FHA, VA, USDA Mortgages Meet Needs of Many Homeowners in Houston, Spring, Tomball, Conroe and The Woodlands

In today’s post-mortgage meltdown environment, many prospective homebuyers in our local markets of Houston, Spring, Tomball, Conroe and The Woodlands are being denied approval by traditional lenders. Most sub-prime mortgage lenders have shuttered their doors and left investors with billions of dollars in losses from non-performing loans. Fortunately, the Federal government is offering programs that are making funds available for marginal credit borrowers, for both purchase and refinance. Unlike yesterday’s sub-prime lenders, the Feds are demanding that borrowers show a willingness to meet their obligations for at least the past 12 months. These programs are sponsored by the FHA, VA and USDA. We will briefly describe each here.

One common element of each of these programs is the generous acceptance of borrowers whose credit score exceeds only 620. Since January 1, 2009 that floor was raised from 580 reflecting the continued contraction of credit availability. However, the cash at closing minimum for these programs remains very liberal. FHA now requires only a modest (3.5%) down payment and 100% financing can be arranged through VA and USDA backed programs.

Another attractive feature of all three of these programs is that they allow the seller to contribute at least 3% toward the buyer’s closing costs. In the vast majority of today’s housing markets, sales are consummated at or below appraised value. The disparity between the appraisal and the contracted price can be applied to the buyer’s closing costs as long as it doesn’t exceed the 3% to 6% that the program guidelines allow. The buyer simply agrees to finance the higher value and the seller agrees to return that incremental value to cover the buyer’s closing costs. This is a mixed blessing for the buyer as it requires a higher loan amount which potentially adds thousands to the interest expense over the life of the loan but does allow him to bring far less to closing. Furthermore, these government approved loans also allow gifts from immediate family members, down payment assistance programs, and tax credits to further lessen the buyer’s commitment at closing. In the case of USDA and VA loans, it is common for buyers to walk away from closing with virtually nothing out of pocket even in today’s tight credit environment.

FHA loans are available to all US citizens provided that they are purchasing their primary residence only, have typical allowable debt to income ratios, have had no credit problems in the past 12 months and are purchasing a home below the maximum price as dictated for their respective county (normally $267,000 for the vast majority of US counties). FHA loans are at a fixed rate for terms of 15 or 30 years. These rates compare very favorably to the best conventional loan rates. Additionally, they carry a reduced monthly mortgage insurance premium which equates to approximately ½ the premium demanded for an identical conventional loan scenario. An up-front-premium equaling from 1.5% to 3.3% must be paid by the buyer. However, this cost can be negotiated as a seller paid concession. In other words, borrowers with marginal credit and little down payment can enjoy a very affordable rate with an FHA loan.

The USDA program offers even greater economies to the borrower. Again the qualifying credit score is around 620 and the debt to income ratios are virtually the same as FHA. However, the USDA program offers the incredible opportunity to purchase with no money down! The USDA program is designed to assist in the development of rural communities. The program is limited to families with low to moderate income levels as compared to the average statistical incomes for the respective area. The maximum allowable population for the community can be no more than 25,000. However, the vast majority of non-urban America qualifies. In the Greater Houston Metro area, significant portions of Montgomery, Fort Bend, San Jacinto, Liberty, Chambers, Brazoria, Waller and Galveston counties qualify. Here again, interest rates are very competitive with conventional programs. Finally, no monthly mortgage insurance premium is required. As is the case with FHA, an up-front closing fee is charged which can either be financed or paid for through seller concessions if available.

Veterans can also obtain 100% financing for their home purchase (or refinance) through the VA program. The veteran must only have served a minimum of 90 consecutive days in time of war or 180 days consecutively in peace time. Once again, rates for veterans are virtually identical to those of top conventional loan programs. In fact, if the veteran has suffered any disability during his or her service, further rate adjustments are deducted making monthly payments extremely attractive to honor the service of these returning soldiers, sailors and airmen. Once again, no monthly mortgage insurance premium is due and a modest up-front charge is due at closing equaling 2% of the loan amount.

Some negative characteristics of government loans are that they normally take approximately 50% longer to underwrite, are not available through all mortgage lenders, and are limited to owner-occupied residences only. If you have a good job but have had past credit challenges and haven’t been able to save for the down payment, ask your mortgage professional if he can provide a government program.

We have found that government mortgage loan programs now fill an important gap in the mortgage markets and represent an attractive option for homeowners in Houston, Spring, Tomball and The Woodlands looking to purchase a home, or refinance their existing mortgage.