GOVERNMENT PROGRAMS FOR CONDOS AND TOWNHOUSES
Both the state and federal governments have special loan programs to help purchase a condo or townhouse. These programs range from outright mortgages to down payment assistance programs aiding those who are having trouble finding money to close on a property.
Some of these programs require that the buyer be a first time homebuyer or make a certain amount of money, while others have no requirements whatsoever. Either way, it makes sense to explore any available government programs that can help.
Conventional mortgages that are backed by Fannie Mae and Freddie Mac aren't direct loans. Fannie and Freddie don't make mortgage loans; they just buy them from lenders. It's the lender that's on the hook if the mortgage loan goes bad. With government loans, if the loan goes bad the government will guarantee a certain portion of it. There are two types of government-backed mortgages: VA and FHA loans.
Backed by the Department of Veterans Affairs, VA loans are hands-down the best option for those who qualify. VA loans require zero money down while offering interest rates just as competitive as those issued for conventional loans.
Historically, VA loans could only be placed on owner-occupied single-family residences, townhouses, and condominiums — but not cooperatives. Recently, legislation was signed that allowed for VA financing to be made available to those wishing to buy a co-op in New York City. Other cities may soon follow suit.
But VA loans aren't available for everyone. In fact, they're only for people who have served in the armed forces.
In 1944, Congress enacted the GI Bill, giving those who served in World War II various entitlements as a “thank you” for serving their country. Education benefits, pensions, and medical and housing assistance were provided for qualifying veterans.
Today, there are around 25 million who qualify for a VA loan and those people include those who served in the armed forces, active-duty personnel who have served at least 181 days, those who are in the National Guard or Reserve, and spouses of deceased veterans who died as a result of service-related injuries.
If you fall into one of these categories, you should explore the VA loan first. You'll need to obtain a certificate of eligibility from the federal government.
Conventional loans require that you make a down payment of at least 5 percent. And remember, if your first mortgage is more than 80 percent of the sale price you'll need mortgage insurance.
VA loans require no down payment and no mortgage insurance. They do, however, have a requirement for a VA funding fee — about 2.15 percent of the loan amount. It is this fee that the VA uses to provide funds to lenders when borrowers default; it is a requirement on every VA loan.
However, the funding fee may be rolled into the loan and not be paid out of pocket. In fact, every VA loan I've ever done had the funding fee rolled into the loan.
Lef s compare a VA loan with a conventional one with minimum down payments for each.
SALES PRICE $300,000
Payment at 6.50%
You can see that even when the funding fee is included in the loan amount, the total monthly payment is still less than a conventional loan that requires a mortgage insurance policy. You also save $15,000 in down payment funds, which can be used for other things such as closing costs, remodeling, savings, or investing.
Beyond their eligibility requirements, VA loans have no special requirements or limits compared to conventional loans. In fact, there are even provisions for using VA financing when the sale price is above the conforming limit. This is known as the “VA Jumbo.”
For years, the Veterans Administration has allowed VA Jumbo loans. But hardly anyone knows about them. The current VA loan limit with zero down is $417,000, matching the conforming loan limits set by Fannie Mae and Freddie Mac. But the VA does make allowances for VA loans above that amount — way above. Say around $700,000.
Jumbo fixed rates can be anywhere from 1.00 percent to 1.50 percent higher than conforming rates. That's a lot, and it has many Jumbo buyers in a quandary. A 30-year fixed conforming rate might be 6.00 percent while a similar Jumbo rate could be 7.50 percent. It did not used to be so vast a spread. Prior to the recent mortgage mess, Jumbo rates were typically about 1/4 to 1/2 percent higher than a conforming loan. But not so with a VA Jumbo loan. VA Jumbo rates are about a 1/4 percent higher than conforming rates. And loans can be as high as $700,000. So how does this work?
First, if you're a qualified veteran or reservist in search of a no-money-down loan, there simply is no better home loan out there. Even when every lender on the planet was shouting, “No Money Down!” for their home loans, they couldn't hold a candle to a VA loan when comparing rates and closing costs — as long as the VA loan didn't exceed $417,000 ($625,000 for Alaska and Hawaii).
But a little “quirk” in VA lending allows for VA loans above $417,000 as long as the veteran comes up with some down payment — same as with any Jumbo mortgage.
To figure out how much down payment a veteran will need, simply multiply the amount of the sales price over $417,000 and take 25 percent of that. For instance, a home sells for $650,000. Now subtract the maximum zero-down VA loan amount of $417,000 and you get $233,000. Twenty-five percent of $233,000 is $58,250. That's the down payment needed from the veteran.
That works out to about 9 percent down payment on a $650,000 home! As on all VA loans, there is a funding fee of about 2.2 percent of the loan amount. But that can be rolled into the loan and not paid out of pocket. In this example, the final loan amount would be about $604,750.
With a conventional Jumbo loan, you'd need 20 percent down and pay a higher rate, say 7.50 percent compared to 6.25 percent.
Not all lenders will offer this program, so you'll need to do a little homework. And even those who do offer it may have their own VA Jumbo limits. But if you're in the Jumbo market and are VA eligible, then you need to explore this option because most Jumbo loans will require a larger down payment along with the higher rates.
VA loans also restrict certain closing costs, further protecting the veteran. Well discuss closing costs in detail in chapter 7, but the only fees that are allowable for the veteran to pay are those for;
Title and title-related fees
Origination fees or discount points
An easy way to remember which charges the veteran may pay is to simply remember the acronym ACTOR.
Sometimes, however, this restricted closing-cost benefit can be a hindrance. For instance, there might be a lender's loanprocessing fee or a document-preparation fee. The veteran does not pay these fees. So who does? Either the lender or the seller.
But sometimes — especially when closing costs that can't be charged to the veteran add up to $1,000 or so — sellers might not be inclined to pay those fees and they'll reject your offer.
Typically, your Realtor will negotiate to get the seller to pay those charges. Many contracts are made with the seller offering to pay certain closing costs; a contract can be written specifying that the seller pay the veteran's “nonallowable” closing charges as part of the deal.
What if the seller is not willing to pay? If the real estate market is doing well the seller may simply decline your offer. If that's the case, you may consider changing your offer to reflect the amount of closing costs you're willing to pay.
For example, say your nonallowable closing charges add up to $1,500. You offer $200,000 and are rejected because of the additional closing costs that the seller does not want to pay. You could simply increase your offer to $201,500. Yes, your loan amount will go up slightly, but now the seller can pay those additional costs while still netting the same amount.
Some veterans believe that because they are eligible for the VA program they will automatically qualify for a loan. That is not the case. You still need to qualify for the loan in terms of credit and income. If there are credit issues or your debt ratios are too high, then you may not qualify for the loan — and your certificate of eligibility won't matter.