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LRC Homebuying Edition - Day 10: Popular Home Loans

LRC Homebuying Edition - Day 10: Popular Home Loans

New to the Live Richer Challenge: Homebuying Edition? Learn more about it HERE.

Need to catch up? Click on the link where you left off and then come back!

Day 4: Qualifying Income

Day 5: Debt-to-Income

Day 6: Review, Reflect, Relax.

Day 7: Weekly Inspiration

Day 8: Your Character

Day 9: Your Capital

Today’s Easy Financial Task: Learn about various home loan products.

How to rock this task:

  • Read through the guidelines of four popular home loan types.
  • Pull out your Qualifying Income & DTI worksheets, Part 1 and Part 2, from last week.
  • Compare the DTI you have to these loan guidelines.

Day 10 and we’re on to a new task!

Today, we’ll be discussing a few popular mortgage programs. There is a decent amount of information in this task, so carve out some time to carefully read and understand the mortgage options.

Before we get started, one public service announcement!

Requirements for mortgages can vary from lender to lender. This overview is just to give you a guideline. Some programs have minimum requirements, but lenders can choose to be stringent on what they will and won’t accept. The good news is, you can shop around with multiple lenders. If you don’t meet requirements for one lender, you may meet requirements for another!

Below we discuss: FHA loans, VA loans, USDA loans, and conventional loans. Let’s get started!

FHA Loan

Background: The FHA loan is popular because it allows a very low loan payment and perfect credit isn’t necessary. This is a government-backed loan that’s insured by the Federal Housing Administration (FHA). You do not get this loan directly from the FHA - lenders give you this loan and the FHA insures it. The FHA loan can be used on multi-unit homes (up to four units) as long as the property is your primary residence. There’s also the FHA Section 203(K) version of this loan for single-family property rehabs. Looking at a fixer-upper? The FHA loan could be right for you.  

Eligibility requirements:

  • Down payment: 3.5% to 10% depending on your credit score
  • Credit score minimum: 580+ may qualify you for 3.5% down; 580 or below may qualify you for 10% down
  • Debt-to-income ratio (DTI) maximum: 50% or lower

Other FHA loan details:

  • Seller contributions: FHA loans allow the home seller to contribute up to 6% of the home sale price to be applied towards your:
    • Loan origination fees
    • Discount points
    • Credit reporting fees
    • Title charges
    • Homeowners insurance
    • Attorneys fees
    • Inspection fees
    • Any other third party charges that you may incur in the homebuying process
  • Wait periods after adverse credit history:

    • Discharged Chapter 7 bankruptcy: Two-year wait.
    • Chapter 13 bankruptcy:  Debt doesn’t have to be discharged. You can be one year into your payment plan. With timely payments, you can purchase with the trustee’s and lenders approval.
    • Foreclosure, deed in lieu of foreclosure, and short sale: Three years from the date your name was removed from the title.

VA Loan

Background: The VA loan is backed by the U.S. Department of Veteran Affairs for active duty military, select reserve and national guard servicemembers, and certain spouses. The VA loan can also be used on multi-family homes (up to four units) as long as it’s your primary residence.

Eligibility requirements:

  • Down payment: 0%, 5%, or 10% down
  • Credit score: No credit minimum, but 620 or above is preferred
  • Debt-to-income ratio (DTI): Maximum is generally 43%

Other VA loan details:

  • Seller contributions: The VA allows for the seller to contribute 4% of the sales price. The VA is specific on how you can use these contributions.
    • Here’s a list directly from the VA Loan Guide on what seller concessions can include:
      • Payment of the buyer’s VA Funding Fee
      • Prepayment of the buyer’s property taxes and insurance
      • Gifts such as a television set or microwave oven
      • Payment of extra points to lower your interest rate
      • Payoff of credit balances or judgments on behalf of the buyer
    • Seller concessions can not include:
      • Payment of the buyer’s closing costs, or
      • Payment of points as appropriate to the market
  • Wait period after adverse credit history:
    • Discharged Chapter 7 bankruptcy: Two years from the discharge date; no late payments are allowed during this two-year period.
    • Discharged Chapter 13 bankruptcy: 12 months of on-time Chapter 13 payments, as long as the trustee approves the new mortgage loan.
    • Foreclosure, deed in lieu of foreclosure, and short sale: Three-year wait.
    • Loan Modification: One year wait after a loan modification (contingencies apply). A loan modification is when you change loan terms like interest rate or loan term length to make payments more affordable. Lenders can do this if you’re having trouble making payments.

