Even though the Federal Government is not directly in the business of financing home mortgages, they do offer a number of programs designed to help make it easier for Americans purchase a home. The main government agency responsible for administering these programs is the Federal Housing Administration (FHA.)
The FHA was created in 1934 and is primarily targeted at those who are unable to get a traditional mortgage due to a poor credit rating or low income. It was created to provide mortgage insurance on home loans made by government approved lenders in the United States. The FHA not only insured mortgages on single family homes, but also multi-family homes, hospitals, and manufactured homes.
The Federal Housing Administration is not the only government agency that provides mortgage assistance. About 10 years after the creation of the Federal Housing Administration, the Veterans Administration (VA) began offering a mortgage assistance program for enlisted personal and veterans of the Armed Services. The Rural Housing Service(RHS) also provides assistance for mortgages on homes in rural areas.
Together, the FHA, VA, and RHS work together to help people who might not otherwise be able to get a home loan by offering a guarantee to the lender. These agencies guarantee that if the borrower defaults, they will pay the remainder of the mortgage.
The Federal Housing Administration is currently the largest mortgage insurance company in the World. It was created while the Great Depression was still fresh in lawmakers minds and many citizens were unable to receive a loan.
The FHA, and programs like it, help reduce the risk of a default, specifically for borrowers who have less than 20% available for a down payment. Typically, the FHA requires only a 3% down payment, which can be a gift of contribution.
While the FHA will cover a number of different types of homes, they do not offer insurance on multi-million dollar dwellings.
Instead, they will insure mortgages for about $360,000 in areas deemed as high cost and about $200,000 for lower cost areas. In Alaska, Hawaii, the Virgin Islands, and Guam, the FHA will insure homes up to almost $550,000.
While an FHA Loan can be a great choice for someone with poor credit or who has previously filed bankruptcy, they do charge a premium for the insurance. The FHA requires 1.5% of the value of the loan at the time of closing and 0.5% annual charge over the course of the loan.
The Veterans Administration offers mortgage insurance for veterans and insure mortgages for up to $417,000.
As is the case with an FHA loan, a VA loan can be used by veterans who have limited credit or even those who have previously filed for bankruptcy, as long as it has been at least 2 years.
Rural Housing Service Loans (RHS) became available in 1994, with the passage of the Department of Agriculture Reorganization Act.
RHS Loans are intended to help stimulate rural areas that have been in a recession over the last twenty years. These types of loans are also called Section 502 Guaranteed Rural Housing Loans and do not require a down payment.
RHS loans can be used to help rebuild a rural home or prepare a site for a home, including installing water and septic facilities.
While an RHS loan can be an excellent way to purchase a rural home, the interest rate is based off of the income of the borrower and can go up if the individuals income increases. There are also may be a charge for selling the home early.
When considering purchasing a home, it is a good idea to get approved for a loan prior to beginning to look at too many homes. The reasoning is two fold in that you want to be certain that you can indeed get a loan and also that you have an idea of how much money the homeowner is willing to finance. Today, there are a number of options available to individuals wishing to purchase a home, but prior to the eighties, there were fewer choices.
Typically, prior to the 1980s, mortgages were primarily offered by commercial banks, thrifts, and some of the larger credit unions. Today, however, it is also possible to receive mortgages from mortgage brokers and mortgage bankers.
Mortgage Bankers are institutions that are classified as banks and sometimes package their own loans to sell to investors as mortgage securities. Other times, they will go through Freddie Mac, Fannie Mae, and Ginnie Mae, who in turn package and resell the mortgages.
Mortgage Brokers, on the other hand, has a number of relation ships with lenders. Their relationship is considered to be wholesale and they act as an intermediary between the borrower and the lender. It is their job to find the borrower the best deal, which often varies day by day or even hour by hour. Once the mortgage is approved and the home purchased, the mortgage brokers work is done and the borrower will deal directly with the lender.
For those with very good credit, a mortgage broker can often find the best deal available, because they are in contact with a number of different lenders. Many times, the mortgage broker will be able to get the borrower a better deal than they could possible expect from a bank or other institution.
However, for those with less than perfect credit or even no credit, going through your bank might be a better choice. The bank might not be able to offer as great of a deal or as low of an interest rate as you might get from a mortgage broker, but they might be willing to be a little more flexible if you have a good relationship with them.
For the homeowner, there are a number of advantages to home ownership, many of which are financial and tax related.
One of the biggest benefits of owning a home, as opposed to renting, is that every month you are actually putting money towards the value of the home, instead of simply giving it to a landlord. This process is referred to as building equity in a home.
Equity is the difference between the value of the home and the principal of the mortgage. As the principal of the mortgage decreases, the equity increases, however equity can also be influenced by increases or decreases in the value of the home.
