USDA and VA loans offer home ownership without a down payment. Both programs have unique restrictions, and many will not qualify for obvious reasons.
VA Loans are, hands down, the best finance option in the country today. If you are eligible for VA benefits, first I would like to thank you for serving our country, and I would be honored to help you with the purchase of a home. If you are eligible for a VA loan, please visit my VA loans page, and contact me if I can be of any service to you.
The USDA loan program comes in a close 2nd best behind VA. USDA loans in Ohio are restricted by location, income and loan size. For this reason, many people will need to look towards other low money down options to purchase a home. For more information about the USDA loan program, please visit my USDA loan page, and contact me here.
The next closest option for zero down is the Ohio Housing Finance Agency (OHFA) first time homebuyer program. A 3.5% down payment is required, however 2.5% of the down payment can come from a 2.5% grant. The 2.5% grant is only repaid under circumstances that you sell the home within 5 years. Only 1% down is required to purchase your first home with the OHFA program.
FHA is one of the most popular loan programs in the US today. FHA requires 3.5% down, all of which is allowed to come from a family gift, if necessary. Many people are unaware that FHA is NOT exclusively a first time homebuyer program. Any qualifying borrower can purchase a primary residence, regardless of home many homes you have purchased in the past, and regardless of income.
Ohio first time homebuyer Q&A
Following are questions you should know the answers to before beginning the process of buying your first home.
HOW MUCH CAN I BORROW?
The lender considers your debt-to-income ratio, which is a comparison of your gross (pre-tax) income to housing and non-housing expenses. Non-housing expenses include such long-term debts as car or student loan payments, alimony, or child support. According to the FHA, monthly mortgage payments should be no more than 31% of gross income, while the mortgage payment, combined with non-housing expenses, should total no more than 43% of income. The lender also considers cash available for down payment and closing costs, credit history, etc. when determining your maximum loan amount.
HOW CAN I DETERMINE MY HOUSING NEEDS BEFORE I BEGIN THE SEARCH?
Your home should fit the way you live, with spaces and features that appeal to the whole family. Before you begin looking at homes, make a list of your priorities – things like location and size. Should the house be close to certain schools? your job? to public transportation? How large should the house be? What type of lot do you prefer? What kinds of amenities are you looking for?
Establish a set of minimum requirements and a “wish list.” Minimum requirements are things that a house must have for you to consider it, while a “wish list” covers things that you’d like to have but aren’t essential.
WHAT SHOULD I LOOK FOR WHEN DECIDING ON A COMMUNITY?
Select a community that will allow you to best live your daily life. Many people choose communities based on schools. Do you want access to shopping and public transportation? Is access to local facilities like libraries and museums important to you? Or do you prefer the peace and quiet of a rural community? When you find places that you like, talk to people that live there. They know the most about the area and will be your future neighbors. More than anything, you want a neighborhood where you feel comfortable in.
WHAT SHOULD I LOOK FOR WHEN WALKING THROUGH A HOME?
In addition to comparing the home to your minimum requirement and wish lists, use the HUD Home Scorecard and consider the following: Is there enough room for both the present and the future? Are there enough bedrooms and bathrooms? Is the house structurally sound? Do the mechanical systems and appliances work? Is the yard big enough? Do you like the floor plan? Will your furniture fit in the space? Is there enough storage space? (Bring a tape measure to better answer these questions) Does anything need to be repaired or replaced? Will the seller repair or replace the items? Imagine the house in good weather and bad, and in each season. Will you be happy with it year ’round?
Take your time and think carefully about each house you see. Ask your real estate agent to point out the pros and cons of each home from a professional standpoint. Using the HUD Home Scorecard to keep track of the homes you see is a great way to keep organized. (Refer to the HUD Home Scorecard)
WHAT QUESTIONS SHOULD I ASK WHEN LOOKING AT HOMES?
