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| Link to Lenders | Credit Reports and Scores |
| Prequalification and Preapproval (UC) | Low Down Payment Programs |
| Conventional Loans | Appraisals and CMA's |
| FHA/VA Loans | More Than You Wanted to Know |
[This section is under construction]
A vital element of the financing application process is running a credit report. It is absolutely in your best interest to obtain a copy of your credit report before paying any mortgage application fees. This will give you an opportunity to discuss any issues on your report with your lender beforehand, as well as give you time to prepare written "letters of explanation" addressing each issue.
If an error is detected, you should notify the credit agency who will, in turn, investigate and record the status of the error within a "reasonable period of time" unless the dispute is irrelevant or frivilous. If the agency cannot verify the accuracy of the error, it must delete it. Furthermore, if there are items in your report that you think really deserve an explanation on your part, you can submit a "brief statement" that will be disclosed with each subsequent credit inquiry.
Any company that requests information must have a legitimate need to do so, as defined by federal law. The credit reporting companies are regulated heavily since 1971 under the Fair Credit Reporting Act (FCRA). The FCRA outlines your rights regarding rights to view and contest the information contained in your report as well as rights regarding access to credit information. Generally, the types of entities requesting credit information are: Credit grantors (banks), collection agencies, insurance companies, and employers. Lenders usually obtain information from one or several of the large credit reporting companies such as those above. If there are errors on your report, it is best to find and correct these as early as possible in order to get to the closing table on time.
Credit Scoring Credit scoring is a method of assessing your credit worthiness based upon the number of times you have been late in making payments on three types of loans; Mortgage/Rents, Revolving Accounts (credit cards for example), and Installment loans such as car payments. The index is really a reflection of your willingness to pay back loans granted to you. The higher your score, the better your chances of obtaining favorable credit. An example of a scoring model is below:
| Payment Characteristics for: | ||||||||||||||||
| Mortgage | Rev Accts (CC's) | Inst. (Cars) | ||||||||||||||
Credit |
Debt |
Max |
Days Late | Days Late | Days Late | |||||||||||
Score |
Ratio |
LTV |
30 |
60 |
90 |
30 |
60 |
90 |
30 |
60 |
90 |
Bankruptcy/Foreclosure | ||||
| A+ | 670 |
36 |
95 |
0 |
0 |
0 |
2 |
0 |
0 |
1 |
0 |
0 |
None Allowed Within 10 years | |||
| A- | 660 |
45 |
95 |
1 |
0 |
0 |
3 |
1 |
0 |
2 |
0 |
0 |
Minimum 2 Years, Re-Established Credit | |||
| B | 620 |
50 |
85 |
2 |
1 |
0 |
4 |
2 |
1 |
3 |
1 |
0 |
Minimum 2 Years, Some Lates | |||
| C | 580 |
55 |
75 |
4 |
2 |
1 |
6 |
5 |
2 |
5 |
4 |
1 |
Minimum 1 Year | |||
| D | 550 |
60 |
70 |
5 |
3 |
2 |
8 |
8 |
4 |
7 |
6 |
2 |
Discharged | |||
| E | 520 |
65 |
60 |
6 |
4 |
3 |
10 |
10 |
6 |
10 |
8 |
3 |
Possible Current | |||
An A+ score of over 670 is a lenders dream! The borrower with a score in that range will likely be able to get a low interest rate and very fast processing time. Scores of 660 and below generally speaking get progressively more time consuming, labor and paperwork intensive, and may carry a higher interest rate as the score drops. As the speed of information processing increases, via computerization and/or internet, credit scoring will become more and more important.
What’s Found in a Credit Profile The profile shows your trends and behavior with respect to paying back your creditors and other financial obligations. Generally contains information on identification, credit, public records, and inquiries made concerning your credit. What’s not found there is information regarding income, race, religion, political affiliations, health, criminal records, or driving records.
What Makes Low Down Payment Loans Possible? In a nutshell, mortgage insurance does! The insurance protects the lender (not the borrower) against financial loss if a homeowner stops making mortgage payments. Mortgage companies usually require this insurance on low down payment loans. When a homeowner fails to make the mortgage payments, a default occurs and the home goes into foreclosure; a situation that no one except a ruthless foreclosure investor/buyer likes. The homeowner loses the house and all of the money put into it and takes their credit rating down the tubes right along with it.
