home matters

Breaking the Code: Specialty Mortgage Programs and Why They’re Special

John Pataky | September 1, 2016 4 MIN READ

For most homebuyers, mortgages will be an essential part of how one will pay for their new home. And while you may be familiar with the general concept of a mortgage—the additional terms and acronyms that define the type of mortgage can become confusing very quickly. Let’s unlock the code—in plain English—and create clarity around what specialty mortgage programs are available and what is required for eligibility.

Federal Housing Administration (FHA)

The widest available specialty offering comes from the Federal Housing Administration (FHA) home loan program, which is run by the U.S. Department of Housing and Urban Development (HUD). In this case, the FHA works with accredited lenders to insure certain mortgages. These loans are known as “FHA-insured.” The FHA began this program during the Great Depression to help homeowners get back on their feet in an effort to support the larger housing market, and is still a significant offering today.

Unlike some of the loans discussed later in this article, there is no specific homebuyer demographic that an FHA insured loan is available to. Homeowners looking to purchase either single or multi-family homes can qualify for an FHA loan. Buyers who may have lower credit scores or less cash available for a down payment often look to an FHA option. The upside to these loans is that they have less stringent credit score and down payment requirements. Generally speaking, with a credit score of at least 580, a homeowner can qualify for an FHA loan with a down payment of 3.5 percent of the purchase price of the home. Though many lenders require a minimum credit score of 580 to qualify for an FHA loan, exceptions can exist for credit scores between 500 and 579, though a downpayment of at least 10 percent would be required.

For borrowers interested in an FHA-insured loan, they should keep in mind that they will be responsible for mortgage insurance premiums, which do add an additional cost to each monthly payment.

U.S. Department of Veterans Affairs (VA)

Unlike FHA loans, which are available to the general population, “VA loans” are guaranteed by the U.S. Department of Veterans Affairs (VA) and are only available to those associated with the military. More specifically, these loans are offered to current members of the military, veterans, reservists and National Guard members as well as spouses of military members who died while on active duty. If you qualify based on those requirements, it’s important to note that there are time frames associated with eligibility as well. Active duty members of the military generally will qualify after six months of service during peacetime or three months of service during wartime, whereas reservists and members of the National Guard qualify after six years unless enlisted to active duty.

In some but not all cases, VA loans do not have any associated down payment or credit score requirements. Eligible homeowners may obtain 100 percent (and higher in some cases) financing on a new home without private mortgage insurance. In other words, those who are VA-eligible can purchase a home with no money down and borrow the full price of the home along with some or all of the closing costs. While VA loans generally cost less to obtain than other mortgages, they require a one-time funding fee that varies based on the down payment and type of veteran.

U.S. Department of Agriculture (USDA)

Those who live in a rural area may qualify for a U.S. Department of Agriculture (USDA) loan. USDA mortgages were originally introduced in the 1990s for Americans who were struggling to find decent, safe housing and who had an adjusted income equal to or below the low-income limit in their area. While the term “rural,” may create the visual of pastures and fields, the USDA’s definition of the word actually results in 97 percent of the U.S. being eligible. Homeowners can verify eligibility for a USDA loan by checking their specific home address and census tract on the USDA website.

For those who qualify for a USDA loan, no down payment or private mortgage insurance is required. However, USDA loans include a minimal upfront guarantee fee at closing that can be added to the loan balance, as well as an annual guarantee fee, which is factored into each monthly mortgage payment. The rates of these fees are typically reanalyzed each year and adjusted by the USDA.

Bottom Line

There is a wide range of loan programs available to accommodate just about any future homeowner, and while this is encouraging for your financial stability and homeowner aspirations, understanding the nuances of each is paramount. While we’ve outlined a few of the mortgage-associated acronyms, the first step on the path to homeownership is to contact your lender to discuss your personal profile and determine what loan programs best fit your needs.

John Pataky
John Pataky
EVP, EverBank Consumer Division
John Pataky
John Pataky
EVP, EverBank Consumer Division
John has long served as a leader in the financial services industry. And today, his focus on our clients' needs drives the strategic growth and evolution of our banking and home lending businesses.

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