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    FHA Loans

    The Department of Veterans Affairs isn’t the only sector of the government that makes guaranties for home buyers. The Federal Housing Authority (FHA), begun in 1934 as part of President Franklin D. Roosevelt’s New Deal initiatives, offers the most common type of government-backed home loan. VA loans are nearly always a better deal overall than FHA loans, but the VA requires borrowers to meet stricter criteria, so if you’re currently unable to secure a VA home loan, consider going through the FHA instead.

    While VA lenders will probably require you to have a FICO credit score of 620 or higher, FHA lenders will most likely work with you as long as your score is 580 – in fact, sometimes they will work with borrowers whose FICO scores are as low as 500. FHA loans require a down payment of at least 3.5% (compare this with the 5% minimum for conventional loans and 0% for VA loans); if your credit score is particularly low, you’ll probably have to put down at least 10%. Closing costs must be paid for FHA loans, although the seller can contribute up to 6% of the purchase price or appraised value of the home (whichever is less) to go toward your closing costs. The seller cannot contribute to your downpayment. One benefit of FHA loans is that gift funds can be used to cover your down payment and closing costs. Gift funds must truly be a gift, with no expectation of repayment. They must be given by an approved party, such as family, friends, or a down payment assistance program, and they cannot come from anyone involved in your transaction on the home. Gift funds must have a verifiable paper trail, usually a certified or cashier’s check, and they must have a letter of documentation signed by both you and the donor.

    Like VA loans, FHA loans must be used to purchase a primary residence, and they have maximum dollar limits attached. Currently, the FHA limit for a single family is $271,050 in most markets (compare this to $417,000 from the VA), although limits are raised in certain areas of the country with higher costs of living. FHA loans are also assumable, meaning that if you want to sell your home before you’ve finished paying off your FHA loan, the person who buys it from you may be able to simply take over the rest of your loan, rather than getting a whole new mortgage for themselves. (This can be an advantage to buyers when interest rates are high.)

    One major difference between FHA loans and VA loans is the requirement to pay mortgage insurance premiums (MIP). (An MIP is similar to but not the same as the private mortgage insurance (PMI) paid on conventional loans.) MIP offers security for lenders in case their borrowers default on their loans. The FHA requires that MIP be paid both up front and annually. So once the down payment on an FHA loan has been made, the MIP will be taken as a percentage (currently 1.75%) of the remaining purchase price, and that amount will be added onto the balance of the loan principal. The annual MIP is determined by both the length of the loan term and the amount of the loan remaining after the down payment (loan-to-value, or LTV). The value of the annual MIP is divided by twelve and added onto each monthly mortgage payment. These days, most FHA borrowers pay MIP for the entire life of their loan. If you put at least 10% down, you will be able to stop paying it after eleven years.

    There are many types of available FHA loans:

    • Fixed-Rate 203(b) Mortgage – This is the most common type of FHA loan, and it’s great for first-time home buyers. Its interest rates will not change over the loan’s lifetime.
    • Adjustable-Rate Mortgage – Its major benefit is that early payments will stay low. While the interest rates may change over the lifetime of the loan, they cannot increase more than 1% each year, nor can they increase more than 5% from the initial rate.
    • Energy Efficient Mortgage – This allows borrowers to include the cost of energy-saving home upgrades in their loan, and it can be used to build a home or purchase an existing one.
    • Section 203(k) Loan – This loan can be used to repair or rehabilitate certain kinds of single-family dwellings, and it can be used in conjunction with the FHA Energy Efficient Mortgage.
    • Reverse Mortgage – Designed for home owners ages sixty-two and older, it converts home equity into income or a line of credit.
    • Graduated Payment Mortgage – Payments start small but get bigger each year. This is a great choice for people who expect their income to rise over the next several years.
    • Growing Equity Mortgage – Intended for first-time home buyers and young families, this loan’s payments start small and gradually get larger, with an increasing amount going toward the loan’s principal, which will reduce the mortgage term.
    • Loans for Condominiums – These are only applicable to purchases of condominium units, and they’re structured similarly to Section 203(b) loans.
    • Cash-Out Refinance Loan – This allows home owners to either lower their monthly payments or convert home equity into cash.
    • Streamline Refinance Loan – This refinance process is quick and reduces the borrower’s interest rate. No cash can be received.

