In a Nutshell: While becoming a homeowner has tremendous financial advantages, navigating the mortgage approval process can be difficult, especially for those with past credit issues. Fortunately, federal options, from FHA and VA loans to those from Fannie Mae and Freddie Mac, offer conditions well-suited to people in less-than-ideal financial situations. To find out more about these programs, we turned to Mortgage Daily Founder Sam Garcia, who worked in the mortgage industry for 20 years and has written about it for another 18. Garcia provided several tips for tentative homebuyers, including the advantages of a 15-year loan and taking the time to shop around, compare offers, and choose the loan best suited to their needs and goals.
For a first-time homebuyer with low income, poor credit, or both, getting a mortgage can be especially challenging.
Just starting the search for financing can be intimidating, as can the prospect of saving up enough money to make a down payment. In these situations, expert guidance can mean the difference between continuing to rent and getting started on the path to homeownership.
And expert guidance is what we got when we turned to Mortgage Daily Founder Sam Garcia, who worked in the mortgage industry for 20 years, specifically in subprime and wholesale lending.
“Around 1998, that all really took a dive,” Garcia said. He decided to leave the industry, but his expertise combined with an interest in news motivated him to start writing a newsletter. Now, 18 years later, that newsletter has evolved into a full news publication called Mortgage Daily.
The site contains mostly subscription content aimed at industry professionals, but it also hosts free consumer news for homeowners and buyers on topics like refinancing and reverse mortgages.
There are plenty of compelling reasons for renters to consider becoming homeowners, not least of which is property appreciation. “It’s basically equity that builds up as they live there longer, which they don’t get if they rent,” Garcia said.
This equity can be borrowed against for major purchases and home improvement. Additionally, paying a mortgage is usually cheaper than paying rent. “You can wind up with smaller payments, depending on how many years you go,” Garcia said. “The offset to that is you have to come up with some money down to do that.”
But that hurdle may not be as high as many potential buyers tend to think. Here are some of Garcia’s thoughts on loans, terms, and finding a deal that will get buyers out of their apartments and into homes of their own.
Federal Financing Options for Homebuyers
Prospective homebuyers, even those with low income or bad credit, have access to loans that can help them achieve their goals. These include mortgages from the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), and conventional federal lenders.
FHA Loans Offer Flexibility and Low Down Payments
Garcia referred to FHA loans as the go-to mortgage for people who can’t make a standard down payment or have credit issues.
“They’re pretty flexible on their credit requirements and debt ratio requirements,” Garcia said, adding that down payments on FHA loans can be as low as 3%. “All things considered, that’s definitely the easiest way to get a loan.”
However, this ease comes with some potential drawbacks. “With FHA, there are sometimes requirements that Realtors and sellers are familiar with that they may not want to have to deal with,” Garcia said.
For example, FHA loans require a very strict appraisal process by a Housing and Urban Development (HUD)-approved appraiser. Some agents and sellers also believe FHA loans have a higher chance of failing the underwriting process. Although this is largely untrue — 73% of FHA loans close successfully within 90 days, compared to 76% of conventional loans — it may still be a sticking point for some sellers, and so it can put FHA borrowers at a disadvantage.
“Given a conventional offer and an FHA offer, the seller might go with the conventional,” Garcia said. “It can hold you back in certain situations.”
VA Loans Provide 100% Financing Guaranteed by Government
Veterans seeking to buy a home can access 100% financing through a VA loan.
“In that program, the Department of Veterans Affairs basically guarantees a portion of any loss that a lender will experience on a loan that meets VA requirements,” Garcia said.
This government backing of the loan is more attractive to lenders in comparison with an FHA loan, wherein the government merely insures losses on a portion of the loan. For servicemen and women, this is an outstanding choice for financing a home purchase.
Conventional Loans Help Underserved Individuals Achieve Homeownership
Federal agencies also provide conventional loans with a 3% down payment. Freddie Mac offers this option for low- to moderate-income homebuyers and buyers in high cost or underserved communities.
Likewise, Fannie Mae offers financing to creditworthy buyers who can’t make a large down payment. Fannie Mae has also adopted new criteria for financing manufactured housing, offsetting affordability barriers and the lack of availability of conventional houses that impede some buyers.
Garcia encourages anyone interested in these products to speak with their local originators to learn more about their specific options.
Maximizing Your Investment with a 15-Year Loan
Choosing a 30-year mortgage over a 15-year helps borrowers maximize their buying power and get the most house for their money. While this seems like a good deal, they may want to rethink that logic.
“The one piece of advice I would offer anybody who’s going to finance a home is to go for the 15-year loan,” Garcia said. “Fifteen years into the loan, you’re done. On the 30-year loan, after 15 years, you’re just starting a 15-year loan.”
The borrower also enjoys a lower interest rate, and, by paying the loan off faster, they pay much less in overall interest. This also makes the home a more feasible retirement tool, since it will be owned outright with no debt, and the equity can be borrowed against if necessary.
Garcia said that, before the housing crisis of the early 2000s, many buyers chose 30-year loans because it got them nicer, larger houses. But, he says, if they had chosen to take the 15-year option, they might have avoided financial hardship and even foreclosure. The moral of the story is clear: “Go 15 years, all the time.”
Tips for Finding the Right Lender
The first step in getting a mortgage is doing your homework. Luckily, prospective buyers can start the process without getting off their couches.
“It’s very easy to go online,” Garcia said. He noted loanDepot and Quicken Loans’ Rocket Mortgage as fast ways of assessing affordability and getting preapproved. “They have these pretty much instant approvals that guide you through that pretty quickly,” he said.
The information these services provide can help buyers orient themselves before moving forward.
“Then, you want to shop a few lenders on the same day and see the pricing they’ll give you so you can find the best deal,” Garcia said. He recommends that consumers look to J.D. Power’s rankings of lenders by customer satisfaction. “It gives you an idea of how all the big players rank among their peers,” he said.
Even with these available online resources, a buyer’s best bet is a recommendation from someone they trust. If a friend or colleague can provide the name of someone who handled their mortgage well, it’s a lead worth pursuing.
“A referral like that is more valuable than anything you’re going to find non-organically,” Garcia said. This sort of personal satisfaction is a good indicator of approval.
Ultimately, obtaining financing comes down to understanding your options and having the knowledge to make the best choice. By doing so, potential buyers put themselves in a strong position to get a loan, close the deal, and achieve the dream of homeownership.