Many of your questions should focus on potential problems and maintenance issues. Does anything need to be replaced? What things require ongoing maintenance (e.g., paint, roof, HVAC, appliances, carpet)? Also ask about the house and neighborhood, focusing on quality of life issues. Be sure the seller’s or real estate agent’s answers are clear and complete. Ask questions until you understand all of the information they’ve given. Making a list of questions ahead of time will help you organize your thoughts and arrange all of the information you receive. The HUD Home Scorecard can help you develop your question list.
HOW MANY HOMES SHOULD I CONSIDER BEFORE CHOOSING ONE?
There is no magic number of houses you should see before you decide. Visit as many as it takes to find the one you want. On average, homebuyers see 15 houses before choosing one. Just be sure to communicate often with your real estate agent about everything you’re looking for. It will help avoid wasting your time.
WHAT DOES A HOME INSPECTOR DO AND HOW DOES AN INSPECTION FIGURE INTO THE PURCHASE OF A HOME?
An inspector checks the safety of your potential new home. Home inspectors focus especially on the structure, construction, and mechanical systems of the house and will make you aware of any repairs that are needed. The inspector does not evaluate whether or not you’re getting good value for your money. Generally, an inspector checks (and gives prices for repairs on): the electrical system, plumbing and waste disposal, the water heater, insulation and ventilation, the HVAC system, water source and quality, the potential presence of pests, the foundation, doors, windows, ceilings, walls, floors, and roof. Be sure to hire a home inspector that is qualified and experienced.
It’s a good idea to have an inspection before you sign a written offer since, once the deal is closed, you’ve bought the house “as is.” Or, you may want to include an inspection clause in the offer when negotiating for a home. An inspection clause gives you an “out” on buying the house if serious problems are found, or gives you the ability to renegotiate the purchase price if repairs are needed. An inspection clause can also specify that the seller must fix the problem(s) before you purchase the house.
DO I NEED TO BE THERE FOR THE INSPECTION?
It’s not required, but it’s a good idea. Following the inspection, the home inspector will be able to answer questions about the report and any problem areas. This is also an opportunity to hear an objective opinion on the home you’d like to purchase and it is a good time to ask general maintenance questions.
ARE OTHER TYPES OF INSPECTIONS REQUIRED?
If your home inspector discovers a serious problem, another more specific inspection may be recommended. It’s a good idea to consider having your home inspected for the presence of a variety of health-related risks like radon gas, asbestos, or possible problems with the water or waste disposal system.
WHAT OTHER ISSUES SHOULD I CONSIDER BEFORE I BUY MY HOME?
Always check to see if the house is in a low-lying area, in a high-risk area for natural disasters (like earthquakes, hurricanes, tornadoes, etc.), or in a hazardous materials area. Be sure the house meets building codes. Also consider local zoning laws, which could affect remodeling or making an addition in the future. Your real estate agent should be able to help you with these questions.
HOW DO I MAKE AN OFFER?
Your real estate agent will assist you in making an offer, which will include the following information:
- Complete legal description of the property
- Amount of earnest money
- Down payment and financing details
- Proposed move-in date
- Price you are offering
- Proposed closing date
- Length of time the offer is valid
- Details of the deal
Remember that a sale commitment depends on negotiating a satisfactory contract with the seller, not just making an offer.
HOW DO I DETERMINE THE INITIAL OFFER?
Unless you have a buyer’s agent, remember that the agent works for the seller. Make a point of asking him or her to keep your discussions and information confidential. Listen to your real estate agent’s advice, but follow your own instincts on deciding a fair price.
Calculating your offer should involve several factors: what homes sell for in the area, the home’s condition, how long it’s been on the market, financing terms, and the seller’s situation.
By the time you’re ready to make an offer, you should have a good idea of what the home is worth and what you can afford. And, be prepared for give-and-take negotiation, which is very common when buying a home. The buyer and seller may often go back and forth until they can agree on a price.
WHAT IS EARNEST MONEY? HOW MUCH SHOULD I SET ASIDE?
