Home Financing Types
There are several “Different types of financing” you can utilize to purchase a home. Some are more common, some are more involved, and some are the only way to accomplish certain goals. Below we go into detail about the different types of mortgages or financing available for purchasing a home in Lane County Oregon, and Cottage Grove Oregon.
Government Backed Mortgages
There are a few home loans that are backed (Guaranteed) by the government. These are the most typical when you do not have a lot of down money, you have high Debt to Income Ratios, or if you are a veteran or first time buyer. One of the government backed mortgages that is more prevalent in the Cottage Grove area is USDA financing.
This program assists approved lenders in providing low- and moderate-income households the opportunity to own adequate, modest, decent, safe and sanitary dwellings as their primary residence in eligible rural areas. This program is more popular in areas like Cottage Grove, because they are determined to be an eligible rural area in Lane County. Other areas that qualify as being rural in Lane County are: Veneta, Junction City, Coburg, Creswell, Cheshire, Vida, Noti, Jasper, Lowell, Oakridge, and other small communities outside of the Eugene-Springfield metro area.
Eligible applicants may build, rehabilitate, improve or relocate a dwelling in an eligible rural area. The program provides a 90% loan note guarantee to approved lenders in order to reduce the risk of extending 100% loans to eligible rural home-buyers.
Who may apply for this program?
- Meet income-eligibility
- Agree to personally occupy the dwelling as their primary residence
- Be a U.S. Citizen, U.S. non-citizen national or Qualified Alien
- Have the legal capacity to incur the loan obligation
- Have not been suspended or debarred from participation in federal programs
- Demonstrate the willingness to meet credit obligations in a timely manner
- Purchase a property that meets all program criteria
What is an eligible area?
Check eligible addresses for the loan guarantees. There are some pockets outside of the metro areas that qualify.
How may funds be used?
Funds backed by loan guarantees can be used for:
- New or existing residential property to be used as a permanent residence. Closing cost and reasonable/customary expenses associated with the purchase may be included in the transaction
- A site with a new or existing dwelling
- Repairs and rehabilitation when associated with the purchase of an existing dwelling
- Refinancing of eligible loans
- Special design features or permanently installed equipment to accommodate a household member who has a physical disability
- Reasonable and customary connection fees, assessments or the pro rata installment cost for utilities such as water, sewer, electricity and gas for which the buyer is liable
- A pro rata share of real estate taxes that is due and payable on the property at the time of loan closing. Funds can be allowed for the establishment of escrow accounts for real estate taxes and/or hazard and flood insurance premiums
- Essential household equipment such as wall-to-wall carpeting, ovens, ranges, refrigerators, washers, dryers, heating and cooling equipment as long as the equipment is conveyed with the dwelling
- Purchasing and installing measures to promote energy efficiency (e.g. insulation, double-paned glass and solar panels)
- Installing fixed broadband service to the household as long as the equipment is conveyed with the dwelling
- Site preparation costs, including grading, foundation plantings, seeding or sod installation, trees, walks, fences and driveways
USDA is not perfect for everyone or everywhere though and so there are other programs that can pick up where USDA RD leaves off. The one that is most prevalent among non-veteran home buyers is the FHA loan.
FHA is another government backed loan, that is not 100% financing, but is darn close with a down payment requirement of 3.5% of the total purchase price (Including repairs if a rehab FHA 203K loan covered later in this article).
FHA loans have been helping people become homeowners since 1934. The Federal Housing Administration (FHA) – which is part of HUD – insures the loan, so your lender can offer you a better deal.
- Low down payments
- Low closing costs
- Easy credit qualifying (Allows higher Debt to Income Ratios and lower credit scores)
What does FHA have for you?
Buying your first home?
FHA might be just what you need. Your down payment can be as low as 3.5% of the purchase price. Available on 1-4 unit properties.
Are you 62 or older? Do you live in your home? Do you own it outright or have a low loan balance? If you can answer “yes” to all of these questions, then the FHA Reverse Mortgage might be right for you. It lets you convert a portion of your equity into cash. There are a lot of caveats to Reverse mortgages, so if you think it might be a good option for you, do not hesitate to contact us to find out more.
Want to make your home more energy efficient?
