What’s the Difference Between an FHA and a USDA Mortgage?

The vast majority of first time home buyers purchase their first home with using either an FHA or a USDA home loan for their financing.  These two options offer some great advantages as well as some negatives.  Let’s take a look at the differences.

 

Hopefully after watching that video you have a bit better understanding of the difference between an FHA and a USDA home loan.

FHA Loans

FHA loans are by far the most popular of all loan options for first time home owners.  The unique combination of low down payment, lenient credit qualifying, artificially low interest rates along with no income limits or property geographic limitations make this the loan of choice.

These loans are sponsored by the Federal Housing Administration (FHA) in order to increase availability of mortgage financing to those who have only a small down payment but still would like to purchase a home.

USDA Loans

A USDA loan, where available, offers true 100% financing.  Obviously, this makes it a very popular program.  All that glitters is not gold, however, as I explained in the video.  I’m not opposed to using the USDA loan but I do believe strongly that a home buyer should clearly understand what they’re getting themselves into here.

The obvious advantages is the fact there is no down payment and there is no monthly mortgage insurance.  But nothing is free.  The USDA loan is no exception.  The not-so-obvious disadvantage is that you are adding over 3.5% of the purchase price onto your loan in the form of a reservation fee.  Therefore you are actually borrowing not 100%, but 103.5% of the purchase price.  Additionally the loan is only available on certain addresses.  Basically the program is designed to encourage “rural” housing.  In other words, to increase sales of homes outside of major cities like Fort Wayne.

Why is that a big deal?  Well, when you go to sell a home here in Indiana you need roughly 10% equity in the property just to break even (after paying pro-rated taxes, Realtor fees, closing costs, etc).  With a typical 30 year loan this borrower will not have 10% equity in their home (starting with 103.5% and assuming flat housing prices) for roughly 7 years!  So, you’ve made your mortgage payments from August 2011 all the way through August 2018, you go to sell your house and walk away with… Nothing?  Ouch!

Now pointing this out won’t be popular with many Realtors and even more builders.  Builders can charge a premium for homes in areas that offer USDA 0% down financing because it EASY to get into the house.  If you plan to purchase one of these home because you can get in with very, very little “skin” in the game, just remember, it’s “pay me now or pay me later.”  Facts are the facts and you deserve to understand your options.

Personally, I encourage buyers who are using the USDA loan to set up AUTOMATIC extra principal payments along with their mortgage payments.  On a $100,000 mortgage you can dramatically reduce your principal balance quickly by just adding an additional principal payment of 10% of your payment each month.  Many people I’ve seen have the best of intentions, but unless it is set to AUTOMATICALLY get paid, alas, the extra payment loses out to an iPad, or braces, or a cruise, or even Starbucks.  Don’t let that be you!

For a detailed post on USDA loans click here.

Your next loan in Indiana

When you’re ready to get your next loan in Indiana, I would love to help you.  My pledge, as always, is to treat your money as if it were my own.  I will treat you as a friend, not just a file.

Sincerely,

Chris Sanderson
Tech Savvy Lender
260-414-3511

Top Secret Mortgage Payment Calculator

Top Secret Mortgage Payment Calculator

After many years as a mortgage loan originator I was frustrated by how difficult it was to quickly give a Realtor or a home buyer an accurate estimate of the money they would need for closing.  Sure, we all have access to mortgage payment calculators, but that won’t tell you how much you’ll need for closing, the difference between lender-paid closing costs, interest rates, etc.  Furthermore, I could not easily email or print out samples from a mortgage payment calculator. 

Soooooooo, I came up with a fabulous idea, if I do say so myself!  It tested every “tech savvy lender” bone in my body, but I developed my top secret mortgage payment calculator!  Watch the video to see it in glorious action!

What do you think?  How cool is that!?!  Realtors and borrower alike were shocked to see how effortlessly I could accurately estimate their monthly payments and money needed to close, etc.  Within 2 minutes this top secret mortgage payment calculator can knock out what loan origination software used to take 15 minutes to do.  Who wants to wait around 15 minutes????  Not me.  Not you.  Not my borrowers.  And certainly not the Realtors I deal with.