Enough of the scary stuff. The important thing for the parties to understand is that its vitally important that the family buying the home can really afford it, not only at the time it is purchased, but throughout the time period of the loan.
The mortgage company's decision to use mortgage insurance is driven by the requirements of investors in the mortgage market, specifically in the secondary mortgage market. Many lenders will underwrite the mortgage loan, then sell the loan to investors, thereby receiving more money to loan again. This is very common practice, and is beneficial to all participants. To quell their fear of losing money on an investment, major investors require mortgage insurance on all loans made with low down payments. The three primary investors in home loans are Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac) and Government National Mortgage Association (Ginnie Mae). By purchasing and selling residential mortgages, Fannie Mae and Freddie Mac help keep money available for homes across the country. Unlike Fannie Mae and Freddie Mac, Ginnie Mae does not actually buy mortgages. It adds the guarantee of the full faith and credit of the U.S. Government to mortgage securities issued by mortgage companies.
Private mortgage insurance is available on a wide variety of home loans and there are few limits on the loan amount.
With the wide variety of loans available, home buyers have the freedom to choose the type of loan that best suits their needs. Compare the types of mortgages offered by lenders and shop for the best price and terms. Best of all, working with a mortgage insurer can be very easy, whether your loan is insured by the FHA or a private mortgage insurance company, because your lender handles all of the arrangements. By making lending money to home buyers safer, mortgage insurance helps more families get into homes of their own.
Anyone can apply for FHA insurance, the other two government mortgage guarantee programs are much more targeted. The VA program is limited to qualified, eligible veterans and reservists. This program is very specialized and not all local lenders offer VA loans. The FmHA insures loans for the construction and purchase of homes in rural communities and is quite common in the Jackson County market area.
Low down payment mortgages can be insured in two ways -- through the government or through the private sector. Mortgages backed by the government are insured by the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA) or the Farmers Home Administration (FmHA).
Home buyers generally make a down payment of at least 5% of a home's value to be considered for private mortgage insurance. However, under some special programs, the down payment could come from a gift or grant to cover 2 of 5% down payment required by private mortgage insurers, leaving just 3% of buyer funds required. The gift or grant may come from a friend, relative, community group or other organization. Loans and gifts can help with your down payment but you can not use this strategy for all loan programs. The most popular program for this tactic is the Federal Housing Administration or FHA. FHA allows 100% gift funds for your down payment. The gift can be from any relative or can be collected through new innovative programs that your lender can describe fully. It is also possible to borrow from your 401K program, withdrawing without penalty for your down payment with an agreement to pay it back (to yourself!) over a specified period.
Qualifying for a Low Down Payment Loan The banks, while willing to fund a low down payment loan, will have a few requirements, including but not limited to, sufficient income to support the payment, some down payment funds, cash for closing costs and expenses, good credit background, a cash reserve to cover a couple of mortgage payments (varies), and a solid appraisal supporting the loan and purchase price. Closing costs typically consist of a loan origination fee, points, prepaid homeowner's insurance, appraisal fee, closing fee, recording fee, title search and insurance, tax adjustments, agent commissions, mortgage insurance and other expenses. Some of these expenses are negotiable between buyer and seller, and some aren’t. Your lender is required to give you a "good faith estimate of funds needed to close" within three days of application, and frequently before you get up from the application table.
There are many affordability programs, both government and conventional, that have more lenient requirements for families of low to moderate income levels; what is found below are simply guidelines. Your lender has the percentages that are most appropriate.
| Program | Housing Ratio |
Total Debt Ratio |
| Conventional | 28% |
36% |
| FHA | 29% |
41% |
| VA | 31% |
41% |
CountyRealty can perform a quick estimate of affordability and the price range of homes to begin looking at. Just ask.
Down Payment Assistance Many local and state agencies run bond programs to generate funds to help individuals and families with a down payment. IHFA has income requirements and price maximums which consider the number of persons in a household, and are definitely worth checking out. Application and documentation for these programs is quite involved, but getting into your own home is worth it! They want to help Hoosiers enjoy home ownership, but there is a limit to their funding. They get pools of money and generally loan it all out pretty quickly. The state agency for Indiana is http://www.state.in.us/ihfa/index.html and address information is below:
Indiana Housing Finance Authority (IHFA)
One North Capitol, Suite 515 Indianapolis, IN 46204
(800) 872-0371 or (317) 232-7777
This sounds like a fairly straightforward topic to discuss, and simply speaking, it is. A conventional loan is generally one that has a down payment of at least 10-20% or more from the Buyer’s funds. For loans in excess of 79.9% of the purchase price, there would likely be some sort of private mortgage insurance, also known as PMI. The percentage paid for PMI varies with respect to how much the Buyer puts down. The less the Buyer puts down, the higher the PMI is.