Earnest money is money put down to demonstrate your seriousness about buying a home. It must be substantial enough to demonstrate good faith and is usually between 1-5% of the purchase price (though the amount can vary with local customs and conditions). If your offer is accepted, the earnest money becomes part of your down payment or closing costs. If the offer is rejected, your money is returned to you. If you back out of a deal, you must forfeit the entire amount.
WHAT ARE “HOME WARRANTIES,” AND SHOULD I CONSIDER THEM?
Home warranties offer you protection for a specific period of time (e.g., one year) against potentially costly problems, like unexpected repairs on appliances or home systems, which are not covered by homeowner’s insurance. Warranties are becoming more popular because they offer protection during the time immediately following the purchase of a home, a time when many people find themselves cash-strapped.
WHAT IS A LOAN-TO-VALUE (LTV) RATIO? HOW DOES IT DETERMINE THE SIZE OF THE LOAN?
The loan to value ratio is the amount of money you borrow compared with the price or appraised value of the home you are purchasing. Each loan has a specific LTV limit. For example: with a 95% LTV loan on a home priced at $50,000, you could borrow up to $47,500 (95% of $50,000), and would have to pay $2,500 as a down payment. The LTV ratio reflects the amount of equity borrowers have in their homes. The higher the LTV ratio, the less cash homebuyers are required to pay out of their own funds. So, to protect lenders against potential loss in case of default, higher LTV loans (80% or more) usually require a mortgage insurance policy.
HOW LARGE OF A DOWN PAYMENT DO I NEED?
USDA and VA loans do not require any down payment. OHFA requires either 1% or 3.5% down payment, while FHA requires a 3.5% down. The down payment is based on the purchase price of the property. For those with limited assets, it is possible to be approved with a gift from a friend or family member. Another thing you may want to take advantage of is the ability for a seller to pay closing costs. Mortgages with less than a 20% down payment generally require a mortgage insurance policy to secure the loan. When considering the size of your down payment, consider that you’ll also need money for closing costs, moving expenses, and possibly repairs and decorating.
WHAT IS INCLUDED IN A MONTHLY MORTGAGE PAYMENT?
The monthly mortgage payment mainly pays off principal and interest. But most lenders also include local real estate taxes, homeowner’s insurance, and mortgage insurance (if applicable).
WHAT ARE DISCOUNT POINTS?
Discount points allow you to lower your interest rate. They are essentially prepaid interest, with each point equaling 1% of the total loan amount. Generally, for each point paid on a 30-year mortgage, the interest rate is reduced by 1/4 (or .25) of a percentage point. When shopping for loans, ask lenders for an interest rate with 0 points and then see how much the rate decreases with each point paid. Discount points are smart if you plan to stay in a home for some time since they can lower the monthly loan payment. Points are tax deductible when you purchase a home and you may be able to negotiate for the seller to pay for some of them.
WHAT IS AN ESCROW ACCOUNT? DO I NEED ONE?
Established by your lender, an escrow account is a place to set aside a portion of your monthly mortgage payment to cover annual charges for homeowner’s insurance, mortgage insurance (if applicable), and property taxes. Escrow accounts are a good idea because they assure money will always be available for these payments. If you use an escrow account to pay property taxes or homeowner’s insurance, make sure you are not penalized for late payments since it is the lender’s responsibility to make those payments.
HOW DO I CHOOSE THE BEST LOAN PROGRAM FOR ME?
Your personal situation will determine the best kind of loan for you. By asking yourself a few questions, you can help narrow your search among the many options available and discover which loan suits you best. You should know the answers to the following questions:
- Do you expect your finances to change over the next few years?
- Are you planning to live in this home for a long period of time?
- Are you comfortable with the idea of a changing mortgage payment amount?
- Do you wish to be free of mortgage debt as your children approach college age or as you prepare for retirement?
ARE THERE ANY COSTS OR FEES ASSOCIATED WITH THE LOAN ORIGINATION PROCESS?