    At Fortress VA Loans, we want our clients to obtain the best loan for their situation, so they can save money for the long-term and accomplish dreams and goals outside of home owning. If at all possible, our family of VA loan specialists and lenders will get you set up with a VA home loan, but if you don’t meet those financial requirements, an FHA loan is often the next-best option. If you have any questions about the FHA home loan process and how it compares to the VA loans process, get in touch with us today!

    USDA LOANS

    Like the Department of Veterans Affairs and the Federal Housing Authority (FHA), the United States Department of Agriculture, or USDA, provides loan guaranties for qualified active-duty and veteran military service members who wish to become farmers to purchase land and housing. This program works to alleviate two important concerns in the U.S.: one, the overall population of farmers in this country is aging rapidly, with few young people taking up the profession, and two, unemployment among young American veterans is around 20%, and with about 45% of service people hailing from rural areas these days, encouraging and enabling many veterans to become farmers seems like a natural fit. In addition to the loan program, the USDA offers several training opportunities and support organizations for those starting out in agriculture. While there are certain restrictions attached to USDA loans that are applicable to loans through the VA, USDA loans may be the best option for certain service men and women and their families.

    USDA loans bear some similarities to VA loans:

    • The government does not impose specific credit requirements for eligibility, but your lender may. You’ll likely need a FICO credit score of 620 or higher for a USDA loan, but lower scores may be workable for some lenders.
    • USDA loans do not require any down payment. (Currently, the VA and the USDA programs offer the only $0 home loans in the U.S. market.
    • The entirety of your closing costs may be financed as part of your loan.

    USDA loans and FHA loans also share certain qualities:

    • The seller may contribute up to 6% of the purchase price or appraised value of the property (whichever is less) to go toward your closing costs.
    • You may also use gift money (from an acceptable source, with a paper trail, with absolutely no expecation of repayment) to cover closing costs.
    • USDA loans also require their own form of mortgage insurance, which is paid both up front (usually around 1% of the loan amount) and annually (although the annual charge, about 0.35% of the loan balance, can be divided into monthly installments).

    USDA-guaranteed loans may be used either to build a new home, purchase an existing home, or purchase and immediately renovate an existing home. They can only be secured for your primary residence. Eligibility for a USDA loan is partially based on your geographical location; you must build or purchase within a qualified rural area (defined by the agency, and potentially changing from year to year), although a surprisingly large portion of the country meets this requirement. Also, participants in the USDA loan program are subject to income requirements – you can’t be making more than 115% of the local area’s median income, adjusted to account for the size of your household. Unlike FHA and VA financing, there are no set limits on how much you can borrow for a USDA loan, but your new home must be reasonable in size, and you must demonstrate that you’ll be able to handle the payments on your loan in addition in addition to your other financial obligations and regular living expenses. USDA loans can be assumed if you sell your property, but the interest rate and mortgage terms will probably change unless your loan is being assumed by a member of your family.

    If you’re an active-duty military member, veteran, or qualified family member who is interested purchasing land and a home to help you get started as a farmer, the USDA loan program may fit your needs. Contact your family of VA loan specialists and lenders at Fortress VA Loans to discuss your options or begin your loan process today.

    Conventional Loans for Military Borrowers

    Conventional loans are the most common way to obtain a mortgage on a home. They’re certainly open to military members, both current and former, and their spouses – just because you have an entitlement to a VA-backed loan, you’re not required to use it. The particulars of VA loans are often extremely helpful to military-connected home buyers, but since every person’s goals and financial picture are different, it’s important not to completely discount conventional loans without knowing their basics.