You can include the costs of energy improvements into an FHA Energy-Efficient Mortgage.
Energy Efficient Mortgage Program
FHA’s Energy Efficient Mortgage program (EEM) helps families save money on their utility bills by enabling them to finance energy efficient improvements with their FHA-insured mortgage.
The EEM program recognizes that an energy-efficient home will have lower operating costs, making it more affordable for the homeowners. Cost-effective energy improvements can lower utility bills and make more income available for the mortgage payment.
In 1992, the Department of Housing and Urban Development initiated the Energy Efficient Mortgage as pilot demonstration in five states. In 1995, the pilot was expanded as a national program.
EEMs recognize that reduced utility expenses can permit a homeowner to pay a higher mortgage to cover the cost of the energy improvements on top of the approved mortgage.
Under its EEM program, FHA Insures a borrower’s mortgage used to purchase or refinance a principal residence, and the cost of energy efficient improvements to be made to the home. The borrower need only qualify for the loan amount used to purchase or refinance a home. The borrower is not required to be qualified on the total loan amount with the portion of loan used to finance energy efficient improvements. Like all FHA insured mortgages, the loan is processed, approved, and funded by a lending institution, such as a mortgage company, bank, or savings and loan association. After the mortgage closes, FHA insures the loan to protect the lender against loss in the event of payment default.
The energy package is the set of improvements that the Borrower chooses to make based on the recommendations and analysis performed by a qualified home energy assessor. The improvements can include energy-saving equipment, and active and passive solar and wind technologies. The energy package can include materials, labor, inspections, and the home energy assessment by a qualified energy assessor.
Energy Efficient Improvements Must Be Cost-Effective
The financed portion of an Energy Package must be cost-effective. Improvements are cost-effective when the cost of making them is equal to or less than the money saved on energy from those improvements.
- Cost Effective Test for Existing Homes
Improvements to existing homes are cost-effective when they pay for themselves over their expected life span with energy dollars saved. Worded differently, the money saved in energy bills because of an improvement, must add up to the same are greater amount than the cost of making the improvement.
A qualified home energy assessment will determine whether the improvements are cost effective.
The assessment evaluates the home’s energy efficiency, and conducts analysis to asses the potential savings for a variety of improvements.
- Cost Effective Test for Newly Constructed Homes
For newly constructed homes, the improvements are cost effective when they exceed the standards set by the most recent International Energy Conservation Code (IECC) that has been adopted by HUD for new construction properties. A qualified home energy assessment will determine which improvements exceed the IECC standards.
Home Energy Assessment
The Borrower must obtain a home energy assessment. The purpose of the energy assessment is to identify opportunities for improving the energy efficiency of the home and their cost-effectiveness.
The assessment must be conducted by a qualified energy rater, assessor, or auditor using whole-home assessment standards, protocols and procedures. Qualified home energy raters/assessors must be trained and certified as one of the following:
- Building Performance Institute Building Analyst Professional
- Building Performance Institute Home Energy Professional Energy Auditor
- Residential Energy Services Network Home Energy Rater
How Much of an Energy Package can Be Financed?
The maximum amount of the energy package that can be added to the borrower’s regular FHA loan amount is the lesser of:
· A cost-effective improvements to be made (energy package) based on the home energy assessment; or
· the lesser of 5 percent of:
- the Adjusted Value;
- 115 percent of the median area price of a Single Family dwelling; or
- 150 percent of the national conforming mortgage limit.
How about manufactured housing and mobile homes?
Yes, FHA has financing for mobile homes and factory-built housing. We have two loan products – one for those who own the land that the home is on and another for mobile homes that are – or will be – located in mobile home parks.
What about homes that are in need of repair? FHA has an option for homes that are not in finance-able condition. This is often the case on homes that are priced below market value attempting to lure a cash buyer. This can also be the case for a lot of foreclosures, where the financing needs to be able to address the needed repairs for the appraiser to sign off on the value of the home and condition.
Section 203(k) insurance enables homebuyers and homeowners to finance both the purchase (or refinancing) of a house and the cost of its rehabilitation through a single mortgage or to finance the rehabilitation of their existing home.