The classic perception of a conventional loan was a 30 year fixed rate mortgage on a loan of 80% of the value of the home. The "80%" concept is still essentially correct and proper, however, the 30 year fixed is not the prevailing financing method of the new millenium.
Before briefly outlining a variety of financing strategies, a borrower needs to determine a few things first. The borrower must objectively determine their current financial picture, and your attitude towards risks/benefits associated with fixed vs variable interest financing. You should also take a good look into your crystal ball and consider how long you expect to stay in the home you are going to buy. Does it make sense to finance a home with 30 year money when you are fairly sure you might get a better job in another city in less than five years?
There isn't a single or simple one-size-fits-all answer whether one loan program is superior to another without considering the your financial objectives. For example, a 15-year fixed-rate mortgage (vs a 30-yr fixed rate) can save you many thousands of dollars in interest payments over the life of the loan, but your monthly payments will be higher. An adjustable rate mortgage may get you started with a lower monthly payment than a fixed-rate mortgage -- but your payments could get higher when the interest rate changes. The best way to find the "right" answer is to discuss your finances, your plans and financial prospects, and your preferences frankly with the person holding the financial keys to your future, namely a mortgage professional.
The fixed rate mortgage was the most common type of mortgage program back when Mom and Dad were buying their house. This was also "way back when" when a fresh-faced college kid went to work at one company and stayed there until he retired 30-40 years later. He earned a nice, steady check and probably budgeted very effectively. The natural mortgage for that time was the fixed rate mortgage. The monthly principal and interest payment total never changed from the first payment to the 360th leaving only taxes and insurance to change the total house payment each month. These loans were structured to repay the entire loan at the end of the loan term.
A fixed rate loan is a good thing, don’t get me wrong. They are generally widely available in 30, 20, 15, 10 year structures, but likely available for whatever duration you want. Just remember, the shorter the term, the higher the monthly payment, holding all other factors constant. The best way to find the "right" answer is to discuss your finances, your plans and financial prospects, and your preferences frankly with the person holding the financial keys to your future, namely a mortgage professional.
Balloon loans are short term mortgages, generally running 5-7 years and have some features of a fixed rate mortgage. The loans amortize over a 30 year horizon, but provide for a payoff (or refinance) of the outstanding balance at the end of the balloon period. Some programs offer conversion options whereby the borrower has the option to convert the balloon mortgage to another type of mortgage after so many years. Many companies have other options such as a conversion feature at the end of the term. These are frequently referred to as Convertibles. The balloon mortgage program with the conversion option is often called a 7/23 Convertible or 5/25 Convertible. The best way to find the "right" answer is to discuss your finances, your plans and financial prospects, and your preferences frankly with the person holding the financial keys to your future, namely a mortgage professional. (Is it starting to drip in yet?)
ADJUSTABLE RATE MORTGAGES (ARM’s)
First a couple of words of wisdom regarding ARM’s. Shop intelligently and wisely, and be ABSOLUTELY POSITIVE YOU UNDERSTAND THE TERMS OF THE LOAN. Ask your mortgage professional about these and other special kinds of mortgages that fit your specific financial situation AND BE SURE YOU UNDERSTAND CLEARLY BEFORE MAKING A COMMITMENT TO THIS TYPE OF LOAN PROGRAM. Don’t get the impression that these loans are undesirable, because they serve a very distinct need in the market. The borrower must, however, understand the implications of their chosen financing method.
These loans generally begin with an interest rate that is substantially below a comparable fixed rate mortgage. This means that for the same amount of monthly payment, a borrower could obtain a higher mortgage amount because of the initially reduced interest rate charged. BUT…. (emphasis added!), the interest rate will very likely change over the term of the loan at specified intervals (for example, every year) depending on changing market conditions. And, if interest rates go up, your monthly mortgage payment will go up, too. However, if rates go down, your mortgage payment should drop too. There are also mortgages that combine aspects of fixed and adjustable rate mortgages - starting at a low fixed-rate for seven to ten years, for example, then adjusting to market conditions.
