The purchasing of your own home has always been part of the American dream but home ownership is more difficult for some then it is for others. Fortunately there are loan programs which help those who might otherwise not be able to purchase their own homes. Many challenges can stand in the way of those families or couples desiring to purchase a home which will service as their primary residence. This article will look at the role of the FHA, VA State funded guarantee loan programs which bridge the gap for those who might otherwise be unable to purchase a home.

VA Loans

Those who have served in the military or armed forces and some qualifying surviving dependents can obtain low interest loans from the Veterans Administration. These loans are guaranteed by the US Department of Government Affairs and can be used for the purchasing of homes to be occupied as primary residences by individuals and families. Due to the fact that the income requirements and large down payments required to purchase a home were preventing veterans from purchasing homes the VA loan was established to help military personnel to access mortgage loans with better terms and conditions when purchasing a new home. A qualified VA lender can help military veterans and their families purchase their home without the need to come up with a large down payment.

State Funded Loans

Many states have programs which allow their residents to purchase homes at reduced interest rates and with a small or no down payment requirements. These programs which are often used in conjunction with federal loan programs make purchasing a home possible for those that would otherwise be unable to purchase a home for their family. Those wishing to participate in these loan programs must qualify based on income level and purchase a home within the price limits set down by the individual states. Some states only allow first time home buyers to participate in their programs, but as these programs vary from state to state it is best to check the state you will be applying to for more specific information.

FHA Loans

The Federal Housing Association also known as the FHA provides both mortgage insurance and training for prospective homeowners. Their programs are geared to address the needs of low income individuals, couples or families. FHA doesn’t directly loan the money to prospective homeowners but guarantees loans made by banks and other financial institutions. If a borrower cannot meet the lending institutions standards for large mortgage loans FHA guarantees the payment with insurance which will payoff the loan to the bank and the FHA will take possession of the property. This greatly reduces the risk to the lender. The institution that grants the loan services the loan during its term and reports statistical information back to the FHA.

Traditional mortgage loans used for the purchase of homes require borrowers to deposit up to 10% of the purchase price as a down payment. When borrowers are unable to do so FHA underwrites the loans for buyers who are able to afford the large down payment required by mortgage lenders as part of the purchase package. Until the FHA programs came about many couples and families desiring to purchase a home of their own were unable to do so because of the prohibitiveness of the large necessary down payment.

Another risk group for lenders are those whose credit-worthiness doesn’t meet the mortgage lenders standards. In this case FHA loans are used for these borrowers who do not meet standard credit approval. Credit for some can be a hard thing to establish thankfully today establishing credit has become much easier then in years past. If an individual has no credit or less then perfect credit programs such as the FHA program allow the banks to reduce the risk by underwriting the loans. Of course the amount of the loan that FHA is willing to underwrite is set down by guidelines and must be adhered to by lenders. Loan amounts that FHA is willing to underwrite can vary depending on the income level and purchase price of the property.

Creative financing refers to a way to own real estate outside of conventional means such as traditional mortgage loans. Traditional mortgage loans are not always the best option for every circumstance, and this is where creative financing techniques can help home buyers get in to a home. Creative financing can help people with less than perfect credit own a home.

Creative financing techniques are also commonly used by investors in order to gain control of properties with the least possible out of pocket expense.

As the name suggests, there are numerous options for creative financing. Before you choose to use any method of creative financing, it is best if you research all of your options and become familiar with how it all works.

Here are several common methods of creative financing that are used…

Rent to Own / Seller Financed Mortgage

In a rent to own situation or a seller financed mortgage, the current owner of the property holds back the mortgage on the property. Typically, in a rent to own, a portion of your monthly rent goes towards a future down payment. This has advantages over renting because you rent is not going to “waste” so to speak. If you decide to purchase the property at a future date, you can use the down payment portion to help you qualify for a traditional mortgage.

In the case of a seller financed mortgage, the seller acts in the same capacity as the bank and holds the mortgage on the property that you then pay back with interest. Typically, arrangements like these are more common in times when the real estate market is moving more slowly. Both sellers and buyers can benefit from such a situation as the buyer gets in to the home and the seller is able to sell the home as well as collect interest on the deal.

80/20 Home Mortgage

An 80/20 home mortgage is actually two mortgages, a primary mortgage an a second mortgage. The concept and idea of an 80/20 home mortgage is to reduce the amount of liability towards any single lender, finance 100% of the purchase price and avoid paying PMI.

You have several options that pertain to the 20% part of an 80/20 mortgage. The second mortgage can either be fixed or a line of credit. The benefit of choosing a line of credit over a fixed rate in this situation is that the interest rates can often be 2 – 5 percent lower than a fixed rate.

Government Backed Loan Programs

Some government back loan programs are also considered creative financing. There are several state and federal loan programs offered that allow for 100% financing. Closing costs can also be rolled in to the loan in some cases.

Because these programs are government subsidized, income qualifications are a common restriction of eligibility. These programs are aimed at people with mid to low income as a means of helping everyone experience home ownership.

Hard Money Lenders

Hard money lenders are traditionally used more for investment purposes than for a primary residence. A hard money lender loans money privately usually with higher interest and shorter terms compared to traditional mortgages.

While this is no means a complete run down of creative financing techniques, as you can see there are many options when it comes to financing real estate outside of traditional means.

Buying a home is probably the single largest investment most people will make in a lifetime. By preparing yourself and your finances for a home purchase, you can ensure a smooth home-buying process.

Start by checking your credit

To have an opportunity to get the best possible mortgage, make sure your credit history is clean and accurate. Start checking your credit profile at least a few months before the house hunt.

Make sure the information is correct and dispute any problems you discover.

For an understanding of your credit history, check your credit profile.

Figure out how much home you can afford

The rule of thumb is that you can afford a residence that runs about two-and-one-half times your annual salary. Most banks insist on the following:

Your monthly housing costs (including mortgage principal and interest, property taxes, homeowner’s insurance and private mortgage insurance) should equal no more than 28 percent of your gross monthly income.

That sum (plus your minimum monthly payment on any long-term debts) should equal no more than 36 percent of your gross income.

Understand the Elements of Home Financing

Down Payment – This is the up-front money you pay toward the home. The more money that you can allocate to the down payment, the lower your mortgage will be (saving you in interest over the life of the loan).

Types of Mortgages – The principle amount and the interest will determine your monthly payment schedule. The typical mortgage is for 13-30 years and falls into two categories:

a. Fixed Rate A fixed rate mortgage consists of a set monthly payment that remains constant throughout the life of the loan. The interest tends to be a bit higher on fixed rate loans.

b. Variable Rate Mortgages (VRM) Variable Rate Mortgages give you a lower initial interest rate with the risk of it rising in years to come – The advantage being the chance that the interest rate could decrease. A cap of around 5%-6% above the initial rate protects you from extreme jumps in interest rates.

Closing Costs – These are the costs of borrowing money, establishing the loan, and preparing all of the documentation for the sale. This cost can be significant, so make sure and plan for them. Buying a home can be one of the best investments you can make. With each monthly payment, you are building equity in your home.

Enjoy the powerful benefits that pride of ownership brings. Your home will give you and your family a wonderful feeling of stability as you become a part of your new neighborhood.