The only money paid prior to closing is for the cost of the appraisal. At the time of this writing, the cost is generally $375 for single family residence appraisals
WHAT IS A GOOD FAITH ESTIMATE, AND HOW DOES IT HELP ME?
It’s an estimate that lists all fees paid before closing, all closing costs, and any escrow costs you will encounter when purchasing a home. The lender must supply it within three days of your application so that you can make accurate judgments when shopping for a loan.
BESIDES RESPA, DOES THE LENDER HAVE ANY ADDITIONAL RESPONSIBILITIES?
Lenders are not allowed to discriminate in any way against potential borrowers. If you believe a lender is refusing to provide his or her services to you on the basis of race, color, nationality, religion, sex, familial status, or disability, contact HUD’s Office of Fair Housing at 1-800-669-9777 (or 1-800-927-9275 for the hearing impaired).
WHAT HAPPENS AFTER I HAVE APPLIED FOR A LOAN?
It usually takes a lender between 3-5 weeks to complete the evaluation of your application. It’s not unusual for the lender to ask for more information once the application has been submitted. The sooner you can provide the information, the faster your application will be processed. Once all the information has been verified, the lender will call you to let you know the outcome of your application. If the loan is approved, a closing date is set up and the lender will review the closing process with you. And after closing, you’ll be able to move into your new home.
WHAT SHOULD I LOOK OUT FOR DURING THE FINAL WALK-THROUGH?
This will likely be the first opportunity to examine the house without furniture, giving you a clear view of everything. Check the walls and ceilings carefully, as well as any work the seller agreed to do in response to the inspection. Any problems discovered previously that you find uncorrected should be brought up prior to closing. It is the seller’s responsibility to fix them.
WHAT IS THE U.S. DEPARTMENT OF HOUING AND URBAN DEVELOPMENT?
Also known as HUD, the U.S. Department of Housing and Urban Development was established in 1965 to develop national policies and programs to address housing needs in the U.S. One of HUD’s primary missions is to create a suitable living environment for all Americans by developing and improving the country’s communities and enforcing fair housing laws.
HOW DOES HUD HELP HOMEBUYERS AND HOMEOWNERS?
HUD helps people by administering a variety of programs that develop and support affordable housing. Specifically, HUD plays a large role in homeownership by making loans available for lower- and moderate-income families through its FHA mortgage insurance program and its HUD Homes program. HUD owns homes in many communities throughout the U.S. and offers them for sale at attractive prices and economical terms. HUD also seeks to protect consumers through education, Fair Housing Laws, and rehabilitation initiatives.
WHAT IS FHA?
Now an agency within HUD, the Federal Housing Administration was established in 1934 to advance opportunities for Americans to own homes. By providing private lenders with mortgage insurance, the FHA gives them the security they need to lend to first-time buyers who might not be able to qualify for conventional loans. The FHA has helped more than 26 million Americans buy a home.
HOW CAN FHA ASSIST ME IN BUYING A HOME?
The FHA works to make homeownership a possibility for more Americans. With the FHA, you don’t need perfect credit or a high-paying job to qualify for a loan. The FHA also makes loans more accessible by requiring smaller down payments than conventional loans. In fact, an FHA down payment could be as little as a few months’ rent. And your monthly payments may not be much more than rent.
WHO CAN APPLY FOR FHA LOANS?
Anyone who meets credit requirements, can afford the mortgage payments and cash investment, and who plans to use the mortgaged property as a primary residence may apply for an FHA-insured loan.
WHAT QUALIFIES AS AN INCOME SOURCE FOR THE FHA?
Seasonal pay, child support, retirement pension payments, unemployment compensation, VA benefits, military pay, Social Security income, alimony, and rent paid by family all qualify as income sources. Part-time pay, overtime, and bonus pay also count as long as they are steady. Special savings plans-such as those set up by a church or community association – qualify, too. Income type is not as important as income steadiness with the FHA.
