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Types of Homebuying Programs

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Saving enough money for a down payment to buy a home is an enormous accomplishment. You’ve saved every last nickel you have, and now you’re ready to start shopping for a mortgage. The problem is, finding the right home loan is a formidable task. If you’re on a fixed budget and you want to save as much money as you can, the mere idea of trying to find a mortgage that saves can appear daunting.

To help alleviate a little of the pain involved in purchasing a home, we’ll discuss several of the national homebuying assistance programs, explore some of the help available at the state level and learn how to find local homebuying assistance programs.

National homebuying programs

Homebuying programs offered at the national level include FHA loans, USDA loans, VA loans and loans backed by Fannie Mae and Freddie Mac. If you want to buy a home but you have limited resources and a low credit score, these agencies are a good starting point to find an affordable mortgage. Most of the programs offered don’t require as much documentation to qualify as do conventional mortgages, and credit scores don’t have the biggest impact. If you’re a first-time homebuyer, these agencies provide an excellent opportunity to buy a home.

U.S. Department of Housing and Urban Development (HUD)

HUD is a federal government agency founded in 1965 to help Americans achieve homeownership. HUD oversees many of the programs you will find on the state and national level. The agency’s primary objective is to identify the housing needs of Americans and address those needs. HUD also enforces federal housing laws and helps rehabilitate struggling neighborhoods. However, the agency is not a direct lender and only offers insurance to lenders.

Here are two of the homebuying programs HUD offers:

Good Neighbor Next Door

The Good Neighbor Next Door program offered by HUD gives police officers, firefighters, teachers and EMTs a 50% discount on the sales price of a home in a neighborhood designated as a revitalization area. HUD provides a tool called the single-family locator that lets you search for foreclosed homes for sale in revitalization areas.

Native American Home Loan Guarantee Program.

This program is available to Native Americans or natives of Alaska who are members of a federally recognized tribe. Also known as Section 184 loans, eligible borrowers can qualify for a low 30-year, fixed interest rate mortgage. Administered by the Office of Loan Guarantee, the program insures the full value of the loan in the event borrowers default and lenders are forced to foreclose. ARM mortgages and commercial properties are not eligible for this program.

USDA programs

Since many Americans associate the U.S. Department of Agriculture with ranchers and farmers, they don’t realize the USDA offers no down payment home loans for low-income Americans in rural communities. The USDA’s Rural Development Department oversees the loan programs, and most of the requirements are less stringent than regular mortgages. Here are two of the most common programs.

The Single-Family Housing Guaranteed Loan Program

This program gives rural borrowers an opportunity to qualify for up to 100% financing on the purchase of a home. There is no down payment since the USDA guarantees 90% of the loan amount. However, the property must qualify as a rural property, and the USDA provides a locator to help determine if an address is in a rural location. In some cases, you can find properties that are close to larger cities, so a property defined as “rural” may not be as rural as you think.

Here are some of the program’s key highlights:

  • Income cannot exceed 115% of the median income in your area.
  • No size restrictions on the subject property.
  • Guaranteed loans are originated by approved lenders and are subject to additional qualifying guidelines.
  • Loans are 30-year, fixed-interest rate mortgages tied to current market rates.
  • Designed for low- and modest-income borrowers who receive a steady paycheck.

Single Family Housing Direct Home Loans

Also known as the Section 502 Direct Loan Program, the USDA provides these loans directly to borrowers. The loans offer very favorable terms since the program caters to low- or very low-income borrowers. The loan is actually a subsidy, and the USDA refers to the proceeds as payment assistance.

Here are some of the program highlights:

  • You can use loan proceeds to renovate, build or repair a home.
  • The maximum loan amount depends on your ability to repay using adjusted-family income limits. You can consult this map provided by the USDA to see income limits by county.
  • No down payment, and the current interest rate is 3.75%.
  • Loan terms range from 33 to 38 years.
  • Home must be a primary residence and modest in size for the area. Generally, the USDA wants homes to be less than 2,000 sq. feet.

FHA programs

An FHA loan is a mortgage that the Federal Housing Administration insures in case you default on your monthly payments. The insurance provided by the FHA helps lenders mitigate some of the loss if you can no longer make your payments.