Most adjustable rate loans (ARMs) have a low introductory rate or start rate, some times as much as 5.0% below the current market rate of a fixed loan. This start rate is usually good from 1 month to as long as 10 years. As a rule the lower the start rate the shorter the time before the loan makes its first adjustment. Compare this to the flood of credit card solicitations offering "introductory rates."
Terms of Interest:
Index - The index of an ARM is the financial instrument that the loan is "tied" to, or adjusted to. The most common indices, or, indexes are the 1-Year Treasury Security, LIBOR (London Interbank Offered Rate), Prime, 6-Month Certificate of Deposit (CD) and the 11th District Cost of Funds (COFI). Each of these indices will change based on conditions of the financial markets.
Margin - The margin is one of the most important aspects of ARMs because it is added to the index to determine the interest rate that you pay. The margin added to the index is known as the fully indexed rate. As an example if the current index value is 7.50% and your loan has a margin of 2.5%, your fully indexed rate is 10.00%. Margins on loans range from 1.75% to 3.5% depending on the index and the amount financed and LTV.
Interim Caps - All adjustable rate loans carry interim caps, namely the amount the rate may change per adjustment. Many ARMs have interest rate caps of six-months, a year, or even longer. Interest rate caps are beneficial in rising interest rate markets, but can also keep your interest rate higher than the fully indexed rate if rates are falling rapidly.
Payment Caps - Some loans have payment caps instead of interest rate caps. These loans reduce sticker shock in a rising interest rate market, but can also lead to deferred interest or "negative amortization". These loans generally cap your annual payment increases to 7.5% of the previous payment.
Lifetime Caps - Almost all ARMs have a maximum interest rate or lifetime interest rate cap. The lifetime cap varies from loan to loan.
A few options are available to fit your individual needs and your risk tolerance with the various market instruments. ARMs with different indexes are available for both purchases and refinances. Some indices change more quickly than others, in response to changes in the credit markets. Choosing an ARM with an index that reacts quickly lets you take full advantage of falling interest rates. An index that lags behind the market lets you take advantage of lower rates after market rates have started to adjust upward. The interest rate and monthly payment can change based on adjustments to the index rate.
If an ARM is for you, keep a good eye on the credit markets. When you believe that rates have fallen to an acceptably low level, it would likely be a great time to either convert the ARM to a fixed rate, or refinance the note to payoff the ARM with fixed rate funds. Borrowers tend to focus on the short term change in monthly payments, but should also focus on the loan repayment horizon as well as the total interest expense remaining for the life of the loan.
Although one-year ARMs currently offer very tempting introductory rates, most experts recommend avoiding them, because you could easily find yourself facing sharply higher payments in the near future, even if interest rates don't rise. Why? The introductory rate expires and the "normal" rate kicks in, pushing the payment amount higher.
There are certain cases, however, where an ARM makes sense. If you are fairly certain you'll be moving within five years, you can save some money -- and avoid rising payments -- with a five-year ARM. CountyRealty.com would be happy to do the math for you.
The most common quote for mortgages is the 6-month quote. LIBOR's cost of money is a widely monitored international interest rate indicator. LIBOR is currently being used by both Fannie Mae and Freddie Mac as an index on the loans they purchase. LIBOR is the rate on dollar-denominated deposits, also know as Eurodollars, traded between banks in London in virtually the same manner as the Fed Funds flow between banks in the United States. LIBOR is the base interest rate paid on deposits between banks in the Eurodollar market on a dollar-demoninated basis. The index is quoted for one month, three months, six months as well as one-year periods. The LIBOR rate quoted in the Wall Street Journal and closely compares to the 1-Year Treasury Security Index.
These programs are ways for the borrower to secure a payment plan that has the effect of temporarily reducing the monthly payment for generally a short term period. In a typical buydown plan, a builder /seller advances a lump sum payment to the lender to reduce or "buy down" the interest payments due on the note from the borrower. This form of creative financing is not generally offered by the lender, but is an arrangement between buyer and seller. (But not always.) Buydowns are more common as interest rates go higher and sales activity declines.