    Unlike VA, FHA, and USDA loans, conventional loans are not backed by any government department or agency, meaning your lender depends entirely on you and your ability to make payments without defaulting to get their money back. This is why credit requirements for conventional loans are nearly always stricter than for loans with government guaranties. Although each lender will have different standards, you’ll likely have to have a FICO credit score of at least 650 to obtain a conventional loan, and you’ll probably need a score of at least 740 to secure the best available interest rates. Average interest rates for conventional loans actually tend to be slightly lower than those for government-backed loans, but they also require a down payment.

    Minimum down payments are usually required to be 5% of the purchase price of a home, although some lenders may allow only 3%. Given the financial realities of military life, even these low amounts may be difficult for some service men and women, and in order to secure the best interest rates, you may need to put down as much as 20%. As with FHA and USDA loans, gift money (received from an appropriate source, with a paper trail, with no expectation of repayment) may be used toward a down payment, but if you’re going to put down less than 20% overall, it’s likely that the buyer will be required to contribute at least 5% of the purchase price.

    Another near-constant with conventional loans is the requirement for private mortgage insurance (PMI) if you put down less than 20%. This cost is based on a number of different factors, and you’ll either have to pay it monthly, along with your mortgage payment, until you reach 20% equity in your home, or your lender will pay your PMI fee in exchange for you paying a higher interest rate.

    If you take out a conventional loan, you can ask the seller to pay up to either 3%, 6%, or 9% of the purchase price in closing costs and concessions, depending on your loan-to-value (how much of the purchase price is left over after your down payment). You can also use gift money for closing costs.

    Unlike VA, FHA, and USDA loans, you may use a conventional loan for a home that is not your primary residence – you can purchase a second home, a vacation home, or a property that you intend to rent to other people. Also, more lenders offer conventional loans than those backed by the government, which may make it easier to compare rates and terms or find specific financing features that meet your needs.

    If you’re wondering whether a VA loan or a conventional loan would better suit your needs, contact Fortress VA Loans today so we can discuss your financial situation. Our family of VA loan specialists and lenders may be able to find options you didn’t even know existed!

    Native American Direct Loans

    Native American military members wishing to live on tribal land used to face significant challenges when it came to securing financing to purchase or renovate a home. Most tribal land in the United States is held in a federal government trust on behalf of the tribes, under agreements that promise federal protection for Native American property and natural resources while allowing tribes the freedom to self-govern and preserve their cultures. Because this land is subject to federal regulations, rather than those from the state, there are a number of restrictions regarding mortgages, building new structures, and renovating existing structures on tribal property.

    In 1992, however, the Department of Veterans Affairs began the Native American Direct Loan (NADL) program. This allows eligible Native American service men and women and their surviving spouses to use their entitlement to a VA home loan to obtain housing on tribal land held in a trust. In order to take advantage of this benefit, the service member’s tribe must have signed a memorandum of understanding (MOU) with the Secretary of Veterans Affairs, and certain conditions of the program are subject to stipulations in the MOU.

    The biggest difference between the NADL and most other VA home loans is that the lender for the NADL is the Department of Veterans Affairs. Most other VA loans are obtained through outside lenders, and the VA essentially co-signs the loan by guaranteeing to repay the funds if the borrower defaults. Like regular VA home loans, though, NADL recipients don’t have to make down payments or pay private mortgage insurance, and closing costs and funding fees are limited. The loan limit for the NADL is usually $425,100 (although it can be higher in certain areas with greater costs of living); regular VA loans are usually limited to $417,000. While interest rates may change due to fluctuations in the market, they are generally significantly lower than anything available from a conventional mortgage lender. The NADL results in a fixed-rate, thirty-year mortgage, and the benefit can be reused as long as certain conditions are met. Refinancing options are available for previously issued NADLs.

