While Federal Housing Administration (FHA) and conventional loans might be touted as the top home financing options, there are many home financing strategies available to those who can meet certain criteria. In fact, taking a less traditional financing route can allow borrowers to reap big benefits — like lower interest rates, no down payment or private mortgage insurance requirements, and more.
Before you put in an offer on that home for sale in Athens, GA, read up on the uncommon financing strategies below that you could take advantage of — if you qualify.
Veterans Affairs (VA) loans are reserved for military service members and their families. To be approved for a VA loan, you must be able to prove eligibility, plan to purchase an eligible property (single-family home, condo, townhome, multifamily home, etc.), plan to occupy the home within 60 days (exceptions can be made for deployments), and you must have the minimum required income and credit score. Note: Before you apply, make sure you meet the active-duty service-length requirement.
There are many pros to VA home loans: no down payment or private mortgage insurance requirement, a higher allowed debt-to-income ratio to qualify, greater flexibility with previous financial hardship or bankruptcy, and no penalty for paying off your loan early. However, VA loans usually require payment of a VA funding fee to reduce the cost of the loan to taxpayers. In addition, not all sellers are willing to accept VA home loans, especially for short sale or foreclosure properties.
The United States Department of Agriculture (USDA)’s Rural Housing Service (RHS) offers loans for single-family homes to those with low to moderate incomes who reside in rural areas. To qualify for a USDA-guaranteed home loan, you must agree to purchase within a certain area, be a U.S. citizen, have a monthly home payment that’s 29% or less of your monthly income, and be able to meet minimum credit score requirements. In addition, your income cannot exceed a level determined by your specific area.
Like VA loans, USDA loans don’t require a down payment, and there is no penalty for early loan repayment. In addition, there are no restrictions on the size of the lot, and modular and manufactured homes could be eligible. The biggest downsides to USDA loans are the restrictions on location and income. In addition, be ready to pay private mortgage insurance if you don’t fork over a down payment.
First-time homebuyer loans
People who have not owned a home for at least three years could qualify for a first-time homebuyer loan, frequently referred to as FHA loans because they are insured by the Federal Housing Administration. The additional FHA requirements for first-time homebuyer loans are a minimum credit score of around 620 to 640 and a down payment of 3.5%. You will also need to have a debt-to-income ratio that does not exceed 41% to 43% of your gross monthly income.
First-time homebuyer loans require a smaller down payment than other types of loans and come with a lower interest rate. In addition, credit requirements tend to be slightly lower. These loans are intended for those planning on using the home as their primary residence. In addition, while private mortgage insurance isn’t always a requirement with these types of loans, you could be required to take out insurance from the loan program, which could have higher fees and less favorable payment terms.
These loans are intended for newly licensed medical doctors, residents, and fellows, who are typically burdened with heavy student loan debt and little savings. Requirements for physician loans vary depending on the lender, but many require an employment contract as proof that the loan will be repaid. Many also require that the loan-payment-to-income ratio be at or below 38%.
Physician loans can offer up to 100% financing and no down payment requirements (depending on the total loan amount), as well as no private mortgage insurance requirement and more flexible repayment terms to match the changing financial situation of this group. In addition, student loans could be excluded from your total monthly debt if they are deferred for at least 12 months at the time of closing. However, for full financing, many lenders will require a minimum credit score of 700. A down payment could be required if the home being purchased is in a declining market, and physician loans are not always available in all states. Physician loans sometimes carry a higher interest rate and can cost more than other loan types.
Have you bought a home with one of these financing strategies? Share your experiences and tips in the comments below!