USDA loan

Background: The USDA loan is another government-backed loan obtained through the U.S. Department of Agriculture. The purpose of this loan is to spur development and encourage homeownership in suburban and rural areas. The USDA loan is only available in specified locations, but you may be surprised to find out that there may be some qualifying places near you. There are income limits for this home loan. Learn more at www.rd.USDA.gov.

Eligibility requirements:

  • Down payment: 0%
  • Credit score: 640 typical score; 650 or above is preferred
  • Debt-to-income ratio (DTI): The maximum is generally 41%

Other USDA details:

  • Seller contributions: No limit per USDA guidelines; most lenders limit it to 6%. Closing costs can be financed into your loan.
  • Wait period after adverse credit history:
    • Discharged Chapter 7 & Chapter 13 bankruptcy: Three years from discharge date.
    • Foreclosure: Three years.
    • Deed in lieu of foreclosure & short sale: If you had a number of issues (determined by the lender/USDA), the deed in lieu of foreclosure will be viewed as a foreclosure and you have to wait three years. If your scores are over 640, your underwriter decides if you're eligible to purchase using USDA within one year.

Conventional loan

Background: The conventional loan is the plain Jane of home loans. It’s not a government-backed loan, but meets the requirements set by Fannie Mae and Freddie Mac, which are two government-sponsored agencies. Lenders have a wide variety of conventional loan products. Some even allow for a low down payment. Shopping around is the key to getting the best conventional loan.

Eligibility requirements:

  • Down payment: As low as 3%, but can be higher for conventional loans
  • Credit score: 620; 640 to 720 or higher preferred
  • Debt-to-income ratio (DTI): Up to 50%

Other conventional loan details:

  • Sellers assist may be allowed: Sellers can contribute anywhere from 2% to 9% of the sales price to your costs depending on your down payment. Most lenders want you to have the funds for your own down payment and will allow you to use seller concessions towards closing and other settlement costs.
    • General rules:
      • Down payment under 10%: Seller concession up to 3%
      • Down payment between 10-25%: Seller concession up to 6%
      • Down payment 25% or more: Seller concession up to 9%
  • Wait period after adverse credit history:
    • Discharged Chapter 7 bankruptcy: Four-year wait.
    • Discharged Chapter 13 bankruptcy: Two-year wait.
    • Deed in lieu or short sale: Four-year wait.
    • Foreclosure: Seven-year wait.

Your Task

After reading through these popular home loans, your task is to pick out the home loan you are considering.  

You can do a bit of independent research on the loans to get more details. Keep in mind that the above is just an overview. There’s quite a bit of nuance to home loans and different lenders can have different requirements.

After you’re finished with that task, you’re done for the day!

Don’t forget to reach out to your accountability partner(s) and check into the Dream Catchers: LIVE RICHER group.

Share what you’ve learned today with your tweeps:

Today I learned about popular home loan products and what may be required to get approved. Day 10: #LiveRicherChallenge Click To Tweet

Live richer,

Tiffany

You can reach out to me here:

Twitter: @thebudgetnista

Instagram: @thebudgetnista

Facebook: The Budgetnista

Private Forum: Dream Catchers : LIVE RICHER

Want to work through the Live Richer Challenge: Homebuying Edition in a workbook? It's part of a bestselling series!

Click the link below and get your copy.


P.S. If you haven't already... Get your Challenge Freebies from our Live Richer Challenge: Homebuying Edition coauthor, Netiva Heard. Click the pic below if you'd like to learn more about Netiva's services. You'll receive a discount! Just let her know you're a Dream Catcher.


P.P.S. Here’s a copy of the Challenge Calendar. It’s a fun way to keep track of your progress.

P.P.P.S. Don’t forget to get your free Live Richer Challenge: Homebuying Edition Starter Kit. Download it HERE.

My Lisa Rule: I have 4 sisters and Lisa is the baby (well she’s not a baby anymore). Of all of my sisters, I’m the most protective of her. Before I share any product or service with you, it must pass my Lisa Rule.

What’s the Lisa Rule? If I would not advise Lisa to use a product or service, I won’t advise you to. YOU are my Lisa. I feel protective of you and your financial journey.

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Tiffany “The Budgetnista” Aliche is quickly becoming America's favorite, personal financial educator. The Budgetnista is also an Amazon #1 best selling author (The One Week Budget and Live Richer Challenge), sought-after speaker and teacher of financial empowerment.
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