The Graduated Payment Mortgage (GPM) is another alternative to the conventional adjustable rate mortgage, and is making a comeback as borrowers and mortgage companies seek alternatives to assist in qualify for home financing. The lower qualifying rate of the GPM can help borrowers maximize their purchasing power, and can be useful in a market with rapid appreciation. GPMs have a fixed note rate, payment schedule, and interest rates/payments generally change once per year. The important element of a GPM is that for a period of time at the beginning of the loan repayment period, the payments made by the borrower may not be sufficient to pay all of the interest due, and pays nothing towards reducing the principal amount of the loan. This is known as being "upside down" in a loan and as negative amortization. The GPM does give the borrower a chance to pay more towards the loan (if funds become available to the borrower) to avoid the negative amortization. Again, be sure you KNOW ALL THE DETAILS OF THIS SORT OF LOAN ARRANGEMENT.
The best way to find the "right" answer is to discuss your finances, your plans and financial prospects, and your preferences frankly with the person holding the financial keys to your future, namely a mortgage professional.
I know I’ve repeated this phrase over and over again, but I cannot emphasize enough the importance of your mortgage professional’s assistance. Years ago, while a salesperson, I took many buyers statements of "don’t worry about me, my financing is under control, I will talk to the banker AFTER we find a home" and I learned what a big leap of faith I was taking when I didn’t require at least a pre-qualification from the bank. I wasted many hours of time, much effort, and received nothing for it, all because the borrower thought they "had it under control" when in fact they did not. For most buyers, it’s a matter of when and not if they need the financial backing of a lender. Believe me, there is no benefit whatsoever for a buyer to wait to talk to a lender about financing. –The sooner the better!! ....Steve Freeman, Broker
First of all, it may come as a shock, but there is no such thing as a "FHA Loan". The FHA insures loans made by lenders against default for properties that meet certain quality criteria, and does extend to manufactured homes, sticks and bricks homes, even some multi-family properties. It was designed to help low and moderate income families enjoy the experience of home ownership. Even though I’ve established that there is no "FHA Loan", I will continue to use that term on this website because that’s what it’s commonly known as, and will do the same later with "VA Loans".
FHA makes sure that their loans serve their intended markets, namely low to moderate income people. There are limits on incomes as well as loan limits to make this goal achievable.
Key characteristics of an FHA Loan are low down payments, ability to finance some of the closing costs, and the limits on fees charged by lenders. The down payment can be as little as 3% down. Many of the fees and charges associated with buying a home can be financed, generally up to 2-3% of the purchase price of the home. Additionally, the up front fee can be rolled into the financed amount as well. The FHA has caps on the fees that can be charged by lenders to underwrite loans.
The FHA loan is a heck of a good deal, but does come at a price, and the price is FHA Mortgage Insurance. FHA requires a mortgage insurance premium (MIP) for its loan programs. A fee of 2.25% of the loan amount is paid at closing, which could be financed into the mortgage, which in effect requires no out of pocket expense. (You are financing that amount over the term of the loan.) Additionally, FHA requires a monthly insurance payment in addition to the up front premium. The monthly rate is equal to 0.50% of the loan amount, which is tacked onto the regular principal, interest, taxes, and insurance payment PITI. For some reason, condominium ownership does not require the up front 2.25% fee, but still requires the monthly MIP. (The government has cooked and continues to cook up all kinds of different criteria for their programs, which is why it is always best to get the most current information from your lender.) The MIP insures the lender against loss in the event of buyer default. Logic holds that if a new owner has a higher equity stake in the home from the start, the risk of default is lower because the owner has more to lose. With an FHA loan (or VA too for that matter) with a low down payment (little owner equity), the MIP is relatively high. On an insured conventional loan (90% financed) there is also insurance involved, but the premium is often considerably less.
Down Payment Gifts The down payment on an FHA loan can be 100% gift funds and verification of the source of the gift is frequently not required. All that is required is proof of deposit. Generally gifts come from a relative of the buyer, but can also come from other organizations. This is one of the key benefits to the FHA program. Another gift involves wedding gifts. Family and friends can deposit their cash wedding gifts directly into the interest-bearing account known as a Bridal Registry Account. Consumers may receive more information about the program by calling 1-800-CALL-FHA.
Improvement Loans FHA makes loans for purchases as well as home improvement loans. HUD, under Title I Home Improvement Loan program Section 203(k) offers loan products that assist in enhancing the functional utility of a home. This loan can be used by Buyers to finance the purchase (or refinance) or just to finance the rehabilitation of their existing home. These improvements include, but are not limited exclusively to, structural alterations, floor repairs, enhancing accessibility for disabled persons, reducing health and safety hazards, modernization efforts, elimination of obsolescence, plumbing/septic/well repairs, roofing/gutter systems, and energy conservation. There are, of course, limits to this product. As stated previously, ask your lender for the most current advice on this product.
