Georgia first time home buyers have many options today to purchase a home with little to no down payment. Most of these programs today are tailored for first-time homeowners by offering flexible credit standards, secure fix interest rates and minimal money down.
Getting approval for a mortgage is often the first step in the home buying process. But unlike getting a car or a credit card loan, a home mortgage does require a bit more documentation.
In addition, there are different types of loan programs available that can lead to some confusion as to what loan might best suit someone’s needs. You can do all the research you want to get familiar with some of these programs but you do need to speak with an experienced loan officer that can craft a set of options from which to choose. Let’s take a closer look at what is available in today’s home loan marketplace.
Government & Conventional
Mortgage loans are generally broken down into two categories, a government loan and a conventional one. A government-backed loan is so-called because the loan carries some sort of inherent guarantee. This guarantee doesn’t guarantee a mortgage loan applicant a loan approval but does provide the lender with some degree of confidence when approving such a loan. There are three such programs, the VA home loan, USDA, and FHA mortgage programs, and can only be used to finance an owner-occupied property.
Conventional mortgage loans do not a government guarantee and the risk is placed entirely upon the mortgage company writing the loan. Should the loan ever go into default the lender endured the entire loss, foreclosing on the property and putting up the home for sale at a foreclosure option. Conventional loans fall into the conforming or jumbo category. A conforming loan means the maximum loan amount is $726,200 in Georgia and for most of the country for that matter.
Some more expensive locations known as “high-cost” areas have loan amounts even higher. Any loan that is above that amount is called a Jumbo mortgage. Most conventional loans today are underwritten to standards issued by mortgage giants Fannie Mae and Freddie Mac.
A third option that occupies a very small slice of the mortgage lending pie is a portfolio loan. A portfolio loan is a mortgage that does not conform to the typical government or conventional guidelines and the lender intends to keep the loan and not have the option to sell it to other lenders or to Fannie and Freddie. The lender keeps the approved loan in its “portfolio” with no intention of selling it in the secondary market.
Government Mortgage Programs for First Time Buyers
FHA Loans. FHA is easily the most popular first-time buyer program today. FHA does have a down payment requirement, but this is 3.5% of the value of the home. The FHA loan is not restricted to any particular class of borrower nor is the loan limited to certain areas and does not have a maximum income limit. While the FHA program is not reserved for first-time buyers in Georgia it is extremely popular for them due to the low down payment requirement and low interest rates.
The Federal Housing Administration, or FHA, introduced the guidelines banks could use which provided universal standards banks could use and first introduced in 1934 as part of the National Housing Act of 1934. FHA loans carried a mortgage insurance policy that compensated lenders to 100% of the loss should the lender be forced to foreclose on the property as long as the lender followed prescribed FHA guidelines.
The FHA program requires two separate mortgage insurance premiums, an upfront and an annual one. The upfront premium is 1.75% of the sales price and rolled into the loan just like the other two government-backed programs. In addition, there is an annual premium of the outstanding loan amount and paid monthly. Think of this as PMI or monthly mortgage insurance.
Read more about FHA credit and down payment requirements on the FHA details page.
VA Loans. VA loans are those underwritten to guidelines set forth by the Department of Veteran’s Affairs. This program was first introduced way back in 1944 to help returning soldiers from WWII more easily assimilate into civilian life and part of the original “G.I. Bill.” The driving force behind this original home loan program took into consideration that soldiers didn’t have all that much time saving up for a down payment and closing costs while serving their country during wartime. To address this, the VA loan requires zero down payment and one of two such 100% financing programs available today.
Over the years, eligibility for a VA home loan has expanded to include not just veterans of the armed forces but to active duty personnel with at least 181 days of service. In addition, those who have served for at least six years with the National Guard or Armed Forces Reserves can also apply for a VA home loan as well as unremarried surviving spouses of those who have died while serving or the result of a service-related injury. In addition to not requiring a down payment, the VA home loan limits the types of closing costs the veteran is allowed to pay.
The government guarantee to the lender that approved the VA home loan compensates the lender for 25% of the loss. This guarantee is financed by what is referred to as the Funding Fee. This is expressed as a percentage of the loan amount and can vary slightly based upon the number of times the veteran uses the VA loan to buy a home as well as the type of loan. For a first-time buyer in Georgia for example using the VA loan program, the funding fee is 2.15% of the loan amount and is rolled into the loan amount.
For instance, a home is listed for sale at $300,000. The first-time buyers don’t need a down payment and the funding fee is 2.15% of that amount or $6,450. The funding fee is not paid out of pocket but instead rolled into the loan amount for a final loan amount of $306,450. VA loans do not have an extra monthly mortgage insurance premium as do the other two government loans USDA and FHA. Read more about VA purchase loans here.
USDA Rural Housing Loans. This loan program has been around for several years under different names but today the United States Department of Agriculture issues guidelines for the other zero down loan program besides the VA loan. USDA loans are available for first time home buyers but the qualification requirements are a bit different.
USDA loans are meant to help buyers in more rural or semi-rural areas more easily obtain financing as well as having no down payment requirement. Most of GA outside of metro Atlanta is eligible for USDA financing. The USDA loan also limits the amount of household income of those not only on the loan application but in the household as well.
For those who are considering a USDA loan, the first step is to make sure the potential property is in an approved zone. Your loan officer can help walk you through the process but you can also log onto USDA’s website where all you need do is enter the property address to see if the home is within an acceptable area.
If the property is in an acceptable area the borrowers must then calculate household income and fall at or below the maximum income limits established for the area by the USDA. These limits are set at 115% of the median income for the area. There are adjustments to this amount so it’s not exactly 115% but your loan officer can explain these limits to you. The USDA loan compensates the lender for 100% of the loss should the lender be forced to foreclose.
This guarantee is financed the USDA Guarantee Fee of 1.00% of the loan amount and rolled into the loan as an upfront fee. An annual fee is required which is 0.35% of the loan amount and paid in monthly installments. Using a $150,000 loan, the upfront fee is $1,500 resulting in a final loan amount of $101,500 and the annual fee is $525 and paid in installments of $43.75 If a first-time buyer wants a loan with 100% financing but is not VA-eligible, the USDA loan is an option.
Keep in mind that all the government loan programs listed above are reserved only for owner-occupied homes. Investment properties are not eligible.
Conventional Loans for First-Time Buyers
Conventional loans up to $726,200 are either approved using guidelines set by Fannie Mae and Freddie Mac. The minimum down payment for either program is 5% yet there are special programs that only ask for 3.0% down yet the 3.0% program is only for owner-occupied properties.
Conventional loans for first-time buyers are a good choice for those with a larger down payment. If a conventional loan is equal to at least 80% of the value of the property the lender will require a mortgage insurance premium. For those that can structure a mortgage where the first lien is at or below the 80% threshold, there is no monthly mortgage insurance. Contrast that requirement with some other programs that require mortgage insurance regardless of the difference between the value of the property and the amount borrowed.
Which of these is the ideal choice for a first time buyer? If you have funds saved up for a down payment and closing costs then you might consider a conventional loan that requires no monthly mortgage insurance or upfront mortgage insurance premium. If you do need or want a loan program with little or no down payment, then a government-backed loan might be the right fit.
Contact us today to discuss your options. Call the number above or just fill out the Quick Contact Form on this page.