Types of Special Mortgage Loan Programs

Borrowers can find specific programs to help them get a home loan. Most of these loan programs are restrictive and have certain requirements. However, they make it easier for people to qualify for a home loan and allow for better terms and lower payments.


FHA loans

This loan is insured by the Federal Housing Administration, which is part of the Department of Housing and Urban Development. It has been around since 1934 and is often considered the loan of choice for first-time home buyers.

The FHA loan is designed for those who are buying their first home and has many benefits. This loan requires a much lower down payment than traditional loans and will accept borrowers that have a lower credit rating or have been in bankruptcy or foreclosure.

Lenders do not take a risk with a borrower who chooses the FHA loan since the government agency insures it. This allows them to offer a loan with a lower down payment of only 3.5% instead of the usual 20%. First-time home buyers often have trouble saving up enough for other types of loans due to a lower income so this is an attractive option for them.

Here are some other benefits of an FHA loan:

  • Mortgage insurance can be added into the loan instead of paid out of pocket like with traditional loans.
  • Debt ratios can be higher than with other loans.
  • Anyone can get an FHA loan even though they are usually the choice of first-time buyers or those with low or moderate income levels.
  • There is no income limit.
  • No prepayment penalty.
  • Easier for the borrower to use gifts and other special funding for closing costs and down payments.
  • Possible funding for home improvements.

Reasons why an FHA loan may not be for you:

  • A higher loan interest rate than with a fixed loan.
  • Higher mortgage insurance than with private insurance.
  • Lower loan limits. FHA loans put limits on how much a person can borrow based on the area where they live. They are usually determined by the average price of a moderate home in that area.

VA loans

This loan has been available to veterans ever since Congress created the program in 1944 to help World War II veterans achieve home ownership. Since then, it has helped millions of ex-servicemen and women become homeowners.

Lenders that are approved to offer VA loans are protected with the guarantee that a fourth of the loan will be repaid if a borrower should default. This guarantee allows lenders to offer more competitive rates than with other special programs.

Numerous benefits make this an excellent loan option for anyone that has served in the military.

  • No down payment is required.
  • No mortgage insurance is required, which lowers the monthly payments.
  • Lower requirements to qualify for the loan. In fact, it is estimated that up to eighty percent of those with a VA loan would not qualify for any other loan.
  • Interest rates are competitive to other types of loans and may often be lower.
  • No prepayment penalties.
  • Sellers can pay up to six percent of the closing costs, which further reduces the amount of cash needed to purchase.
  • Higher debt-to-income ratios are allowed.
  • No additional underwriting is needed if the owner decides to refinance.

There are two possible disadvantages to choosing this type of loan. First, you are limited to where you will live and the house you can buy. Second, there is an income limit and higher income borrowers will not qualify. This loan was designed for low to moderate income people that cannot qualify for other loans because they do not have money to save for a down payment.

There are other loan programs available that may vary by state or lender, but these three are the ones most often used when a borrower is looking for a specialized program.

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