Section 203(k) fills a unique and important need for homebuyers. When buying a house that needs repair or modernization, homebuyers usually have to follow a complicated and costly process. The interim acquisition and improvement loans often have relatively high interest rates, short repayment terms and a balloon payment. However, Section 203(k) offers a solution that helps both borrowers and lenders, insuring a single, long term, fixed or adjustable rate loan that covers both the acquisition and rehabilitation of a property. Section 203(k) insured loans save borrowers time and money. They also protect the lender by allowing them to have the loan insured even before the condition and value of the property may offer adequate security.
For less extensive repairs/improvements, see Limited 203(k). For housing rehabilitation activities that do not also require buying or refinancing the property, borrowers may also consider HUD’s Title I Property Improvement Loan program.
Type of Assistance:
Section 203(k) insures mortgages covering the purchase or refinancing and rehabilitation of a home that is at least a year old. A portion of the loan proceeds is used to pay the seller, or, if a refinance, to pay off the existing mortgage, and the remaining funds are placed in an escrow account and released as rehabilitation is completed. The cost of the rehabilitation must be at least $5,000, but the total value of the property must still fall within the FHA mortgage limit for the area. The value of the property is determined by either (1) the value of the property before rehabilitation plus the cost of rehabilitation, or (2) 110 percent of the appraised value of the property after rehabilitation, whichever is less.
Many of the rules and restrictions that make FHA’s basic single family mortgage insurance product (Section 203(b)) relatively convenient for lower income borrowers apply here. But lenders may charge some additional fees, such as a supplemental origination fee, fees to cover the preparation of architectural documents and review of the rehabilitation plan, and a higher appraisal fee.
The extent of the rehabilitation covered by Section 203(k) insurance may range from relatively minor (though exceeding $5000 in cost) to virtual reconstruction: a home that has been demolished or will be razed as part of rehabilitation is eligible, for example, provided that the existing foundation system remains in place. Section 203(k) insured loans can finance the rehabilitation of the residential portion of a property that also has non-residential uses; they can also cover the conversion of a property of any size to a one- to four- unit structure. The types of improvements that borrowers may make using Section 203(k) financing include:
- structural alterations and reconstruction
- modernization and improvements to the home’s function
- elimination of health and safety hazards
- changes that improve appearance and eliminate obsolescence
- reconditioning or replacing plumbing; installing a well and/or septic system
- adding or replacing roofing, gutters, and downspouts
- adding or replacing floors and/or floor treatments
- major landscape work and site improvements
- enhancing accessibility for a disabled person
- making energy conservation improvements
HUD requires that properties financed under this program meet certain basic energy efficiency and structural standards.
Applications must be submitted through an FHA approved lender. We have many lenders we can refer you to if you are considering an FHA 203K loan.
We are very experienced in the FHA 203k loan program at Mountain View Real Estate, and can help guide you through the ins and outs while tapping a network of professionals that we have worked with on these loans before for happy clients!
Not everyone is best served with an FHA or USDA loan. If you have served your country and are a veteran or the surviving spouse of a veteran with a DD214, VA financing will likely be the best option for you.
VA helps Servicemembers, Veterans, and eligible surviving spouses become homeowners. As part of our mission to serve you, we provide a home loan guaranty benefit and other housing-related programs to help you buy, build, repair, retain, or adapt a home for your own personal occupancy.
VA Home Loans are provided by private lenders, such as banks and mortgage companies. VA guarantees a portion of the loan, enabling the lender to provide you with more favorable terms. VA loans are capable of covering 100% of the cost of the purchase.
Purchase Loans help you purchase a home at a competitive interest rate often without requiring a downpayment or private mortgage insurance. Cash Out Refinance loans allow you to take cash out of your home equity to take care of concerns like paying off debt, funding school, or making home improvements. Learn More
Interest Rate Reduction Refinance Loan (IRRRL): also called the Streamline Refinance Loan can help you obtain a lower interest rate by refinancing your existing VA loan. Learn More
Native American Direct Loan (NADL) Program: helps eligible Native American Veterans finance the purchase, construction, or improvement of homes on Federal Trust Land, or reduce the interest rate on a VA loan. Learn More
Adapted Housing Grants: help Veterans with a permanent and total service-connected disability purchase or build an adapted home or to modify an existing home to account for their disability. Learn More
Other Resources: many states offer resources to Veterans, including property tax reductions to certain Veterans. Learn More Here is a link to the information on Oregon’s Deferred tax program for veterans.