As an example, lets say that someone purchases a $120,000 with a $12,000 down payment. This means that the principal of the mortgage is $108,000 and they have $12,000 in equity.
Now, lets assume that in five years, the value of the home has increased to $150,000 and they have paid the principal down to $80,000.
Even though the homeowner has only paid $40,000 towards the value of the home, because the homes value has increased, they have $70,000 in equity.
The equity is computed by taking the value of the home($150,000) and subtracting the amount that is still owed on the mortgage($80,000.)
It is important to remember that the equity of the home is not real money, in that it is not something you can physically hold. In order to actually earn the equity, the home must be sold and if the value of the home were to decrease, then equity would go down.
It is a common misconception that a homes value is always going to significantly increase, which was fueled by rapid increases in home prices during the 1990’s, when a homes value would sometimes increase by over 20% every year.
While technically, you do not receive your equity until you sell your home, a number of lenders offer home equity loans and home equity credit lines.
A Home Equity Credit Line is much like a credit card, which has a credit limit based off of the homes equity. In most cases, the interest rate will also be very high, like a credit card, but the homeowner is not obligated to use the Home Equity Credit Line.
A Home Equity Loan, on the other hand, is more like a second mortgage. The homeowner will receive a single lump sum, which is based off of the equity of the home. They then have to make monthly payments, which is in addition to their monthly mortgage payments.
With the rapid increase in home values that took place during the 1990’s, many lenders began offering very large home equity loans, but with subprime mortgage rates. As a result, many homeowners took out these loans and began using them for things like new cars, vacations, or college tuition. Some even began piggybacking their down payment loans, which is when the homeowner takes out a mortgage and a separate loan for the homes down payment at the same time.
Then, the housing bubble burst, home values decreased, which resulted in a lot of people owing a lot more than their home is currently worth. Also, many of those who had received a subprime mortgage faced increasing mortgage payments, which further compounded the issue.
Deciding to take out a Home Equity Credit Line or a Home Equity Loan should not be taken lightly, because if the homes value were to decrease, the equity would also decrease, with the homeowner still being responsible for paying for the home equity loan.
Preparing to buy a new home can be a very daunting process, especially for a first time home buyer. Due to the current financial situation, in many cases lenders have become much more strict with who they will lend to and are much more likely to throughly analyze the finances of a prospective home buyer, more so than they would have only a few years ago.
For many lenders, having a high credit score with limited or manageable debt is a key factor in offering an individual a home loan, with some lenders now requiring minimum credit scores of 700. A persons credit score is a number that is based off of information on your credit report. Whenever you make a purchase on credit, are delinquent on a bill, or make a payment on your line of credit, this information is added to your credit report. In the case of a delinquent or unpaid bill, your credit score would likely be lowered, while a record of on time payments will raise your credit score.
A credit score of 850 is considered to be perfect, while a credit score of 300 is considered to be fairly low. With many lenders tightening their restrictions on financing mortgages and requiring a credit score of over 700, they have successfully limited the number of individuals who will now qualify for a home loan.
These restrictions help to highlight the importance of thinking about the big picture when using a credit card or deciding not to pay a bill. While missing a payment or making a late payment might not be a big deal at the time, if this prohibits you from getting a mortgage a year later, it has effectively cost you much more than a little bit of extra interest.
When preparing to apply for a mortgage, it is important to first take steps to repair your credit report and take care of any delinquent or unpaid bills. This will not only help raise your credit score, but will also show a strong sense of commitment to the bank or mortgage broker, who will see that an effort has been made to be fiscally responsible.
Not only will a lender take your credit score and borrowing practices into account when you apply for a home loan, but they will also consider your net worth. Your net worth is basically the difference between your total assets and how much money you owe. So, even if you were to make six figures a year, if your liabilities were also six figures, then you would not be considered to have a very high net worth.
Both your net worth and credit rating are two very important factors a mortgage broker or other lender will consider when deciding whether to offer you a mortgage and how much of a mortgage to offer. So, not only should you try to clean up your credit report well before applying for a mortgage, it is also a good idea to try to reduce your overall liabilities whenever possible.
The process of buying a new home can be very exciting, but it can also present a very daunting task for the prospective home owner, especially if it is their first time buying a home. For many, one of the most difficult parts of purchasing a new home is all of the paperwork that is required and it is true that by the time you finish closing on the home, you will very likely have a sore wrist from signing your name.
However, before a person can purchase a home most will have to apply for and be approved for a mortgage, which is a type of loan that uses the home and land as a form of collateral. This is because most new home buyers do not have enough money to purchase the home upfront and instead must turn to a bank or other lender to borrow the money. When you first speak with a mortgage broker, bank, or other lending institution, you will likely either be preapproved for a mortgage or prequalified for the mortgage. While in some financial institutions these terms are used interchangeably, there is a technical difference that should be noted.
