U.S.

July 20, 2012

Home loans: Look before you leap

by Capt. Young B. Yim
452 AMW legal office

It seems in this economy that more and more people are gearing up to purchase their first home. We hear virtually every day that property values have bottomed out and that now is the time to buy. While there are no guarantees that prices will not continue to drop, you might be in the market for a new home. If so, the question then becomes “What are my options to finance my new home?” Well, you need to consult with an expert to guide you through the process. We sought advice from Scott Halliwell, a certified financial planner with United Services Automobile Association, just one of several financial institutions available to servicemembers.

According to Mr. Halliwell, when it comes to mortgage loan types for service members, there are several choices available that generally fall into three broad categories: VA loans, FHA loans and conventional loans.

Veterans Administration loans are government insured home loans for veterans and active military personnel. The benefits of VA loans include zero-down, 100% financing available for those who qualify, no monthly mortgage insurance premium, and limited origination fees and closing costs. However, VA loans usually require that the participant pay a funding fee. The funding fee may range from half a percent to 3.3 percent, and may be paid out-of-pocket or included in the loan. Veterans receiving service-connected disability compensation are exempt from funding fees.

Federal Housing Administration loans are also government insured home loans, but they are open to everyone, not only veterans or military personnel. FHA loans are more easily approved and require lower down payments than conventional loans. The down payment could be as low as 3.5% of the home purchase price versus the 20% down payment usually required to purchase a home with conventional loans. Furthermore, the down payment for an FHA loan may be gifted from family members, a government agency, or a nonprofit organization. The disadvantages of FHA loans are the limits on loan amounts (less than what conventional loans allow), monthly insurance premiums, and upfront mortgage insurance premiums.

Conventional loans are home loans that are not VA or FHA, including Fixed and Adjustable-rate loans, Jumbo loans (generally loans greater than $417,000), and Combination loans (such as an 80/10/10 loan, where the buyer is responsible for 10% down, 10% is a home equity second mortgage, and 80% is the first mortgage). Most conventional loans require monthly mortgage insurance premiums unless the down payment exceeds 20% of the purchase.

According to Mr. Halliwell, VA loans are typically best for buyers who are eligible for them, even if they meet credit and income requirements for other types of home loans. He suggests FHA loans for those not eligible for VA loans but who may not have the credit score and income for a conventional loan. Conventional loans are best for those that have a lower debt-to-income ratio and a good credit score, want to borrow more than FHA or VA loans allow, and can afford some down payment.

Mr. Halliwell also warns that the lower down payment requirements of FHA and VA loans can be a double-edged sword. On the positive side, they often make it possible for people to buy homes who either haven’t or can’t accumulate a significant down payment. On the negative side, the prospective homeowner’s inability to accumulate a significant down payment may be an indicator that they are not financially prepared to purchase a home in the first place. Unfortunately, this often isn’t uncovered until after the home is purchased and the new homeowner is now burdened with a home they probably shouldn’t have purchased in the first place. Putting little to nothing down can also become a problem if the owner needs to sell the home in the short term because there may not be enough equity to cover the costs associated with selling.

Homeowners also need to beware of additional costs that might not be reflected in the loan amount. For example, property tax and homeowner’s insurance can amount to hundreds of dollars a month, and depending on the property, homeowner’s association fees may tack on a few hundred more.

Consequently, the phrase, “just because a lender will give you the loan, doesn’t mean you should take it,” should be in the forefront of every prospective homeowners mind as they consider how much house they can afford to take on. Once you’re in the game, it’s often very difficult to quit.




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