FHA Loan Default In the event of a foreclosure, the borrower has three years from the date the claim was paid until he/she is eligible for another FHA loan. This period could be less if the borrower has established good credit and if the foreclosure was the result of extenuating circumstances beyond the borrower's control. Generally speaking a Chapter 7 bankruptcy requires the borrower to wait at least two years from the date of discharge and a Chapter 13 bankruptcy requires the borrower to have been paying on the bankruptcy for at least one year. Additionally on a Chapter 13, the borrower’s repayment performance must have been satisfactory and court approval must be granted to the borrower before he can get involved in another FHA mortgage. In any event, a credit report will be obtained on the borrower and any lates, collections, judgments, foreclosures, bankruptcies, etc. must have a justifiable explanation in writing by the borrower before any FHA loan will be granted.
Refunds on FHA Loans If you have ever paid off a home loan backed by FHA, you may have money owed to you. And, this is hard to write without laughing, the government really wants to pay you back but makes virtually no effort to notify you of this money. (Its like the 2000 Census – how is it that the IRS knows all about us, but the government doesn’t? Isn’t the IRS part of the government? LOL) That said, roughly 1 in 10 FHA borrowers really do leave an average of $700 in their escrow accounts at loan payoff. Former FHA borrowers who think they might be due a refund should either call 800-697-6967, or write HUD at P.O. Box 23669, Washington DC 20026-3699. Or you can look for your name by clicking here. There are also a few unscrupulous people called "Tracers" that will do the same thing you could do, for a percentage of your refund total or fixed fee.
You may find this hard to believe, but there also is no such thing as a "VA loan." Like the "FHA Loan" which is insured by the government, a "VA Loan" is a loan which is guaranteed by the government. Note the terms "insured" and "guaranteed" in the definition. I, Steve Freeman, Principal Broker of CountyRealty.com, am also a Navy veteran and proud owner of a home financed using a VA loan. I purchased an old Victorian home as well as a Carriage House (considered one property) with no money down using a VA loan and left the closing table with cash in hand. I am walking talking proof that in some cases this can be done.
The VA makes you work for it however. There are additional hoops to jump through and some fees that must be paid, but in the long run, a VA loan is worth the effort. VA loans are worth the effort because in most cases, (like mine) no down payment is required and there are limitations on the closing costs a buyer can pay. The loan maximum is generally $203,000 or up to 100% of the VA-established reasonable value, interest rates are negotiable, tremendous flexibility over repayment plans (fixed, Adjustable Rate Mortgages ARM, and Graduated Payment Mortgages GPM) VA loans can be used to build a home, buy a home, townhouse, or even a condominium unit (in a VA approved project), buy and simultaneously improve a home, refinance a loan, or to make energy efficient improvements to a home. You can also use a VA loan to purchase a manufactured home and/or a lot to put a home on.
The application process isn’t much different from other loans; the lender will verify employment, income, assets, and credit status. If the borrower checks out and the property qualifies, generally the loan will close under the VA’s established procedure. The appraisal gives the VA a CRV, which is a Certificate of Reasonable Value. It should be noted that a VA appraisal is not the same as a home inspection and does not guarantee or warrant that the property is free of defects. The VA guarantees the loan, not the home.
The VA funding fee is generally 2% of the loan amount if the loan is 100%. However, if the buyer can put down 5-10%, the funding fee drops to 1.5% and 1.25% respectively. Reservists and National Guard people have to pay a 100% fee of 2.75%, which reduces with a 5-10% down payment to 2.25% and 2% respectively. For refinances, the funding fee is 0.5%. If you are using your entitlement for other than the first time, there is a down payment requirement of 5% and a funding fee of 3%. Don’t let the VA funding fee scare you too much; it can be rolled into the financing and not be an out-of-pocket expense at the closing table. There are, however, some costs that cannot be rolled into the financing. These costs include, but are not limited to, appraisal fees, loan origination fee (not VA funding fee), points, title insurance, survey, and others. The buyer shall not pay any commissions, brokerage fees, or buyer broker fees. (Ask the Seller to make an allowance to or directly compensate your Realtors® Buyer Broker fee.)
