We often get calls here at Federal Home Loan Centers laced in confusion. How exactly federal home loans are different than conventional bank loans, is the key question on their minds.
There are six key differences from a loan you could get at a corner bank versus a government sponsored federal home loan provider, like us. We can also provide loan tables to customers with examples of fees if they apply.
One big pull for consumers to federal home loans is that a lower credit score than most conventional lenders will accept is needed. No government home loan programs require a specific credit score, so some applicants are confused when it comes time for a credit pull. Since the government is insuring the loan and not giving it to the borrower, it depends on what the lender requires. Many federal lenders require a credit score, which can be as low as 580, but typically 620 or higher is needed. Even when some banks accept a low credit score, they will follow it by weighing down the consumer with strict underwriting policies.
Down payments and closing costs are conventionally a big piece of the mortgage process. Thankfully, USDA and VA home loan programs do not require a down payment.
While you do not need that money upfront for those two loans, it is suggested you have money for closing costs, which can vary from two percent of the loan’s value up to six percent. There are lender and seller credits, which can help you cover closing costs. Seller credits are obtained when closing costs can be included and financed into the loan, if the seller agrees to it during the purchase contract. Lender credits are essentially a gift from the lender and do not need to be paid back.
For FHA home loans, you will need to be able to do a 3.5 percent down payment. This money can be gifted from others, but it still needs to be available as physical money to put down upon the purchase of a home. As stated above, seller and lender credits can help with closing costs.
Down payments on conventional home loans will typically be a requirement and the amount paid will be much more than 3.5 percent. There are some conventional loan providers who will do a down payment as low as three percent, but the underwriter will be more stringent and the interest rate will likely cancel out that extra .5 percent you would save versus FHA loans.
The monthly amount of your mortgage is going to depend on if a down payment was given, what the set interest rate was, what fees are going into escrow, and if the lender helped with closing costs. What can be financed into the loan are property taxes, home owners insurance, and any private mortgage insurance (known as PMI). Some of the fees may be avoided with certain federal home loans, pending on your circumstances. Interest rates with federal home loans can be one percent or lower than conventional loans, and this is without having perfect credit or leaving a big down payment.
WAITING PERIODS AFTER FINANCIAL HARDSHIP
When a Chapter 7 bankruptcy occurs, two years will be the standard waiting time to qualify for a federal home loan. A three year wait is required with the USDA home loan. A conventional home loan will not be within your reach, typically, for four years.
Chapter 13 bankruptcies, with 13 months of on time payments, will get you a federal home loan after those 13 months of on time payments have passed. You will wait two to four years for a conventional loan.
If a short sale occurred, you can get another VA home loan immediately if all mortgage payments were on time, whereas any late payments will result in a two year waiting period. Three years will be your waiting time for new FHA and USDA home loans. Conventional home loans will leave you with a four year wait.
Now we come to foreclosures, which is the scariest word in the mortgage process. Let’s start with the bad news first: you will need to wait up to seven years for another conventional loan. The upside is you only have a two year wait for another VA home loan, or three years for a new FHA or USDA loan.
As you can see, waiting times can vary wildly. Getting approved again after any of these events will also depend on your credit score and factors like income, savings, and employment.
For a federal home loan, a lender is the brain and the funding fee is the heart. The funding fee is what the government pays to subsidize using the federal home loan program for the borrower. This fee could be considered the cover fee or convenience fee in order to access these lenient programs.
Funding fees are typically 1.75 percent for FHA loans, can go from zero to 3.3 percent for VA home loans, and will be around two percent of the loan for USDA home loans. It is possible to add the funding fee to the overall loan.
LOAN AMOUNT LIMITS
Federal loans will typically need to abide by county limits. The limit seen through most of the county currently is $417,000, whereas expensive areas with higher limits, such as San Francisco, can see higher limits. San Francisco’s limit is currently at $625,000.
Federal home loans are meant to get Americans into housing that is suitable enough for their needs and their budget, so while getting a jumbo loan that exceeds county limits is possible, it can be tricky. People can use FHA and VA home loans on multi-family properties and use rent to help pay for the mortgage, but the catch is that the borrower needs to be using one of the units as their primary residence.
Federal Home Loan Centers is happy to take further questions on federal mortgages over on Twitter at @fedhomeloan or by calling 877-432-5626(LOAN).