Prequalification for a home mortgage is probably the quickest and easiest way to see if you are eligible for a mortgage. During the prequalification, the lender will ask a series of questions regarding your salary, current level of debt, and your assets. Sometimes, the lender may require the prospective borrower to fill out a form with this information, but some will prequalify people over the phone or Internet.
Once the borrower has supplied their current financial information, the lender will use this data to determine what type of mortgage they could offer. The lender does not actually check to see if this information is correct, nor do they run the borrowers credit. Instead, they provide a letter that states how much they would offer assuming all of the information about the borrower is correct.
With a prequalification, it is possible to supply the lender with false information and receive an estimate that is much larger than it should be. However, before the lender offers the loan, they will verify that all the information you provided is correct. So, falsifying this information is not in the best interest of the lender or the borrower. This is also the reason that most sellers and real estate agents look at prequalification letters with a very high level of suspicion. Often, they will require a much stronger letter from the lender before approving the purchase agreement.
During a Preapproval the lender will not only request information about the borrowers finances, but they will also take measures to verify this information. This means that they will run the individuals credit and may even require copies of work and tax statements. Once they have verified this information, the lender will be able to offer the borrower a mortgage.
However, even though someone is preapproved, this does not guarantee that they will receive the loan, nor does it legally bind the bank to give the individual the mortgage. Typically, the bank will require a completed application before officially approving the mortgage, but a preapproval is much stronger than a prequalification.
Typically, a real estate broker or real estate agent will look at a preapproval letter much more favorably than simply a prequalification letter, because a preapproval letter shows that lender has actually verified that the information the borrower provided is correct. However, since the bank has not officially approved the loan yet, a number of brokers will not take a preapproval letter at face value, instead looking at it with a little suspicion.
A mortgage is a special type of loan that can allow almost anyone to eventually own a loan. Owning a home can be a great investment and for many, getting a mortgage is the only way that this can be achieved. The first mortgages actually date back to medieval times, but they have changed a great deal since then.
Basically, a mortgage is just a loan that uses a home or land as collateral. Typically, historians credit England with having created the first mortgages, but these were often very unfair to the borrower. For instance, these first mortgages would require a very large down payment by todays standards, often over 50% and the borrower was not considered to actually own the land, until the mortgage had been completely paid off. It would not be until the 17th century that the rights of borrowers would begin to take a turn upwards, when it became the standard for the borrower to have ownership rights to the land, even if it had not been paid off yet.
Today, in addition to the general benefits of owning a home, such as not having a landlord and being able to modify the home and property however you wish, there are also a number of other tax benefits. The mortgage interest deduction, which allows a tax payer to deduct interest payments from their taxes, was instated in 1913 and today is a very powerful incentive for home ownership.
While today, many people take advantage of this tax credit, at the time it was intended to stimulate business mortgages, because during the beginning of the 20th century, most homeowners would save up their money until they had enough time to purchase a home without a mortgage.
It would not be until the US Federal Housing Administration (FHA) and the Federal National Mortgage Association (Fannie Mae) were created that average citizens began taking advantage of the tax credit allowing interest payments to be deducted from their taxes. This is because these institutions were in part responsible for increasing the amount of money available to lenders, which in turn allowed the lenders to offer more home loans.
Currently, there is another powerful incentive for new homeowners, who can receive 10% of the cost of their home in the form of a credit from the federal government. This can be up to $8,000 and is part of the Federal Housing Tax Credit for new Homeowners.
Prior to the Great Depression, most lenders took money from deposits and lend it out to new homeowners. However, when the banking system began to crumble, the Federal Government created a several government agencies to fund the mortgage market.
Today, the government agencies responsible for circulating funds in the mortgage market are the Federal National Mortgage Association (Fannie Mae,), the Federal Home Loan Mortgage Corporation (Freddie Mac,), and the Government National Mortgage Association (Ginnie Mae.) These agencies help support the home mortgage industry and act in some regards as a stock market.
Fannie Mae is responsible for creating financial products, which help low to middle income families purchase homes. Ginnie Mae creates a number of security products that are made up of mortgage loans is part of HUD, which is the US Department of Housing and Urban Development. Ginnie Mae has a guarantee that even if the debtors become delinquent, investors who purchase their securty products will still get paid. Freddie Mac is in some regards similar to Ginnie Mae, because they also create investment packages, which are guaranteed, then reinvest this money in the mortgage market.
Often, people think of their bank as the source of their loan, but in many cases this is only partially true. Often, the bank will simply process the application and take the monthly mortgage payment, but they are not the one actually lending the money. Instead, they are simply servicing the loan and the actual lenders are investors who have purchased mortgage based securities.
One of the reasons that mortgage based securities are so popular as investments is that even if the homeowner is unable to pay for their home and goes into foreclosure, the investors still have the land and home. They are in turn almost always able to sell this property, in many cases still making a profit.