How can I get the best deal on a home? Where do I start? Part 3

It is essential that you understand some of the pitfalls of mortgage loans when making the determination as to which is the best loan for you. You should be very familiar witheach loan program you are considering.

In the rather lengthy Part 3 we discussed several loans, how they work and someof the pitfalls related to each. Naturally, you should discuss these loans with yourloan consultant in detail. Make sure you are completely comfortable before makingthe decision.

This post will address four other loan types. Each is backed by the State or Federal government.

FHA LOANS

The first is an FHA loan. There are specific requirements that both the borrower(s)and the property must meet before the loan will be approved. The objective is toprotect the borrower from selecting a “money Pit” property. The home must haveall of its appliances and fixtures and there can be no safety or security problems (broken windows, doors or locks). The FHA loan program is more restrictive than aconventional loan. For this reason some sellers do not like offers that are dependanton FHA financing. When faced with two identical offers, one backed by conventionalfinancing and the second backed by FHA financing, seldom will the FHA offer beaccepted.

One major advantage to the FHA buyer is that the minimum down payment requiredwith an FHA loan is presently 3.5%. Indications are that that will soon be increased. Estimates are that it might go up to 5%. Either way, the amount of cash required to buy a home with FHA financing is lower that it is with almost any other option.

As with any other loan where the borrower does not have 20% equity in the property there is an additional charge for Private Mortgage Insurance. This PMI helps protect the lender in case of default. It does nothing for the buyer/borrower except help them get the loan. Mote that in the last quarter of 2009 over 17% of all FHA loans were in default. The government is becoming much more cautious.

HUD FHA SITE

VA Loans

The second type of government backed loan is a VA loan. In order to qualify for a VA loan you have to be on active duty in the military or have been honorable discharged. A veteran can only have one VA loan at a time. There are also limits to the size of a loan that the VA will back.

As with the FHA loan, there are minimum requirements that a property must meet and restrictions on what a borrower can be charged. Therefore, it costs a seller more to accept a VA loan. However veterans are buying homes every day with VA financing.

VA LOAN SITE

 Cal Vet Loans

California has a stated back program for veterans who were California residents before entering the military. The tend to be a little less restrictive than the VA about property condition. They can also be more forgiving of a vet with a so-so credit history. With a Cal Vet loan Cal Vet is on title with the borrower. Some borrowers don’t like that. However, if it is the only way you can qualify to buy a home you can take it or leave it.

CAL VET SITE

USDA Loans

The last government backed loan we will discuss it he USDA program. It is designed for borrowers who want to buy property in rural areas. It will not work for city dwellers. All of El Dorado County, most of Placer County and some areas of Sacramento County (Galt) will qualify. The USDA will finance 100% of the purchase price plus a lump sum PMI payment of a little over one percent of the purchase price, collected up front. Borrower credit scores have to be good and property condition must be acceptable.

This is an excellent program for borrowers who have a good salary but do not have much for a down payment. One problem with the program is that it runs out of funds on a frequent basis and you might have to wait for the next government round of funding to get your loan.

USDA LOAN SITE

 Stay tuned for the next Blog in this series.