMortgageSherpa.com

WHAT TO KNOW ABOUT BUYING A MANUFACTURED HOME

Manufactured homes are built in factories to federal government standards and, when affixed to land, can be financed with Conventional, FHA, VA and USDA.

Sometimes mistaken as mobile homes, manufactured homes are an affordable alternative for home buyers, and some of today’s options feature amenities that might surprise you, such as walk-in closets, fireplaces, stainless steel appliances and vaulted ceilings. Here’s what to consider if you’re thinking about buying a manufactured home.

WHAT IS A MANUFACTURED HOME?

Manufactured homes are built in factories according to construction and safety standards set by the U.S. Department of Housing and Urban Development, or HUD. The homes are built on a permanent chassis — base frames with wheels — and then professionally transported in one or more sections and installed on site. The wheels and axles are removed, and the homes are anchored in place onto a permanent foundation. When the manufactured home is affixed to the foundation, on a plot of land, the title is purged, thus the manufactured home now becomes known as real estate. Distinction: This is what makes a manufactured home eligible for traditional financing. The home and land are connected as one piece of real estate.

WHAT IS A MODULAR HOME:

Modular homes are cousins to manufactured homes. They, too, are factory-built, but modular homes are constructed according to local and state building codes like site-built Single family homes. Sections of the homes, or modules, are transported to home sites, then assembled by local contractors and placed on permanent foundations. Thus Modular homes are considered the same as “stick built” homes. Meaning homes built in a traditional on site manner.

WHAT IS A MOBILE HOME?

The terms mobile home and manufactured home are sometimes used interchangeably, but there’s a big difference. Mobile homes are factory-built homes that were built before June 15, 1976, when the federal HUD standards went into effect. Manufactured homes are those built after that date. The manufactured home industry has come a long way in 40-some years, so new models are a far cry from the mobile home stereotype. However, today even, a manufactured home that is not removed from it’s wheels and sits on a rental site – is still commonly referred to as a mobile home.

MANUFACTURED HOME LOANS:

Manufactured homes must be permanently fixed on a foundation and titled as real property with the land to be eligible for financing with a mortgage.
Conventional, FHA, VA and USDA are eligible loan types to finance a manufactured home.

WHAT IS AN FHA 203(K) LOAN?

The official name of the FHA Renovation loan is known as “FHA 203(k)”. The loan finances the purchase and renovation of a primary residence.

An FHA 203(k) loan allows you to buy or refinance a home that needs work and roll the renovation costs into the mortgage. You’ll get a loan that covers both the purchase price (or refinance loan) AND the cost of upgrades, letting you pay for the renovations over time as you pay down the mortgage.

FHA 203(k) financing can be an affordable way to pay for home improvements and may expand your homebuying options, especially in high-cost areas.

HOW DOES AN FHA 203(K) MORTGAGE WORK?

There are two types of FHA 203(k) loans: the Limited — sometimes referred to as “streamline” — and the Standard.

203(k) Limited Loan: Provides up to $35,000 for renovations, but major structural repairs aren’t eligible.

203(k) Standard Loan: Renovations must cost at least $5,000, and major structural repairs are eligible. Borrowers using a 203(k) standard loan, the lender will have a HUD consultant involved to oversee the renovation process.

Among other things, FHA 203(k) mortgages can be used to:

• Improve a home’s functionality or attractiveness.
• Update kitchens and bathrooms
• Install or replace flooring
• Eliminate health and safety hazards.
• Rehab the plumbing or sewer systems.
• Install or repair the roof, gutters and downspouts.
• Replace windows
• Improve major aspects of the landscaping.
• Ensure accessibility for a disabled person.

Improvements paid for with a 203(k) loan generally must be completed by a licensed contractor and are subject to approval by an FHA appraiser, and in some cases, a HUD consultant.

THE FNMA HOMESTYLE RENOVATION LOAN
THE FHLMC CHOICE RENOVATION LOAN

Fannie Mae’s Homestyle Renovation loan and Freddie Mac’s Choice Renovation Loan are Conventional loans available to home buyers to purchase AND add costs to renovate a home into one new loan. Or, permit existing owners to refinance a current loan and add costs into a new loan for renovation.

The Homestyle Loan and Choice Renovation loan are renovation mortgages buyers can consider. Like FHA 203k, it lets you roll the costs of improving your new home into your monthly mortgage payment.

