There are many mortgage options that allow Indiana homebuyers to purchase a home with little to NO down payment. Conventional mortgages have always required a 5% -20% down payment, which is fine for more seasoned home buyers, but out of reach for the average first-time buyers.
Other options in today like the USDA Rural Housing and VA loan permit qualified buyers to finance 100%. The Federal Housing Administration (FHA) is probably the most popular choice for its wide availability. While the average home buyer may have a basic understanding of these programs, he or she may not understand the difference. Each option carries its own specific set of requirements that may or may not suit the applicant’s needs.
A USDA mortgage is backed by the United States Department of Agriculture (USDA Rural Housing) and offered through approved lenders and banks. These loans are specifically targeted to more rural eligible locations. Indiana still has many cities and suburbs considered USDA eligible, see the USDA eligibility map here.
The USDA 502 program allows up to 100% of the appraised value of the home with no down payment required. The property can be any move in condition home, it just has to be located in an approved area according to the map above. Note, existing mobile homes and land/lot loans are not permitted. Another advantage with USDA loans, the monthly mortgage insurance is less when compared to Conventional or FHA loans. Also note that USDA does have household income limits, read all the frequently asked USDA questions here.
If you are a Veteran or current active duty, the VA loan is likely the best option available today. Very low-interest rates, 100% financing, and credit flexibility to name a few benefits. VA offers no down payment mortgages up to $647,200 for approved Vets nationwide. In addition, there is a special VA Jumbo loan for buyers that require higher loan amounts. The VA Jumbo is available up to $1.5m, but this program will require a small down payment. Eligible properties include single-family homes, condominiums and townhomes. VA loans come with secure fix rate terms with no prepayment penalties.
The most popular first-time buyer program in Indiana remains the Federal Housing Administration (FHA) loan. This is another government-backed program that is sponsored by the U.S. Department of Housing and Urban Development. When compared to USDA and VA, the FHA program is the most popular and widely used. FHA loans require only 3.5 % down payment with no limitations on household income or location. The credit score and underwriting guidelines are less firm than those for a conventional loan. The buyer can put down as little as 3.5% down payment, however, a 600 credit score will be required in most cases.
The yearly premium is typically .85% of the loan amount broken up over a 12-month period. In addition, FHA loans require a 1.75% upfront funding fee that is normally rolled into the borrower’s loan. FHA, like all the other programs listed above, is only available to buyers who occupy the property as a primary residence. Investment homes and vacation homes are not permitted. Buyers can read a list of the most common FHA Loan Q&A here.
A conventional mortgage is among the most common type of home loans. Lenders require the buyer to put down 5-20% of the purchase price. The buyer needs to qualify within the lender’s debt-to-income ratio. The ratio for home expenditures (principal, interest, taxes, and insurance) should be no more than 35% of the buyer’s gross monthly earnings. The ratio limit for housing plus general debts should be no more than 45% of the buyer’s gross monthly earnings.
The buyer must present evidence they have money available for the down payment. Please do note the ratio limits above can be exceeded for strong buyers that have good credit, stable job history, cash savings. Credit scores for conventional loans should be above 620. Conventional loans come in a variety of fixed rate and flexible adjustable-rate terms.
Pro and Cons:
A conventional mortgage is favorable in that a borrower starts out with at least 20% down payment and can avoid private mortgage insurance (PMI) or any kind of funding fee – like all the government loans require. The downside is that saving that enough for so large a down payment can take a considerable amount of time. FHA loans give you the flexibility to purchase a home with less money down.
There are also no income or location restrictions with FHA (like USDA) USDA loans have the least rigid guidelines, but you must be looking for a rural home specifically and have a household income below the limit for your area. USDA & VA are also the only mortgage programs today that permit 100% financing.
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