August 10th, 2018 5:52 AM by Jackie A. Graves, President
If you want to get a mortgage to buy a home but
don’t have a big down payment, two federal programs can help make your dream a
Both the Federal Housing
Authority (FHA) and the United States Department of Agriculture (USDA) sponsor
programs that guarantee home loans for people without a lot of cash; the idea
is to encourage homeownership. But the loans work differently and they aren’t
and USDA loan basics
are administered through private lenders, just like regular mortgages. The government’s job is
to guarantee that the loans will be repaid. That promise makes banks more
likely to loan to people with limited incomes and savings.
FHA loans can
be used for most properties anywhere in the United States, from big cities to
suburbs and beyond. They require a credit score of at least 580 and a down
payment of just 3.5 percent of the purchase price—far lower
than banks would normally accept. There is no income limit, but the mortgages
are generally for modest homes. Another plus: You can use “gift” money, such as from parents, for the
down payment. Banks typically frown on gifts because they want owners to have
their own hard-earned money in the property.
are for homes in approved rural areas—but the definition of rural is broad and
includes many developed suburbs. You can look up an
address on the USDA eligibility website to see if it qualifies.
Significantly, USDA loans require no down payment. But unlike
FHA loans, there are income limitations. You can’t have adjusted income greater
than 115 percent of the median for your county. For example, in 2018 a family
of four in Boulder County, Colo. cannot earn more than $97,750 in adjusted
Both types of
loans carry hefty insurance premiums, which help offset the
government’s cost of paying off bad loans.
An FHA loan
requires an upfront insurance payment of 1.75 percent, which most buyers roll
into the loan itself—thus increasing payments and interest. There also is an
ongoing monthly fee that varies based on the loan but is usually under $100.
Still, that adds up. USDA loans have a smaller upfront insurance payment—1
percent as of early 2018—but a higher monthly premium set at 0.35 percent of
cases, the premiums are considerably higher than conventional mortgage
insurance. Moreover, those payments continue for the life of the loan; the only
way out is to refinance. These insurance costs alone can
often make a regular bank mortgage the better option, assuming you have enough
savings for a down payment.
occupancy is a must
also require owner occupancy—no investment or rental property—and frown on
fixer-uppers. And in a competitive market, some sellers may be turned off by a
buyer with a government-backed loan because it implies the person is “risky.”
consider if you really can afford a large loan that comes when borrowing all or
most of the home’s purchase price. Saving more for a larger down payment will
lower your monthly payments for years to come.
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