FHA, VA and other special loans

You may qualify for a FHA, VA or other special loans designed to bring homeownership to first-time and low- to moderate-income buyers.

For thousands of first-time and low- to moderate-income buyers, the only way into the home market is through loan programs sponsored by the government, such as the Federal Housing Administration or the Department of Veterans Affairs, or non-profit entities, such as state housing agencies or credit unions.

These loans usually offer such features as low down payments, below-market interest rates, few if any points, relaxed income/debt ratio qualifications and assumability (FHA and VA). You may think that you don't qualify, but in the 1980s, housing in many locations became unaffordable to many as rising home prices outpaced incomes. To bridge these gaps, the government loosened requirements for FHA and VA loans and numerous new programs sprang up sponsored by entities ranging from secondary market mortgage investors Fannie Mae and Freddie Mac and housing groups of all stripes. Even some labor unions have a first-time buyer's program.

These loans are not always easy to find, but if you think you might qualify, it is worth learning about them:

The major players

The FHA and the VA, and within its sphere the old Farmers Home Administration (now the Rural Housing and Community Development Service), are the old hands of government loan programs.

Here's what they offer:

FHA-insured: Family housing expenses should not exceed 29% of gross income; total debt no greater than 41% of income; Variety of loans ranging from fixed-rate to adjustables; down payments of 5 percent of less; interest rates up to 1 percent less than market; no prepayment penalty; assumable; most closing costs can be included in loan; borrower must buy mortgage insurance (2.25% of loan upfront with .5% of balance for set number of years after); impound accounts required; loan amount limited to 95 percent of local median home price or 75% of loan limit set by Freddie Mac ($160,950 in high-cost areas); available through mortgage brokers and FHA-approved lenders.
VA-guaranteed: Veterans of the armed services who obtain a certificate of eligibility from VA. Reservists are also eligible. Fixed or adjustable loans; no down payments; no prepayment penalty; assumable; loan amount limited to $203,000 (VA guarantee covers $50,750 on loans over $144,000); available through mortgage brokers and VA-approved lenders. Note: VA also guarantees other loans from graduated-payment mortgages to energy-efficient mortgages.
U.S. Dept. of Agriculture Rural Housing/Community Development Service: (formerly Farmers Home Adminstration): Low and moderate-income families who want to buy rural property; must meet income, job status and credit requirements; Only conventional fixed-rate loans guaranteed by program; property must fall into USDA-designated rural areas; closing costs and repairs can be included in loan if amount doesn't exceed home's market value; available through USDA and lenders.

TIP: All of these loans can take longer to process than conventional loans. This may hinder your offer negotiations if the seller wants to close quickly. Be sure to budget enough time when setting your closing date.

Other special loan options

If you are short of cash or are an entry-level buyer, there are a number of low-down-payment loan programs to apply for, including special Freddie Mac and Fannie Mae mortgages as well as state and local first-time buyer programs.

Fannie Mae

Fannie Mae has a couple of programs that are good examples of how these loans work. The Community Home Buyers program offers loans with down payments as low as three percent. Participating lenders market it to prospective borrowers through a special home-buying seminar. (These free seminars are required for some Fannie Mae loan applicants, but anyone can attend). The seminars are designed to educate novice buyers about the process of buying a house and applying for financing, theoretically to make them better borrowers. Fannie Mae's 97 percent loan program is available in most states. The 3 percent cash down payment must be the borrower's own funds. The seller can credit a maximum of 3 percent of the purchase price for the buyer's nonrecurring closing costs. Standard ratio guidelines are used to qualify the borrower. The front-end ratio (housing debt to income ratio) cannot exceed 28 percent and the back-end ratio cannot exceed 36 percent. Good credit is required. To qualify for this loan program, the borrower's income cannot exceed a limit, which varies by location. The Housing and Urban Development’s median income chart is used to set the income limit.

Impound it out

Both FHA and VA mortgages require impound accounts, which means your loan's monthly payment must be increased enough over the actual mortgage to cover real estate taxes, and mortgage and homeowners insurance premiums. Lenders now must observe strict guidelines on the amount held in your impound account after criticism they kept too much. As a result, your lender may ask you for extra funds to pay for any shortfalls. Monitor your account to make sure enough is being taken out.

Advice for the loan-lorn

What's the best way to research special loan programs? Aside from checking with major players like FHA, VA and Fannie Mae, check with state and county housing agencies (to find them, look in the Yellow Pages or check with the National Council of State Housing Agencies). Talk to a loan agent or mortgage broker about the financing options available and ask about any special programs they may offer or be involved with. If they can't help you, ask for a referral to someone who can. Also, network with other first-time buyers you know to find out who they used for their financing.