FHA loans are known for their low down payment and credit score requirements, lower than average closing costs and reasonable interest rates. The minimum credit score to qualify for an FHA loan is 500, and the down payment requirement is either 3.5% or 10%, depending on your credit score. To help reduce some of the lender’s risk, you’re required to pay an upfront (if your down payment is less than 20%) and ongoing mortgage insurance premium (MIP). In some cases, your monthly MIP might be higher than the premium you’d pay on a conventional mortgage.

Here are the most common programs offered by the FHA.

FHA 203(b)

This program is the foundation for most FHA mortgages. It helps borrowers who can’t qualify for a traditional mortgage because of poor credit or a lack of income. The 203(b) lets you buy a new or existing one- to four-family home using an FHA-backed mortgage with lower down payment requirements and affordable terms. You can also refinance an existing mortgage using this program.

Here are a few of the highlights of the 203(b):

  • Down payments as low as 3.5% of the sales price with a credit score over 580. If your credit score is between 500-579, your minimum down payment is typically 10%.
  • Loan-to-value ratios as high as 96.5% of the home’s appraised value
  • Financing obtained from FHA-approved lenders
  • Limited fees
  • Eligible to anyone who plans to use the home as a primary residence

To see if you qualify for the 203(b), you must apply with an FHA-approved lender. Additionally, there are limits on how much you can borrow. The limits depend on your geographic location, and HUD provides a convenient tool to search for mortgage limits in your area.

FHA 203(k)

The FHA offers this program to help you buy or refinance a home that is need of rehabilitation. Often referred to as a construction or rehab loan, this program eliminates the strict requirements lenders place on loans for homes that need repairs.

If you’re buying a home, part of the loan goes to the seller (if you’re refinancing, a portion of the new loan pays off the existing mortgage), and the rest of the proceeds will go into an escrow account that the FHA releases upon completion of all repairs.

Common features of the 203(k) loan include:

  • Rehabilitation costs must be at least $5,000
  • The property’s value must fall within FHA mortgage limits
  • Program guidelines follow the FHA’s 203(b) guidelines, making it easier for lower-income borrowers to qualify
  • The maximum loan amount is the lesser of the nationwide loan limits set by the Federal Housing Finance Agency or 110% of the appraised value after repairs are complete

The FHA also has a limited 203(k) that lets you borrow up to $35,000 for repairs. You can use the funds to get your new home ready to move in by remodeling the bathrooms, kitchen or putting in new tile or carpet. Your lender will roll the funds into your new mortgage and you can use the proceeds to complete repairs before you’re ready to move in.

Compare FHA Loan Rates

VA loan programs

As a veteran of the U.S. military, you can qualify for a home loan backed by the U.S. Department of Veterans Affairs. Unlike an FHA loan, VA-insured mortgages don’t require you to pay mortgage insurance and many times you don’t need a down payment. VA loans are a great option for active-duty military who are returning home and didn’t have time to save money for a mortgage.

To qualify for a VA loan, you must first apply for a certificate of eligibility (COE), which tells lenders you qualify based on your service record. The basic eligibility requirements for a COE are as follows:

  • 181 consecutive days of active-duty service without a dishonorable discharge
  • 90 consecutive days of active-duty service during wartime
  • 6 years of service in the reserves or National Guard

The VA does have other limitations and restrictions on your eligibility, so you should thoroughly review its website for further details.

Here are some of the benefits when you use a VA home loan:

  • There are typically no credit score requirements to qualify for a VA-backed loan
  • Use the loan to buy a home, condo or manufactured home
  • VA limits the total closing costs lenders can charge
  • No penalty for paying your loan off early
  • Seller can pay for closing costs
  • Benefits can be used more than once

To apply for a VA-backed mortgage, you must go directly through an approved lender once you’ve received a copy of your COE. Additionally, the VA charges a one-time funding fee to help offset some of the risk involved in issuing low-cost home loans. You can pay the fee at the closing table or choose to have it added to your mortgage payment. You can use the VA’s funding fee table outlining how much you can expect to pay.

Compare VA Loan Rates

Fannie Mae and Freddie Mac

Fannie Mae and Freddie Mac play a critical role in keeping the United States housing system stable. Although the two government-sponsored agencies don’t lend money directly to you, they do buy mortgages originated by lending institutions, such as banks and credit unions, and package those loans into what are called “mortgage-backed securities.” Investors in the secondary mortgage market then buy those securities from Fannie Mae and Freddie Mac.