Who is Eligible for a VA Loan? Veterans with active duty service, that was not dishonorable, during World War II and later periods are eligible for VA loan benefits. If you had at least 90 days active service during World War II, the Korean conflict, and the Vietnam War, you are eligible. If you joined the service since 1980, you must have served at least 2 years in active service. Veterans with service only during peacetime periods and active duty military personnel must have had more than 180 days of active service. Veterans of enlisted service which began after September 7, 1980, or officers with service beginning after October 16, 1981, must in most cases have served at least 2 years. For those that served in the Persian Gulf Conflict, you must have served at least 90 days active duty and discharged honorably. No Big Chicken Dinners (Bad conduct discharges) (Being a Navy vet myself, I have certain licenses J ). Members of the Selected Reserve, including National Guard, who are not otherwise eligible and who have completed 6 years of service and have been honorably discharged or have completed 6 years of service and are still serving may be eligible. The expanded eligibility for Reserves and National Guard individuals has expired. VA regional office personnel may assist with eligibility questions. Indiana VA Office: 575 N. Pennsylvania Street, Indianapolis 46204, 800-827-1000
Getting the VA Loan There are several steps that need to be accomplished in order to get a VA loan. First and foremost is getting "permission" from Uncle Sam empowering you to get the loan in the first place. The "permission chit" is the Certificate of Eligibility. You will need to make application on VA Form 26-1880 "Request for Determination of Eligibility and Available Loan Guaranty Entitlement" and submit it to the local VA office. Your lender may also be able to help you with this.
I highly recommend that a VA borrower do the following, in order. First, find your DD-214 or, if still on active duty, get your CO to prepare a statement of service showing you date of entry on your current hitch as well as the time frames of any time lost. Include a copy of your DD-214 with the form VA 26-1880 and submit the VA asap. You do not need to have a property in mind or make an offer before sending this form to the VA. A copy of the form can be obtained by calling 800-827-1000. Send it to any VA Regional Office. You must include a copy of your DD214 with the form 26-1880. If you are on active duty, you must submit a statement of service signed by, or by direction of, the adjutant, personnel officer, or commander of your unit or higher headquarters showing date of entry on your current active duty period and the duration of any time lost.
We all know how long the VA might take to return the completed form to you. Do this first, for sure. Second, talk to your lender and get the ball rolling on the application process, and get a preapproval letter from your lender. Now, go looking for a home using the services of CountyRealty! After a quick, yet thorough search, we find your ideal home and make a reasonable offer the seller accepts. Next, the lender will order an appraisal from a VA-approved appraiser, who will make a VA appraisal report. Then, the VA will likely ask for the appraisal and other application data to be sent to them for their review and comment, and hopefully approval. (This step is being automated and may be done very quickly, depending on the level of technological sophistication of the lender.) After the VA grants approval to everything, the next step is to go to closing and become a homeowner! The slowest part of this entire process will most surely be the VA, so getting their paperwork to them asap is very important.
First off, an appraisal is NOT the same thing as a Competitive Market Analysis (CMA) nor is it the same as a home inspection; each is similar in many respects to the other, but they are far from the same things. Those are three distinctively different reports and analyses. The most common reason to conduct an appraisal of residential property is to obtain a loan; specifically to provide the lender support for making the loan for a certain dollar amount. There are plenty of other reasons to obtain an appraisal, such as for tax purposes, insurance, estate (probate), condemnation, IRS mandate, legal reasons, and a variety of others. The best reason to obtain an appraisal is to provide you, the buyer, with the assurance that you are making a wise financial decision involving lots of money! An appraisal of real estate is an unbiased opinion of value of the rights of ownership. The appraiser must define the rights he intends to appraise, inspect the home, examine the market of sold and available homes that are most similar to the subject property. The appraiser also looks at economic factors affecting value, including but not limited to national, state, regional, city, and neighborhood, economic and quality of life elements and characteristics. The appraiser will then develop three different values of the property, one based on the Sales Comparison approach, the second would be on a Reproduction Cost, and the last would be based on the Income Approach (value if a rental/income producing property.) The appraiser then reconciles the values and provides an estimate of value from the perspective of a typically informed purchaser.
