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 chapter.) 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 FHA mortgages and they are partially assumable. (That means that the buyers must qualify as if they were getting a new FHA loan. 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 VA loan 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.

VA loans are usually nothing down to you, and the seller must pay most of the closing costs. However, as with FHA loans, 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.

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