Government Sponsored Loan Programs
The federal government, as well as state and local governments, offer numerous real estate financing options, usually consisting of lower-than-average credit requirements, down payments, and interest rates. However, most of these home loans are limited only to individuals who fall under the specific category targeted by the loan program, such as first-time homebuyers, homebuyers in rural areas of the country, etc.
The two most popular federal loan programs are FHA (Federal Housing Administration) and VA (Veterans Affairs) loans. State and local programs are too numerous to list in one place, but detailed information regarding these programs is free and easy to access.
The FHA is an agency of the Department of Housing and Urban Development. Any U.S. citizen, permanent resident, or temporary resident with a work permit can qualify for an FHA loan, as long as some basic financial qualifications are met. Its loan programs work through insurance backing.
What this is means is that the FHA does not issue loans directly; rather, it insures certain mortgage loans issued through traditional financial institutions, making it easier for potential homebuyers to qualify. The financial institution is more likely to issue an FHA-insured loan because, if the buyer defaults on the mortgage, the FHA will cover 100 percent of the originally insured amount. Additionally, FHA loans can be obtained for a down payment as low as 3.5 percent. More information regarding these loans can be accessed at FHA.com.
In a similar fashion, the Department of Veterans Affairs does not directly issue loans to individual homebuyers. Like the FHA, the VA makes a guarantee of repayment for a portion of the property’s value to the financial institution issuing the mortgage. Due to this guarantee, which creates a safeguard for the issuing authority, homebuyers can receive much more favorable terms, up to and including a zero down payment.
It is important to note that VA loans do not require homebuyers to pay a PMI (private mortgage insurance), which every traditional mortgage includes in its terms. The FHA, on the other hand, requires homebuyers to pay a similar fee, known as MIP (mortgage insurance premium). Lastly, VA loans are only available to current military personnel or veterans who have received an honorable discharge and meet other specific requirements, such as employment history, credit standing, length of service, etc.
It is also important to keep in mind that both FHA and VA loans have price limits. You cannot purchase real estate worth tens of millions of dollars with such programs. Similarly, state and local loan programs usually are provided only to those potential homebuyers who are looking to purchase a property that falls under a moderate price range, which is determined according to the local area in which the property is located.
Every state and local government’s programs are different, and detailed examination of the qualifications, terms, and conditions of a specific loan should be carefully conducted before an application is submitted. Every state’s home website will include a link to that state’s housing authority, which will in turn direct users to the proper local government’s website, or it will provide an address to the local housing office.
Despite their limitations, government-sponsored loan programs can provide a great opportunity for investors. For example, in certain areas of the country, FHA loans are offered for multi-family homes. Obtaining an FHA loan means that the investor is required to live in the purchased property for a specified minimum length of time.
Nonetheless, in a four-unit home, three units can be occupied by tenants, and the revenue generated through rents can easily cover mortgage payments, utilities, and upkeep costs, as well as generate positive cash flow. Opportunities in real estate investing are endless, and investors can use government-sponsored loan programs to ensure and facilitate their road to success.