For more information on any of these types of government backed loans, watch the video at the top of this page, and contact us with your questions. We can help you get connected with a great lender to start the process out right!
That covers the majority of different types of government backed loans available for a home purchase.
There are other ways to purchase, however, and some of those are discussed in further detail below.
Conventional loans are growing in popularity thanks to low rates and increasingly flexible guidelines, and are currently the most common method of financing a home.
A conventional loan is one that is not formally backed by any government entity such as FHA, VA, and USDA. Rather, it is a loan that follows guidelines set by Fannie Mae and Freddie Mac, two agencies that help standardize mortgage lending in the U.S.
Conventional loans are also known as conforming loans because they “conform” to Fannie Mae and Freddie Mac standards.
The lack of government backing does not make conventional loans less desirable.
While a conventional mortgage appeals to a wide demographic, it’s especially good for first-time borrowers with decent credit and some amount of downpayment.
Although, it’s a myth that you need a 20 percent down payment for a conventional loan.
From the ten-percent-down piggyback loan to the three-percent-down HomeReadyTM and Conventional 97 loans, conventional low-down-payment options not only exist but are extremely popular with today’s buyers.
So, how do you qualify for a conventional loan? Simply by matching expectations set out by Fannie Mae and Freddie Mac.
Once you do that, you join the club of conventional loan homeowners who make up about 65% of the market.
There are some situations where it might make sense to pursue an owner carry or lease option transaction when financing is not available due to challenges the borrower has to overcome or when the property does not meet financing condition requirements.
Seller Carried Transactions
Seller carried transactions and lease option transactions are tricky, and you need an experienced agent to attempt to pursue these types of purchase.
In an owner financing or seller carried transaction, you are going to use a different contract than is typical for any of the above mentioned methods of financing. Because of this, it is advised that any buyer attempting to complete one of these types of purchase, retain the services of a Real Estate attorney for final contract review.
One of the caveats of these types of transactions is that the terms of the financing can not be negotiated by your Realtor. All financing terms must be negotiated through the buyer and seller. The agent may only act as a scrivener in the negotiation of terms. Alternatively, a buyer could obtain the services of a mortgage loan Officer (MLO) to negotiate the terms on their behalf.
Seller financing can be a useful tool in a tight credit market as it allows sellers to move a home faster and get a sizable return on their investment. Many buyers may benefit from less stringent qualifying and down payment requirements, more flexible rates, and better loan terms on a home that otherwise might be out of reach.
Sellers willing to take on the role of financier represent only a small fraction of all sellers — typically less than 10%. That’s because the deal is not without legal, financial, and logistical hurdles. But by taking the right precautions and getting professional help, sellers can reduce the inherent risks.
In seller financing, the seller takes on the role of the lender. Instead of giving cash to the buyer, the seller extends enough credit to the buyer for the purchase price of the home, minus any down payment. The buyer and seller sign a promissory note (which contains the terms of the loan). They record a “deed of trust” with the county within which the sale takes place. Then the buyer pays back the loan over time, typically with interest.
These loans are often short term — for example, amortized over 30 years but with a balloon payment due in five years. The theory is that, within a few years, the home will have gained enough in value or the buyers’ financial situation will have improved enough that they can refinance with a traditional lender.
From the seller’s standpoint, the short time period is also practical — sellers can’t count on having the same life expectancy as a mortgage lending institution, nor the patience to wait around for 30 years until the loan is paid off. In addition, sellers don’t want to be exposed to the risks of extending credit longer than necessary.
A seller is in the best position to offer a seller financing deal when the home is free and clear of a mortgage — that is, when the seller’s own mortgage is paid off or can, at least, be paid off using the buyer’s down payment. If the seller still has a sizable mortgage on the property, the seller’s existing lender must agree to the transaction. In a tight credit market, risk-averse lenders are rarely willing to take on that extra risk.
Types of Seller Financing Arrangements
Here’s a quick look at some of the most common types of seller financing.
All-inclusive mortgage. In an all-inclusive mortgage or all-inclusive trust deed (AITD), the seller carries the promissory note and mortgage for the entire balance of the home price, less any down payment.