Attention Realtors and home buyers in northeast Indiana: Why not program my name and phone # in your cell phone so you can call me to get a quick sample?

Chris Sanderson, Tech Savvy Lender
Ruoff Home Mortgage, Fort Wayne, Indiana
mrchrissanderson@ruoff.com
260-414-3511
http://www.facebook.com/techsavvylender.com
http://www.twitter.com/techsavvylender

Zero Down Mortgage? Yes, With The USDA Home Loan

Zero Down Mortgage?  Yes, With The USDA Home Loan

As a loan originator, I get lots of questions from home buyers and Realtors about 100% financing. After the recent home mortgage meltdown crisis, nearly all 100% financing options went bye-bye. USDA, however, did not!  In fact, with the USDA home loan you can actually borrow 103.5% to cover the one-time 3.5% reservation fee.

Maybe the best part of all is that even though you are putting no money down, unlike an FHA loan, with a USDA home loan at 100% financing there is currently NO PMI (private mortgage insurance).

Here’s a quick video I did with Vince  Maloney of the USDA (United States Department of Agriculture).  Vince and Trisha Viscardi of Chase Home Lending were in Fort Wayne, Indiana to put on a seminar on the USDA rural Housing program.

There are a few basic limitations, however. The main two are income limitations (maximum family income of a family 1-4 people is roughly $75,000 in Indiana), and location (house must be located in an approved area).

No USDA on thisun!

In our neck of the woods here’s the qualification map.  The shaded areas are NOT eligible, which leaves a TON that IS eligible.  🙂

When you go to the “real” map on the USDA or Chase’s web site, you can zoom in and easily see the boundaries for the USDA 100% home loan .  You can even enter in your property address and it will tell you whether or not that address is eligible for a USDA guaranteed home loan.  Pretty slick!

Here’s the link to the maximum income limits for Indiana

Finally, here’s some addition USDA Home Loan “fine print” for you detail-oriented types. ;-P 

• Monthly mortgage insurance to begin fiscal 2012, which October 1, 2011.  The Guarantee fee will drop to 2% and a monthly MI premium of .30 will be added to all USDA loans. 
• Education for first-time homebuyers is no longer required by USDA in Indiana.  Some investors overlays may still require it, however.
• Soon all of Aboite Township will NOT be eligible for the USDA Home Loan.  
• Can finance closing costs up to 100% of appraised value, not including Guarantee Fee. With Guarantee Fee can finance 103.5% of appraised value
• Unlimited seller contributions allowed
• Unrestricted gift funds, can come from any source other than an interested party.
• Extra ways you can stay under the maximum income:  Can deduct child care costs dollar for dollar from household income for children 12 and under. You can deduct $480 per dependent under 18. You can also deduct $400 per household member over 62 off of the annual household income.
• Derogatory credit after a BK will be tough from now on
• If a borrower had bad credit before owning a home or having any time of living expense (rent, etc) it will be tough to get an approval
• A 660 score and above will allow for unsecured funds for closing (putting cash to close on credit card, for instance).
• The USDA Guarantee Fee can be partial financed. This is unlike FHA where the MIP has to be either entirely paid in cash or entirely financed. The seller or the lender can pay just a portion or all of the Guarantee Fee and the borrower can finance the difference
• No Pest Inspection or Septic Inspection will be required unless addressed in appraisal.
• A Water test is always required on private wells for a USDA home loan.
• Required repair items for escrow cannot exceed $10k or 10% of loan amount, the lesser of the two. The home must still appraise for no less than the proposed loan amount.
• In RARE situations a USDA home loan CAN be approved even when the borrower owns another property.  If the borrower has a 50 mile or more commute, if the house too small for family (outgrown), other home not affixed to foundation (mobile home).  Caution on these!  Case by case.

For questions about the USDA home loan program, FHA loans, VA loans (and every other conceivable type of home loan / home mortgage program), please contact me, Chris Sanderson, Fort Wayne’s own Tech Savvy Lender, at 260-414-3511 or shoot me a quick email at mrchrissanderson@ruoff.com.  🙂

To your abundant success,

Chris Sanderson