What is PMI?
PMI stands for Private Mortgage Insurance or Insurer. PMI companies are privately-owned companies that provide mortgage insurance. They offer both standard and special affordable programs for borrowers. These companies provide guidelines to lenders that detail the types of loans they will insure. Lenders use these guidelines to determine borrower eligibility. Conventional loans with PMI generally have stricter qualifying ratios than FHA loans, but their premiums are often lower and they insure loans that exceed the FHA limit.
Mortgage insurance is a policy that protects lenders against some or most of the losses that result from defaults on home mortgages. The mortgage insurance is paid by the borrower to a PMI company on a monthly basis, as part of your monthly payment. For FHA loans, PMI comes in 2 forms; a one-time upfront fee paid at closing, and a monthly PMI premium payment. All FHA loans have upfront and monthly PMI premiums regardless of the amount of your down payment. Conventional purchase loans have a monthly PMI payment when there is less than a 20% down payment.
Like home or auto insurance, mortgage insurance requires payment of a premium, is for protection against loss, and is used in the event of an emergency. If a borrower can’t repay an insured mortgage loan as agreed, the lender may foreclose on the property and file a claim with the mortgage insurer for some or most of the total losses.
CAN I ROLL CLOSING COSTS INTO MY NEW PURCHASE MORTGAGE LOAN?
No, but the seller can pay them or most of them, depending upon your purchase price and the willingness of the seller. In order to come to close with as little money as possible, you will make your purchase offer with a seller contribution. Seller contributions on FHA are allowed up to 6% of the purchase price of the home. Conventional loans allow 3% seller contributions with 10% down, and 6% seller contributions with 6% down.
Seller contributions can be made used to pay for closing costs, establishing an escrow account (taxes and insurance), first year home owner’s insurance premium, and upfront PMI premiums on FHA loans.
WHAT SHOULD I DO IF I CAN’T MAKE A PAYMENT ON MY LOAN?
Call or write to your lender as soon as possible. Clearly explain the situation and be prepared to provide him or her with financial information.
ARE THERE ANY OPTIONS IF I FALL BEHIND ON MY LOAN PAYMENTS?
Yes. Talk to your lender or a HUD-approved counseling agency for details. Listed below are a few options that may help you get back on track. Contact a HUD-approved housing counseling agency (1-800-569-4287 or TDD: 1-800-877-8339) and cooperate with the counselor/lender trying to help you.
HUD has a number of special loss mitigation programs available to help you:
- Special Forbearance: Your lender will arrange for a revised repayment plan which may include temporary reduction or suspension of payments; you can qualify by having an involuntary reduction in your income or increase in living expenses.
- Mortgage Modification: Allows you to refinance debt and/or extend the term of the mortgage loan which may reduce your monthly payments; you can qualify if you have recovered from financial problems, but net income is less than before.
- Partial Claim: Your lender may be able to help you obtain an interest-free loan from HUD to bring your mortgage current.
- Pre-foreclosure Sale: Allows you to sell your property and pay off your mortgage loan to avoid foreclosure.
- Deed-in-lieu of Foreclosure: Lets you voluntarily “give back” your property to the lender; it won’t save your house but will help you avoid the costs, time, and effort of the foreclosure process.
If you are having difficulty with an uncooperative lender or feel your loan servicer is not providing you with the most effective loss mitigation options, call the FHA Loss Mitigation Center at 1-888-297-8685 for additional help.
For conventional loans:
Talk to your lender about specific loss mitigation options. In any loss mitigation situation, it is important to remember a few helpful hints: Explore every reasonable alternative to avoid losing your home, but beware of scams offered outside of your lender. Scenarios people have fallen victim to include:
Equity skimming a buyer offers to repay the mortgage or sell the property if you sign over the deed and move out.
Phony counseling agencies: offer counseling for a fee when it is often given at no charge. Don’t sign anything you don’t understand.