When investors buy these securities, it expands the money available in the mortgage market and gives banks immediate access to added funds that they often use for more lending. The bottom line is lenders use the cash they raise by selling mortgages to Fannie and Freddie to provide more lending options to borrowers. For that reason, lenders often follow originating and underwriting guidelines established by the two agencies.

Additionally, lenders make available homebuying programs created by Fannie and Freddie. The two most prominent homebuying programs are the Fannie Mae HomeReady® Mortgage Program and the Freddie Mac Home Possible® Mortgage Program.

Fannie Mae HomeReady® Mortgage

The HomeReady® program’s primary goal is to make homebuying easier for creditworthy borrowers with low to moderate incomes. Since down payments are one of the biggest roadblocks to buying a home for lower-income Americans, Fannie Mae decided to offer this program with down payments as low as 3% of the purchase price or appraised value, whichever is less.

Here are some of the programs key highlights:

  • HomeReady® has cancelable private mortgage insurance
  • Ideal for first-time homebuyers or repeat buyers
  • No loan amount restrictions
  • Credit scores as low as 620 can qualify
  • No minimum personal funds requirement for down payments

Freddie Mac Home Possible® Mortgage

Freddie Mac’s Home Possible® program is similar to the program offered by Fannie Mae since it tailors to borrowers with low to moderate incomes. However, Freddie Mac offers the Home Possible® Mortgage and the Home Possible® Advantage Mortgage.

Home Possible® Mortgage vs. Home Possible® Advantage Mortgage
Home Possible® Mortgage Home Possible® Advantage
  • Allows LTV up to 95%
  • Flexible down payment requirements
  • 1-4 unit properties, condos and manufactured home are eligible
  • Cancelable mortgage insurance after acquiring 20% in equity
  • No income limits in areas considered underserved
  • No credit score needed with a 5% down payment
  • Loan-to-value ratios up to 97%
  • 1-unit properties, condos and planned-unit developments used as a primary residence
  • 30-year fixed-rate mortgages
  • Cancelable mortgage insurance after acquiring 20% in equity
  • Manufactured homes do not qualify
Best for…

  • Low- to moderate-income borrowers with limited cash to close who like the flexibility of an adjustable-rate mortgage (ARM) or the security of a fixed-rate mortgage
Best for…

  • Low- to moderate-income borrowers and first-time homebuyers who have limited funds to bring to closing. The max LTV of 97% lowers the cash borrowers will need to close
  • Ideal for homebuyers who need maximum financing.

Both programs require all borrowers to take housing counseling. The counseling helps you develop a full understanding of your current financial situation and how it applies to you as a homeowner. Both Fannie Mae and Freddie Mac require you to complete the counseling and obtain a certificate before you can sign a purchase contract.

Local homebuying assistance programs

Several local and state governments throughout the U.S. offer programs that help you buy a home. In some cases, they offer down payment assistance up to 5% or more depending on your income. Some of the programs specifically help you save money by turning you from a renter into a homeowner. HUD provides a website that can help you find local homebuying programs.

An example of a state program is the Arizona Home PLUS loan  program. The state established an agency called the Arizona Industrial Development Authority, and it administers the Home PLUS program. If you live in Arizona, you can purchase a home for up to $396,680 with down payment assistance up to 5% of the purchase price.

Another example is California where you can receive assistance through the California Housing Financing Agency. Known as Cal HFA, the agency offers first mortgage programs, loan programs for veterans and loans insured by the FHA. The state also offers grants when you combine them with an energy-efficient, first-mortgage loan.

Programs vary by state and local governments, and Arizona and California are only examples of programs you can find locally.

Final thoughts

National homebuying programs can save you a significant amount of money over the course of your mortgage term. Most of the programs offer competitive interest rates and lower than average closing costs, which is critical if you’re working with less than stellar credit.

Some of the programs do require higher minimum credit scores and mortgage insurance, but those minimum scores usually don’t qualify for a conventional mortgage, unless you can make a significant down payment. The national programs and local assistance we discussed provide a good place to start once you’re ready to buy a home, but you still need to do your own due diligence to find your best rate and terms.


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