There are 3 solid programs available for prospective home buyers seeking 100% financing for a primary residence and I will explain them in plain English for you. I will give you the basic requirements as well as the pros and cons for each. Don’t worry; there will be no quiz at the end of this article.
FHA/TDHCA – The first and most common method is a combination of a standard FHA loan which requires a down payment of 3.5% and down payment assistance funds of up to 4% of the sales price that is offered through the Texas Department of Housing and Community Affairs (TDHCA). This is typically the easiest scenario to qualify for because FHA guidelines are the most lenient for borrowers with less than perfect credit. Typically if a buyer has a 620 middle credit score or higher and no new collections, charge offs or late pays filed in the last 12 months they have a very good chance at getting approved. TDHCA will assist with up to 4% of the sales price that can be utilized for down payment and/or closing costs. They do have their own approval process, income & loan amount guidelines and must review the complete loan package prior to disbursement of funds. There is a limited amount of funds available for this program so the TDHCA is typically inundated with applications that may or may not be approved. Because of this, average closings when utilizing this program can be on average 45 to 60 days depending on volume and market conditions.
Pros: Great for less than perfect credit, no geographic restrictions, most common program so majority of lenders are familiar with closing them, no pre-pay penalty
Cons: 2 different approval processes, income restrictions apply (can’t make too much money), requires mortgage insurance, take longer to close, funds not always available, some pre-pay/recapture restrictions apply
“If you have had credit issues in the past this is your best bet. “
VA loan (Veteran’s Administration) – The second most common type of no money down program is the VA loan. The application process for VA financing is no different from any other type of loan. In fact, the VA application form is the same as that used for HUD/FHA and conventional loans. It is similar to FHA in which it is a government backed loan but is for current or previous members of the Armed forces only. It is one loan for 100% of the contract sales price and has no monthly mortgage insurance premium payment. Like FHA this loan typically requires the buyer have at least a 580 middle credit score or higher and no new collections, charge offs or late pays filed in the last 12 months. The rates are competitive and closely mirror standard FHA rates. Aside from the credit requirements the borrower must have a Certificate of Eligibility and form DD-214. The one quirk on this program that can at times throw off the process is that VA has their own appraisal ordering system. That means your lender does not order the appraisal so it can be hard to gauge estimated value and delivery times. This however can be addressed by having your realtor provide you with a detailed Competitive Market Analysis before securing a property under contract.
Pros: Great for less than perfect credit, no geographic restrictions, no mortgage insurance payment, competitive rates, lower closing costs, may be assumable, graduated payment available under some conditions
Cons: For veterans only, appraisal process can be unpredictable, primary residence only
“No brainer here. One of the benefits of military service.”
USDA (RD) – The third option is one of the least known programs on the market and may be the best if buyers fit the criteria. The United States Department of Agriculture has a Rural Housing Service that helps provide adequate housing for families in rural development areas. Rural development areas do not always mean hundreds of miles out of town but usually just outside the city limits where the population begins to taper off. Like FHA and VA this is a government backed loan and not directly funded through these government agencies. This moderate income loan program is for the purchase of a primary residence and can be a single family home, town home or condo; no manufactured homes. It is a true no money down program with one lien only, that is actually calculated up to 102% of the appraised value of the property and not the sales price. This is helpful in cases where the seller does not want to or cannot pay any closing costs; those fees can be rolled into the loan as long as the loan amount does not exceed 102% of the appraised value. There is no mortgage insurance required, no max in seller concessions, no reserve requirements, not limited to firs time home buyers and rates are competitive with FHA & VA. Buyers need to have at least a 620 or higher middle credit score, no unpaid collections, charge offs, tax liens or judgments and no late payments over 30+ days in the last 12 months.
Pros: One lien, no mortgage insurance, no cap in seller concessions, roll in closing costs as needed, max loan amount based on appraised value, no pre-pay penalty, no recapture conditions, competitive rates
Cons: Geographic & income restrictions apply, not as lenient with previous derogatory credit, income restrictions (can’t make too much money)
“If you are looking for a quiet home just outside of town and have been relatively careful with your credit this is definitely the way to go.”
As I mentioned this is just a real basic description of the 3 no money down loan programs available to prospective home buyers. They each have their own respective qualifying procedures and requirements so please consult with a qualified lender for complete details and quotes.