Purchasing a home can be a little nerve-racking, especially for Tampa first time home buyers. Beyond all mortgage preparation, there are many different people involved in the process. This includes the lender, realtor, closing agent, appraiser, and the list goes on.
Applying for a home loan and getting preapproved from a mortgage lender should be the first step in the home buying process. Buyers can do research in advance to get familiar with some of these programs but speaking to a mortgage professional is always a good idea. There are many different programs tailored to first-time buyers. In this post, we will review the most popular programs and talk about some of the pros and cons of each.
Government and Conventional Mortgages:
Home loans in general are separated into two classes, a government-backed loan and a conventional one. A government-backed loan is so-called because the loan carries some guarantees to the lender issuing the loan. This guarantee doesn’t guarantee a mortgage loan applicant a loan approval but does provide the lender with some degree of confidence when processing such a loan. There are three such programs, the VA home loan, USDA and FHA mortgage programs and can only be used to finance a primary residence.
Conventional mortgage loans do not have such a government guarantee and the risk is placed entirely upon the mortgage lender processing the loan application. Should the loan ever go into default the lender endured the entire loss, foreclosing on the property and putting up the home for sale at a foreclosure option. Conventional loans fall into the conforming or jumbo category. A conforming conventional loan means the maximum loan amount is $510,400 in most locations of Florida. A loan above that amount is considered a jumbo loan. Most conventional loans today are underwritten to standards issued by mortgage giants Fannie Mae and Freddie Mac.
Note: Buyers can see the complete state by state Fannie Mae Conventional Loan Limit here.
A third option which occupies a very small slice of the mortgage lending pie is a portfolio loan. A portfolio loan is a mortgage that does not conform to government or conventional requirements. With this, the bank or lender intends to keep the loan on their own “portfolio” with no intention of selling it in the secondary market.
Government Loan Basics for First Time Buyers:
USDA Loans. This USDA Rural Housing program has been around for several years and offers 100% financing in select locations throughout Florida. USDA loans are available for first time home buyers and move-up buyers, but the qualification requirements are a bit different.
USDA rural loans are meant to help those homebuyers in rural or semi-rural areas more easily obtain financing as well as having no down payment requirement. The USDA loan can only be used in previously approved areas as well as limiting the amount of household income of those not only on the loan application but in the household as well.
For those who are considering a USDA loan, the first step is to make sure the potential property is in an approved zone. Your loan officer can help walk you through the process but you can also log onto USDA’s website where all you need do is enter the property address to see if the home is within an acceptable area. Most areas in metro Tampa – Hillsborough and Pinellas county are not eligible for USDA financing. However, many outlining locations in Pasco and Manatee County are still approved.
If the property is in an acceptable area the borrowers must then calculate household income and fall at or below maximum income limits established for the area by the USDA. These limits are set at 115% of the median income for the area. There are adjustments to this amount so it’s not exactly 115% but your loan advisor can explain these limits to you. The USDA loan has a one-time guarantee fee of 1% that is financed or rolled into the loan as an upfront fee. An annual fee is required which is 0.35% of the loan amount and paid in monthly installments. Using a $150,000 loan, the one-time guarantee fee is $1,500 resulting in a final loan amount of $151,500. If a first-time buyer wants a loan with zero down but is not VA-eligible, the USDA loan is an option.
FHA Loans. FHA mortgage only has a down payment requirement of 3.5% of the purchase price. The FHA loan is not restricted to a particular area and does not have maximum income limits like USDA.
The Federal Housing Administration, or FHA, was first introduced as part of the National Housing Act of 1934. FHA mortgages carried a mortgage insurance policy that compensated lenders to 100% of the loss should the lender be forced to foreclose on the property as long as the lender followed prescribed FHA guidelines.
Like the USDA loan, the FHA program requires two separate mortgage insurance premiums, an upfront, and an annual one. The upfront premium is 1.75% of the sales price and rolled into the loan just like the other government-backed programs. In addition, there is a monthly premium that is also added to the buyer mortgage payment each month. While the FHA program is not reserved for first-time buyers in Tampa it is extremely popular for them due to the low down payment requirement and competitive interest rates. Learn more about FHA loans under the loan programs section above.
VA Loans. VA loans are those underwritten to guidelines set forth by the Department of Veteran’s Affairs. This program offers 100% financing to all eligible and qualified Vets.
Eligibility for a VA home loan has expanded to include not just veterans of the armed forces but to active duty personnel with at least 181 days of service. In addition, those who have served for at least six years with the National Guard or Armed Forces Reserves can also apply for a VA home loan as well as un-remarried surviving spouses of those who have died while serving or the result of a service-related injury. In addition to not requiring a down payment, the VA home loan limits the types of closing costs the veteran is allowed to pay.
VA loans also require a one-time funding fee that is financed into the buyer’s loan. This is expressed as a percentage of the loan amount and can vary slightly based on the number of times the veteran uses the VA loan to buy a home as well as the type of loan. For a first time buyer in Florida using the 100% VA loan option, the funding fee is 2.3% of the loan amount and is rolled into the loan amount. The great thing about VA loans is they do not have the extra monthly mortgage insurance premium (PMI) like the other government loan programs.
Note: VA funding fee amounts can differ based on loan to value and other variables. See the complete VA Funding Fee table here.
VA also offers some fantastic refinance options for Vets that already have VA loans with higher interest rates.
Conventional Loans for First Time Buyers:
Conventional loans up to $510,400 are either approved using guidelines set by Fannie Mae and Freddie Mac. The minimum down payment for either program is normally 5.0%. However, there are special programs that only require 3.0% down for owner-occupied properties.
Conventional loans for first-time buyers are a good choice for those with a larger down payment. If a conventional loan is equal to at least 80% of the value of the property the mortgage company will require a mortgage insurance premium. For those that can structure a mortgage where the first loan is at or below 80% loan to value, there is no mortgage insurance.
Conventional loans are also available to finance more than just a primary residence and are used to purchase a vacation or beach home or a rental property as well. For example, say a buyer is looking to purchase a vacation property in Florida. They intend to rent it out during the summer but will live there during the other months. The sales price is $300,000 and they intend to put down at least 20%. It’s important to understand the difference between a rental property and a vacation home. A property is considered a vacation home if it is not rented out for more than two weeks per year, otherwise, it’s considered a rental. Rental or investments properties generally require a 20% down payment and often come with higher interest rates.
Please see the helpful video below for more program details and call us with questions. We are available 7 days a week.