IS THE HOMESTYLE RENOVATION OR CHOICE RENOVATION LOAN RIGHT FOR YOU?

Borrowers can finance renovations that cost up to 75% of a home’s value after being fixed up, as long as they qualify for the total loan amount. For example, you could buy a $200,000 house that needs $150,000 in repairs, however, you’d need to satisfy the credit score, LTV and debt-to-income requirements for a $350,000 loan.

NEW PROVISIONS TO CHOICE

Choice Renovation loans now cover renovations completed through major home improvement store programs, so long as they meet Freddie Mac’s contractor requirements. The loan covers up to 100% of the cost of materials, as well as other costs outlined in the contract, including labor. Renovations must be done within 180 days, and Freddie Mac requires a home inspection after the fact to verify that they were completed.

HOW TO GET A CONSTRUCTION LOAN TO BUILD A HOME

Construction loans often require a 20% down payment and qualifying is often more strigent then financing a resale home.

The number of existing homes for sale is at a more than 20-year low nationwide, according to the National Association of Realtors. Home buyers — including first-time buyers — are looking at other options that include building a house. Here’s how to get started if you decide to get a construction loan and build a home. It all starts with your ability to be financed and what kind of budget can you establish from there. But not every mortgage broker or banker offers construction loans.

LOCKING IN THE LAND

Getting a place to build a house is a major part of the homebuilding process. You don’t have to own the lot or the land free and clear. And any equity you have in the land can be applied toward a down payment. If you don’t own the land, you can acquire the land and finance its cost and the home construction simultaneously.

QUALIFYING FOR A CONSTRUCTION LOAN

It’s harder to get approved for a construction loan more so than for a typical purchase mortgage. That’s in part because the bank is taking extra risk during the building phase since there isn’t an asset to secure the mortgage. Typically 20% down and a 720 fico score are necessary and reserves in savings and retirement are considered favorably.

WANT TO BUILD IT YOURSELF?

Generally most lenders will not permit a self-build project, with few exceptions going to borrowers with relevant trade experience.

STAYING WITHIN A BUDGET

Cost overruns are the biggest danger you could face when building a home. A builder’s bid sets cost allowances for lighting fixtures, flooring, countertops and other major features. An upgrade here or there can bust the budget, and you’ll have to make up the difference in cash. Thus most lenders will build in a 10-15% Cost Overrun line item in the final budget.

LAND LOANS: EVERYTHING YOU NEED TO KNOW

If you want to purchase land and perhaps build later, or just have the piece of land for recreational or business use, you might need a land loan. A land loan – sometimes referred to as a lot loan – is used to finance the purchase and finance of a plot of land.

While Kathy Nau does not offer land or lot loans, she understands the importance of educating her clients and can help point you in the right direction to find the financing for your land loan.

• TYPES OF LAND LOANS

The three most common types of land loans are raw land loans, unimproved land loans and improved land loans.

• RAW LAND LOAN

Raw land is a completely undeveloped area with no electricity, sewer or roads.

• UNIMPROVED LAND LOAN

Unimproved land is similar to raw land, but it tends to be more developed. Sometimes unimproved land has some utilities and amenities, but typically lacks an electric meter and/ or natural gas meter.

• IMPROVED LAND LOAN

Unlike raw land and unimproved land, improved land has access to things like roads, electricity, sewer, and water. Improved land is the most developed type of land, so it may be more expensive to purchase.

HOW DOES FINANCING FOR LAND LOANS WORK?

Land and lot loans are generally financed by banks or credit unions in the area where the land is located. The bank will use the land as collateral. Thus seeking financing by a financial institution in the area where the land is located is optimal as the bank will be familiar with the area real estate values and market.

LOAN QUALIFICATIONS

Because there are different types of land loans, each has its own qualifications for borrowers to meet. However, there are still general guidelines that are taken into consideration when a borrower applies for a land loan:

• Have an excellent credit score (720 or higher)
• 25-50% down
• Ability to pay back with a 3 to 10 year term
• Have reserves in savings or retirement
• Provide an explanation for intended use of land
• Highlight necessary property checks, such as:
  • zoning
  • land use restrictions
  • land access restrictions
  • survey
  • access to utilities
  • soils report
  • geology report

Once a lender takes these factors into consideration, the rate and terms of the land loan can be issued. Land loan interest rates tend to be higher than mortgage interest rates because they’re riskier.