In addition to the basic types of mortgages we have covered so far, there are alternative sources of home financing as well. In this section we will cover:- Veterans Administration (VA) Loans
- Federal Housing Administration (FHA) Loans
- Borrowing against your 401(k) plan
- Fannie Mae and Freddie Mac
- Foreclosure homes
- For Sale By Owner (FSBO)
Veterans Administration (VA) Loan
Veterans who served on active duty during World War II and later periods and were discharged under conditions other than dishonorable, are eligible for VA loan benefits. In order to qualify, you must first apply for a certificate of eligibility. Here is how it works:
- You will first need to request a certificate of eligibility. You can do so online. Go there now.
- Submit your certificate to one of the eligibility denters along with copies of your most recent discharge or separation papers covering active military duty since September 16, 1940, which show active duty dates and type of discharge. Click here for a listing of the eligibility centers.
VA loans offer several advantages, including:
- One hundred percent financing - You do not have to put any money down on your home.
- Low insurance fees
- Competitive interest rates
- Your origination fee cannot exceed one percent of the loan and cannot be financed.
- VA will guarantee your loan.
- VA mortgages can offer fixed rates and adjustable rates.
Federal Housing Administration, FHA Loan The FHA was created to aid homebuyers, particularly if money is tight. Borrowers are limited to the amount they can borrow with an FHA loan since it is a government-insured loan. Loans are physically paid out by the lending institutions, while insured by the federal government. Non-veterans looking for the least expensive means of purchasing a home will usually take the FHA option.
In order to qualify for an FHA loan you must meet the following guidelines:
- You must be a permanent resident of the United States (citizenship not required).
- The home must be owner-occupied.
- The dollar amount must fall below the statutory mortgage limit. This applies to all cities of the US excluding designated "high cost" areas.
- All FHA loans closed after December, 1991, require the buyer to be deemed "credit worthy."
Like VA loans, FHA loans have several advantages, including:- Many types of FHA loans exist.
- Fixed and adjustable rates are available.
- Low down payments and closing costs (as low as five percent)
- FHA loans have a qualifying debt ratio that is slightly higher than other loans, allowing more debt or less income.
You can find out more from FHA on the Web at www.hud.gov/fha.
Borrowing Against Your 401(k)
If you contribute to a 401(k) retirement plan, you may be able to borrow from it to buy your house, as long as you pay it back into the account later on. Some companies offer programs to help their employees purchase their first home, so check with your human resources department to see what your company provides.
You may be able to borrow up to half of the money in your plan (up to a value of $50,000) and will then have to repay it with monthly payroll deductions.
It is important that you understand that this strategy has significant disadvantages, including the following:
- Borrowing from your 401(k) plan will slow its growth.
- You may be tempted to reduce your monthly 401(k) contributions by the amount of your loan repayment to keep your paycheck stable. This will likely hurt your retirement savings in the end.
- Interest you pay on the loan isn't tax-deductible, unlike the interest on a home equity loan or home mortgage.
- Any loan balance still outstanding when you leave your job will be treated as a withdrawal. You'll owe income taxes on the money, plus a ten percent penalty if you are under 59 1/2.
Fannie Mae and Freddie Mac
There are also two federal agencies that can help you find more information on lending and mortgages - Fannie Mae and Freddie Mac. Although these agencies do not make loans directly to homebuyers, they can help you find approved lenders.
Visit them on the Web at www.freddiemac.com and www.fanniemae.com for more information on how they can help.
Foreclosure
Another option in finding a better price is a foreclosure home. This is one in which the previous owner could not make the payments, so the mortgage company or note holder has taken possession of the house.
For Sale By Owner (FSBO)
You may be lucky enough to find a house that you like, think is priced fairly and find that that it is being sold by the owner. You may come upon them through friends, family, newspaper adds, or even just by passing by and seeing the "For Sale" sign outside. Typically, this kind of transaction is far less costly than going through a listing and a broker - but you should still be sure to enlist the assistance of an attorney to help you get through all of the paperwork and ensure that your own interests are being protected.
HerTip: No matter how you decide to purchase your home, before you actually buy it, it is crucial to have it inspected by a qualified, independent house inspector. The inspector will check over the physical condition of the home and will be able to give you an honest and accurate read on how much work needs to be done.
Continue to:
Part VI: House hunting
Qualifying for a mortgage