In many Offers to Purchase, there is a clause called "Further Conditions" and each clause should contain wording such as "Appraised value to be equal to or greater than Purchase Price." Such a clause protects the Buyer from paying too much for a property, i.e. more than the appraised value. This clause is good for two reasons, first no one wants to pay more than the property is worth, and secondly, the lender will only make a loan based on the Purchase Price or Appraised Value, whichever is less. Bear in mind, however, that when the lender orders the appraisal, a copy of the offer to purchase will be sent to and reviewed by the appraiser.
For example, if the lender agreed loan 80% of the value of the home, the offer was for $100K, and the appraised value was just $90K, the lender will only loan $72K. Assuming you had 20% of 100K offer price to put down ($20K), the amount of down payment, based on appraised value, would now be $28K. Without such a clause, there would be a good case for the Buyer to fail in obtaining financing, and could even potentially lose their earnest money as well. This is an excellent example of why Buyer’s Agents should perform CMA’s for their clients before the offer is written, as well as place the "appraisal clause" in the offer to purchase.
Just what exactly is a Competitive Market Analysis (CMA)? A CMA is a fairly straightforward analysis of value that a Realtor® will conduct for their client, either Buyer or Seller. Realtors® and appraisers do not set prices in the market; buyers and sellers do. A good Realtor® will provide their customer or client with enough relevant information to make an appropriate and informed decision regarding listing/purchase price. The CMA is an opinion of value and nothing more. Realtors® perform them by looking at the characteristics of the subject home, and comparing the features, characteristics, and amenities of the subject home against similar competing (active listings) properties as well as those that have sold recently or expired. There are some agents that are better at conducting this analysis than others based on their experience and comparison tools available.
Unfortunately, there are some agents who will list a home at the price dictated by the Seller, without full regard to the market information. These are the properties that sell very quickly (underpriced) and those that either take forever to sell or don’t sell at all (overpriced). However, there are some sellers that insist on a certain price, usually above market, and some Realtors® that will take the listing at the above market price. Still other Realtors® may take the listing at substantially above market value, hoping that the "right buyer" will come along and pay the above market price. This is a fools errand; very few buyers will want to pay more than the market dictates for a property, the Realtor® will advertise and market the property (at substantial expense to the Realtor®), a lender won’t loan as much money as the buyer needs, and the buyer will either take a loss, or not receive the maximum gain on sale when the buyer resells the home. And another vital element on the buyer’s side of the deal is this: while the Realtor® is showing that Buyer many homes in their price range, the Buyer is forming a pretty strong feel for what their buying dollars will get them. A Buyer, by viewing the market directly, builds experience to base their offer price. In short, buyers are smart enough these days to pay the right price for the home, and nothing more.
Are Realtors® stuck? Well, sort of. The Realtor® going after the listing has every right to refuse to take an overpriced listing – the seller cannot compel a Realtor® to take a listing. The Realtor® representing the Buyer is a bit more constrained. The Buyers agent must, by law, present each and every written offer to purchase to the Seller, regardless of price. A buyer could, in theory, write an offer for one dollar, and the Buyer Agent must present it. This holds true even if the Buyer wanted to pay a huge premium over asking price, even if the Realtor® knew the Buyer was overpaying. The Buyer’s agent must present every offer.
Should a Seller Obtain an Appraisal Prior to Listing Their Home For Sale? It is not a bad idea for several reasons. First, the Seller will get an unbiased opinion of market value. The Seller could make the appraisal report available for potential Buyers to see as they tour the home. The Buyers will know what the home will appraise for, and thus what the lender will loan on the home. Secondly, the Seller’s negotiation position might be improved. The Buyer may be more inclined to offer a price close to the appraised value, rather than "speculate" with a low offer. Third, it may be that the appraiser could re-certify the value of the home for the lender, at a reduced cost to the Buyer. Appraisals do cost money up front however, ranging from $100-$500 or even more, depending on your market. A good Realtor® can deliver a quality CMA and arrive at very near the same value estimate that an appraisal would, but you can’t take a CMA to a lender for a loan.
Find out More About Appraisals and Appraisers You may want to contact an appraiser or two in your local market and discuss this topic more thoroughly. You can find them in the yellow pages and they can also be found in the advertising in the homes magazines. Most states require licensing of appraisers. There are also a variety of designations / specialties that appraisers can earn. One of particular relevance is the SRA designation, Senior Residential Appraiser. For additional insights, please visit the website of the Appraisal Institute.