What About FHA or VA

Loans? The government, except in some rare instances, does not lend mortgage money directly to consumers. It does, however, insure or guarantee lenders, who thus are willing to give you a mortgage, oftentimes at better than conventional nongovernment rates.

What Is the FHA Program? FHA mortgages are insured by the government and are offered through most lenders, such as banks. Generally the down payment is low, under 5 percent. The interest rate, however, is usually competitive with conventional loans. The big problem with FHAs is that the ceiling, or maximum amount for FHA loans, is relatively low. As of this writing it is at $210,000. If you get a new FHA loan, you’ll have to pay the insurance premium for the loan up front. (See the explanation for the similar PMI in the previous article.) The premium is fairly high close to 4 percent of the loan amount. You can, however, add the premium to the loan, although this does increase your monthly payments. Additionally, you are required to occupy the property as your residence in order to get a low down payment, and the property itself must pass a strict qualifying appraisal. There are generally no prepayment penalties for FHAmortgages and they are partially assumable. (That means that the buyers must qualify as if they were getting a new FHAloan. However, generally they can assume the sellers’ loan at the existing interest rate.)

What Is the Veterans Program? Some loans are guaranteed by the Veterans Administration. The guarantee is not to you, but to the bank or S&L that makes the loan. These mortgages offer competitive interest rates and, in many cases, no down payments and reduced closing costs. In order to get a VAloan you must have been on the active list in the armed forces during certain periods of time. (These change periodically check with the Veterans Administration for the current requirements www.va.com ) In addition, the property must pass a rigorous appraisal. Finally, you must plan to occupy the property. VAloans are usually nothing down to you, and the seller must pay most of the closing costs. However, as with FHAloans, the maximum amount is relatively low (around $240,000 as of this writing). Further, in general, they are fully assumable. You can sell the property and the buyers can pick up the loan at the existing interest rate. However, once you get a VA loan, you are on the hook for that loan for as long as it is on the property. Even if at some later date you sell the property, you may still be responsible for the loan! If the future buyer defaults, the VA could come looking to you for repayment! You must get a release of responsibility from the VA at the time someone else buys to fully get off the hook. (But that next buyer must then qualify as a veteran.)

What Is a Graduated-Payment Loan? Less popular today than in the past, loans with a graduated (instead of fixed) payment can be incorporated with almost any other, including government loans. Generally it means that you pay less when you first get the loan and are least able to pay. Then, presumably as your income goes up, so does the monthly payment. Don’t get a graduated-payment loan unless you’re quite certain you’re going to have an increase in income. If your income remains the same or declines, you could be in big trouble down the road.

What About Reverse-Equity (Annuity) Mortgages? After a halting start over a decade ago, reverse-equity mortgages are making a comeback. Designed for senior citizens, they allow you to live in your house and get a monthly stipend from a mortgage you put on it. The amount that you receive is added to the mortgage amount monthly, plus interest. You can stay in the house until you die; then the lender gets the place and can resell. The FHA provides probably the fairest of these mortgages.

TRAP DON’T GET THROWN OUT If you’re looking at a reverse-equity mortgage, be sure the loan provides that you can live in the property in perpetuity. You wouldn’t want to be evicted after a dozen years or so because the mortgage had grown higher than the value of the property or because you had lived longer than expected! Again, check out this feature in an FHA version. Very few lenders offer reverse-equity loans. Consult with a mortgage broker about possible sources in your area.

Should I Ask the Sellers for a Second Mortgage? If the sellers are willing, it’s probably the best mortgage you can get. There’s usually no qualifying and you can bargain for the interest rate. (You might offer a slightly higher purchase price for a lower interest rate.) Many sellers, however, cannot give a second mortgage because they need to cash out in order to buy another home. Others are reluctant, fearing you might not make the payments and they would have the considerable expense of foreclosing and taking the property back. You can also get a second mortgage from an institutional lender such as a bank. Here the second mortgage typically has a higher interest rate than the first.

Watch out for “balloon payments” on seconds. This results when the mortgage is not fully amortized when the monthly payments do not fully pay off the principal. At the end of the term on a seller’s second, you could end up owing a substantial amount of money. For example, if you borrow $10,000 at 10 percent, interest only, for 7 years, at the end of the term, you still owe $10,000! (It was interest only!) Of course, seconds can be amortized, or paid off monthly. However, many seconds have payments that only partially return all the principal. This is frequently the case with a mortgage that is “amortized for 15 years, due in 5,” which is similar to the short-term fixed-rate loans discussed earlier. This means that the monthly payment is high enough to pay back the loan in 15 years. But you owe it all back in 5 years. When the fifth year comes around, you still owe most of your principal. Now you must either dig deep into your pockets or refinance.

What Are Discount Prepayment Mortgages? More recently entering the market are discount/prepayment loans. These typically offer you a discount on the interest rate or in the form of cash back if you agree not to pay off (prepay) the mortgage for a set period of time. For example, the lender may offer you a $1000 discount provided you won’t prepay within three years. If, however, for whatever reason you must prepay before the time limit, you are subject to a hefty penalty, sometimes six months’ worth of interest. To many people this sounds great. The lender is paying you when you borrow the mortgage. However, it could be a poor bonus if your fortunes turn and you suddenly need to refinance. If you do, the penalty could hurt. In most cases, there is no penalty if you sell instead of refinance during the prepayment phase of the loan.

Beware of lenders who offer a very low incentive discount, a very long prepayment period, and a high penalty. The vast majority of real estate agents are very hardworking people whose goal is to serve you by getting the best home on the market for you. Along the way, however, there are a few agents who are simply incompetent or unscrupulous, or who really don’t work very hard at all. Since you’re very likely to work with an agent when you buy a home (around 85 to 90 percent of all homes for sale are listed with agents), you need to be sure you get a good one. Most people think picking real estate agents is like picking apples out of a barrel. There are going to be a few shiny ones here and there, a few bad ones on the bottom, but overall they are going to be pretty much the same. Unfortunately, that’s simply not true. Yes, there are always a few bad apples, but the real distinction has to do not so much with ethics as with ability. Some agents are able to help you, but some are not. It’s important to understand what I mean by “ability.” I’m not talking about understanding the laws of your state with regard to the licensing of agents or the selling of real estate. Today, in all states agents must pass strict tests as well as continue their education to make sure they understand what their legal and fiduciary responsibilities are. In this sense, the overwhelming number of agents are capable. It’s when it comes to serving your needs that many fall down.