Junior mortgage. In today’s market, lenders are reluctant to finance more than 80% of a home’s value. Sellers can potentially extend credit to buyers to make up the difference: The seller can carry a second or “junior” mortgage for the balance of the purchase price, less any down payment. In this case, the seller immediately gets the proceeds from the first mortgage from the buyer’s first mortgage lender. However, the seller’s risk in carrying a second mortgage is that he or she accepts a lower priority should the borrower default. In a foreclosure or repossession, the seller’s second, or junior, mortgage is paid only after the first mortgage lender is paid off and only if there are sufficient proceeds from the sale. Also, the bank may not agree to make a loan to someone carrying so much debt.
Land contract. Land contracts don’t pass title to the buyer, but give the buyer “equitable title,” a temporarily shared ownership. The buyer makes payments to the seller and, after the final payment, the buyer gets the deed.
Lease option. The seller leases the property to the buyer for a contracted term, like an ordinary rental — except that the seller also agrees, in return for an upfront fee, to sell the property to the buyer within some specified time in the future, at agreed-upon terms (possibly including price). Some or all the rental payments can be credited against the purchase price. Numerous variations exist on lease options.
Assumable mortgage. Assumable mortgages allow the buyer to take the seller’s place on the existing mortgage. Some FHA and VA loans, as well as conventional adjustable mortgage rate (ARM) loans, are assumable — with the bank’s approval.
Getting Professional Help
Both the buyer and seller will likely need an attorney and a real estate experienced in seller financing and home transactions to write up the contract for the sale of the property, the promissory note, and any other necessary paperwork. At Mountain View Real Estate & PM we are very experienced in this process, and stay apprised of all contract and law changes to ensure we can offer the utmost in professionalism representing buyers and sellers in these complex transactions.
In addition to the Realtors and Attorneys, reporting and paying taxes on a seller-financed deal can be complicated. The seller may need a financial or tax expert to provide advice and assistance.
Tips to Reduce the Seller’s Risk
Many sellers are reluctant to underwrite a mortgage because they fear that the buyer will default (that is, not make the loan payments). But the seller can take steps to reduce the risk of default. A good professional can help the seller do the following:
Require a loan application. The seller should insist that the buyer complete a detailed loan application form, and thoroughly verify all of the information the buyer provides there. That includes running a credit check and vetting employment, assets, financial claims, references, and other background information and documentation.
Allow for seller approval of the buyer’s finances. The written sales contract — which specifies the terms of the deal along with the loan amount, interest rate, and term — should be made contingent upon the seller’s approval of the buyer’s financial situation.
Have the loan secured by the home. The loan should be secured by the property so the seller (lender) can foreclose if the buyer defaults. The home should be properly appraised at to confirm that its value is equal to or higher than the purchase price.
Get a down payment. Institutional lenders ask for down payments to give themselves a cushion against the risk of losing the investment. It also gives the buyer a stake in the property and makes them less likely to walk away at the first sign of financial trouble. Sellers should do likewise and collect at least 10% of the purchase price. Otherwise, in a soft and falling market, foreclosure could leave the seller with a home that can’t be sold to cover all the costs.
Negotiating the Loan
As with a conventional mortgage, seller financing is negotiable. To come up with an interest rate, compare current rates that are not specific to individual lenders. Check for daily and weekly rates in the area of the property, not national rates. Be prepared to offer a competitive interest rate, low initial payments, and other concessions to lure buyers.
Because sellers typically don’t charge buyers points (each point is 1% of the loan amount), commissions, yield spread premiums, or other mortgage costs, they often can afford to give a buyer a better financing deal than the bank. They can also offer less stringent qualifying criteria and down payment allowances.
That doesn’t mean the seller must or should bow to a buyer’s every whim. The seller also has a right to decent return. A favorable mortgage that comes with few costs and lower monthly payments should translate into a fair market value for the home.
Hiring a Loan Servicing Company
To help ease the paperwork burden, sellers can hire a loan servicing company to help draw up the mortgage, mail statements to the buyers, collect payments, and otherwise administer the mortgage.
There is a lot of ins and outs to any type of financing, and it pays to have experienced people represent your interests. Contact us today to find out more about what type of financing may be right for you!