    In order to use the NADL, you must meet the following criteria:

    • Obtain a Certificate of Eligibility (COE), just like you would if you were seeking a different kind of VA loan
    • Use the loan to purchase, build, or improve a home on land protected by a federal trust, which may include Alaska Native corporations and territories in the Pacific Islands
    • The property must be your primary residence
    • You must be deemed a reasonable credit risk by the Department of Veterans Affairs
    • You must prove your household receives stable income that will be enough to make payments on your mortgage, pay all bills, and cover other necessary costs of living, such as food, transportation, clothing, and home goods

    Please note that beyond the requirements set by the Department of Veterans Affairs and other branches of the federal government, individual tribes may have particular regulations regarding purchasing, building, and renovating homes on their lands. These rules will be monitored and inforced within the tribe; the United States government recognizes the rights of Native American tribes to self-govern and will not overrule tribal policy.

    If you are a Native American who is currently serving in the U.S. military or has served in the past, or if you are the surviving spouse of a Native American service member, contact Fortress VA Loans today to discuss your options for receiving a VA home loan. The Native American Direct Loan program may fit your needs, or you might be better off with a regular VA home loan, Cash-Out refinance, or streamline refinance (IRRRL). Our family of VA loan specialists and lenders will put you on the path to home ownership, helping you fulfill your piece of the American dream.

    Energy-Efficient Mortgages

    What’s better than receiving a VA home loan to purchase the home of your dreams? Receiving a VA home loan plus additional funds to make you new home more energy-efficient, thus reducing both your carbon footprint and the cost of your utility bills! While this option won’t make sense for all VA borrowers, it can be a great boon to those whose needs it meets. Not only will you be decreasing your impact on the environment, studies have shown that borrowers with energy-efficient mortgages (EEMs) are less likely to default than those with regular mortgages. It makes sense when you think about it – with lower utility bills, you’ll have more funds to put toward your mortgage payments.

    If you’re approved for an energy-efficient mortgage, you’ll actually receive a credit on your home loan that’s worth a portion of what you can be expected to save by meeting efficiency standards. This credit can be used in three different ways:

    • Use the EEM to purchase an older home that needs energy improvements
    • Refinance a regular mortgage on an older home that needs energy improvements into an EEM
    • Use the EEM to purchase a newer, already-energy-efficient home (allowing for a boost of up to $6,000 in the value of your mortgage)

    The amount of money allocated for improvements in an EEM is nearly always capped at $6,000. Any improvements totalling more than that amount must be approved by both the VA and your mortgage lender. If you’re only planning to make improvements costing up to $3,000, you generally only need to submit an itemized quote or bid from your contractor and manufacturer information about the products that will be used to qualify for an EEM. For improvements worth $3,001 to $6,000, you will also need to provide an energy audit report showing a year’s worth of average utility costs for the structure to prove that these improvements will end up being cost-effective.

    Energy audits are done by local utility companies, based on the Home Energy Rating System (HERS). Your new home will be given a score between 0 and 150, depending on how energy-efficient it is (lower numbers are better; newly built homes these days must receive a score of 100 or less). A HERS report will cost a few hundred dollars, and you can negotiate to have the seller cover it at closing if you’d like. Sometimes private companies will offer discounted HERS reports for military members or veterans.

    Recipients of EEMs usually have a window of six months in which to complete their improvements. Small jobs may be able to be completed before the loan is closed. For larger, more expensive jobs, you may want to open an escrow account to set aside funds for your improvements. So what fixes can be covered by an EEM? They include:

    • Solar heating and cooling systems
    • Clock thermostats
    • Heat pumps
    • Furnace modifications (but not a whole new furnace)
    • Insulation for nearly the entire home, including insulation for water heaters
    • Thermal doors and windows
    • Vapor barriers and/or storm doors and windows

    If you’re interested in reaping the environmental and financial benefits that come with an energy-efficient mortgage, contact Fortress VA Loans today. Our family of VA loan specialists and lenders are experienced in this and all other types of lending options for current and former military members. We’ll be with you every step of the way.