When you see the phrase “cash-only” listed with a home for sale, this means the home is not in the condition to be financed under a conventional mortgage. These are distressed properties, those that have been abandoned for long periods of time, condemned, experienced flood damage or other natural disasters. Those looking to purchase a “cash-only” property have two main options; one is to attempt to obtain a Hard Money Loan (HML), which is a short-term high-interest loan (12-21% interest) from private investors. Because the HML is not from a bank, they do not have to follow the same guidelines. This is a good option for a commercial buyer looking to make money off of a distressed property. The option more likely to be used by most is the FHA 203k Streamline loan, which allows up to 35k in renovations to spend. The FHA 203k loan is a government-insured loan, requires extra documentation, and takes longer to close than a bank loan. In “Cash-Only” situations, it’s most important to do a title search and to make sure the owner does, in fact, hold the deed to the property.
What Are Some Mortgage Down Payment Options?
The 20% Down Payment Is Not the Only Option Out There
There are many home buyers that struggle to produce 20% down for their home loan down payment. If you are such a homebuyer, understand that 20% down is not a hard and fast rule, and there are several options out there that you should know about.
Conventional 97% LTV Program
Fannie Mae and Freddie Mac both offer the 97% Loan-to-Value program, which allows home buyers to purchase homes with just a 3% down payment. The 97% LTV loan makes for a valuable alternative to the FHA loan, in that the upfront fees are lower.
The 3% loan is a stable, fixed rate loan that can be perfect for many first-time homebuyers. Its requirements include that the homebuyers have not owned a home in the last three years, and will use the home as their primary residence; also, the amount of the loan should not exceed $424,100.
FHA – Federal Housing Administration
In 1934, the Federal Housing Administration was launched to provide an alternative to private market mortgage options. The period, although more severe, was not unlike the one from which we just emerged. Bankrupt banks, foreclosed homes, general housing despair: these were the commonalities of the day.
Since they were launched more than 80 years ago, FHA loans have consistently provided access to mortgage funding where private capital would not. HUD currently requires 3.5% down payment for most borrowers. They also provide flexibility in how and where you obtain that 3.5%.
With the recent changes bringing FHA mortgage insurance back to more reasonable levels, FHA loans continue to be a great option for many home buyers.
VA – Veterans Administration Loans
A well-deserved reward for serving in our Armed Forces, VA mortgage loans have consistently provided the preferred financing option for borrowers with a military background.
To be eligible for a VA loan, you must have served in the U.S. Armed Forces, or have been a member of the National Guard or Reserves. In some cases, spouses of deceased veterans are eligible as well.
VA loans typically offer 100% financing for qualifying veterans. VA underwriting understands the challenges that families with deployed members often face. VA underwriting guidelines provide enough wiggle room to work through those issues, as long as they can be documented and explained.
USDA – US Department of Agriculture
The “Farmer’s Loan” has served America’s rural communities for decades. Funded by the United States Department of Agriculture (USDA), this rural housing incentive is a very solid mortgage product for those that qualify.
USDA loans generally come at rates at or near the going market interest rate. Offering a low interest, no down payment mortgage option for low to middle-income families, USDA mortgage loans are one of the last 100% financing mortgage products available on the market.
Mortgage insurance rates that are 1/3rd of what FHA charges and significantly less than the private mortgage insurance (PMI) fees are required for conventional financing. There are geographic requirements for the property itself, and a lender can definitely help you figure out if your dream home qualifies for this program. The USDA program is commonly used in towns with populations of 25,000 or less.
State and Local Assistance Programs
The majority of the programs available from state housing and finance agencies are geared to low and middle-income buyers. However, there are also programs designed to stimulate neighborhoods and revitalize areas of your city that have some potential for growth and home value appreciation.
If you serve the community as a firefighter, policeman, social worker, or teacher then you’ll want to look at FHA’s “Good Neighbor Next Door Program.”
Good Neighbor Next Door allows for 50% off the purchase price for qualifying buyers. This would mean that your $150,000 house will cost you a mere $75,000 if you qualify.
There are several conditions to this program. Number one is that the home must be a HUD foreclosure and located in a HUD designated “revitalization” area. You can check what properties are available on HUD’s website.
The Different Types of Home Loans
These are some loans and loan terminology you should familiarize yourself with before entering into a mortgage contract. These terms are not discrete categories, and many terms overlap when it comes to the types of mortgages that are available.
Adjustable Rate Mortgage – ARM
Adjustable Rate Mortgage (ARM,) also known as a variable rate mortgage or a tracker mortgage. An ARM is a mortgage where the interest rate changes over time based on a specific index. Commonly, the borrower has a fixed amount of time at the start of the mortgage before the lender begins to alter the rate based on the market. Individual time frames, rates, and indexes are defined in the mortgage.
Fixed Rate Mortgage
A fixed rate mortgage is a mortgage where the interest rate on the mortgage remains the same for the entire term of the loan. This type of loan offers reliability in that the rates never change, but lacks flexibility. In a case where the interest rates drop, the fixed rate mortgage would remain the same. Fixed Rate Mortgages are sometimes colloquially referred to as “vanilla wafer” loans.
Assumable Mortgage is an arrangement where a new owner assumes a previous owner’s debt, and in doing so, avoids taking on a mortgage of th