The ABC's of New Home Language: Part 1 The Alphabet Soup of Government Loans
Congratulations, you´ve decided to improve your life by buying a new home! You and your family are about to embark on one of the most rewarding journeys you´ll ever take. Before you start, however, here is some information that will help you navigate through the alphabet soup of acronyms, abbreviations and initials you´ll start hearing from new home sales people and loan officers. I call it the ABC´s of New Home Shopping language. Familiarity with these terms will make you more confident in your own level of knowledge throughout the shopping process, your ability to ask the right questions, level the playing field a bit by providing you with information, and make the entire new home shopping experience more enjoyable. Let's get started so you can... get started!
VA, FHA, and USDA are all classified as government loans; one of the two basic categories of new home loans, (the other category is conventional loans). Government loans are made by banks but secured by the government. Conventional loans have no government backing. Veterans Administration (VA) Loans are intended for military veterans or their spouses, will allow 103.15% financing without lender´s mortgage insurance (LMI or PMI see below), will allow a monthly payment up to 41% of the a the gross monthly income (with some conditions), and will allow a maximum loan of 625,500 with no down payment. Private Mortgage Insurance (PMI) or Lenders Mortgage Insurance (LMI) is an insurance policy, that in many cases must be purchased by individuals if they plan on financing over 80% of the value of the home to insure that the lender will be paid in the event the buyer defaults on the loan. If you or your spouse is a veteran, a VA loan is generally something well worth considering.
Federal Housing Administration (FHA) loans are also made by private lenders (banks) but are insured by the federal government. Started during the Great Depression, this program was originally intended to help lower income families purchase a home and increase employment by encouraging new home building. This program allows first time buyers to put down as little as 3.5% on their new home and receive up to 6% of the closing costs, significantly reducing one large barrier to entry for many prospective new home buyers. In most states (counties) FHA limits the loans to $271,050 for single family dwellings, but the actual amount in the area you´re buying your new home may vary, so it´s best to check with your local mortgage expert. These loans do not waive mortgage insurance as do the VA loans. FHA will allow a housing payment of 29% of a family´s monthly income.
The United States Department of Agriculture Rural Housing Service (USDA RHS), was established in the early 1990´s to provide home ownership opportunities to individuals. Originally considered a farm financing agency, with the outward expansion of cities, many areas once considered "rural" are now just the outskirts of popular cities and thus, homes in these areas are eligible for USDA loan programs. To be eligible, an individual must have a reasonable credit history, and have a monthly income that falls within a certain range. Different levels of income allow for various amounts of assistance. Housing must be modest in size, design and cost. Many new home builders are building new homes in areas that qualify for this program and it is an ideal program to purchase a new home for many families.
Understanding some of the ABC´s of new home shopping language will give confidence and knowledge as you start your new home search.
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