If you’re interested in buying your first home in the Anaheim-Placentia-Yorba Linda market, you’ll be glad to know there are plenty of great homes available in a variety of fantastic neighborhoods. You’ll also be glad to know that there are low money down, competitively priced mortgage options to help you finance your new home purchase. In today’s post, we’ll offer insight into popular mortgage options for first time home buyers in the Anaheim-Placentia-Yorba Linda area.
Conventional Loans Overview
Conventional loans are one of, if not the most popular home financing solutions in the United States. Conventional loans adhere to the guidelines set forth by the Federal National Mortgage Association (Fannie Mae), but are not insured by any government agency. They typically carry fixed interest rates and the most common term is 30 years, though they may be written with 15 or 20 year terms as well.
Conventional loans usually require a down payment of 20% of the home’s purchase price, otherwise the buyer is subject to paying private mortgage insurance (PMI), which can reduce the savings associated with the low interest rates of a conventional mortgage. For this reason, buyers who do not have enough cash to make a 20% down payment may be better off not choosing a conventional mortgage and considering a low money down option such as an FHA, USDA or VA loan (if they meet the eligibility requirements). Also, because conventional mortgages sometimes have more restrictive credit guidelines, first time buyers without a significant credit history or those who have less-than-perfect credit scores, may find it easier to qualify for a government-backed loan.
Conventional mortgage basics:
- Not insured by government agency
- Usually offered in 30 year fixed rate terms, but other options may be available
- Usually require 20% down to avoid paying PMI*
- Typically offer low interest rates
- May be a good option for first time buyers with a substantial cash savings
- May not be the best option for buyers with low credit
*Note: With conventional mortgages, if you do not put down at least 20%, you will most likely have to pay PMI until you have reached 20% equity, at which time you may cancel your PMI. Talk to one of our loan specialists for details.
Government Loans Overview
While conventional loans may be a common choice among first time buyers in the Anaheim-Placentia-Yorba Linda market, government-backed loans are also quite popular. Government loans are those that are backed by a government agency. FHA loans, VA loans and USDA loans are backed by the Federal Housing Administration (FHA), Department of Veterans Affairs (VA) and the United States Department of Agriculture (USDA), respectively. Each of these loan types offer low or zero money down to qualified borrowers, as well as other benefits.
With FHA loans, the borrower is required to make a much smaller down payment than they would with a conventional loan. FHA loans require only 3.5% down as opposed to 20%. On a $550,000 home (the median listing price reported by Zillow for Anaheim, CA in September 2016), that could mean making a down payment of $15,400 as opposed to $110,000 – a difference of $94,600! FHA loans also allow seller-paid closing costs, gift funds for the down payment, and generally have less restrictive credit requirements. These features can make FHA loans easier to qualify for than conventional mortgages.
The downside is FHA loans often (but not always) have slightly higher interest rates than conventional mortgages. Plus, FHA loan borrowers have to pay 2 separate mortgage insurance premiums – one up front and one annually. Fortunately, the cost of these premiums can be financed into the mortgage, making it easier for the borrower to pay the fees. Unfortunately, these extra costs, plus the higher rate could potentially (but not necessarily) make FHA loans less affordable in the long run. Likewise, since the FHA loan has such a low down payment option, it can take longer for the FHA borrower to build equity in their home. However, since first time buyers often do not stay in their homes more than a few years, the long term costs may not be as big of a concern as they would be to someone buying a home they plan to spend the rest of their life in.
FHA loan basics:
- Backed by the Federal Housing Administration (FHA)
- Only require 3.5% down
- Can be a good option for first time buyers without a lot of cash to put down
- May not be the best option for buyers purchasing their “forever” home.
USDA loans are backed by the United States Department of Agriculture (USDA) and are designed to help increase homeownership rates in rural or less developed areas. The biggest benefit to USDA financing is that the borrower does not have to make a down payment. Borrowers may still be responsible for paying certain closing costs or fees, but these can often be financed into the loan.
The biggest caveat to USDA financing is that the home must be located in a USDA-eligible area. You can check the USDA’s website to see if a home you’re interested in is located in an eligible area. In the Anaheim-Placentia-Yorba Linda market, USDA financing may be difficult to obtain, simply because so much of the area is not eligible for USDA financing. Buyers interested in USDA financing may have to expand their home search to south of Woodcrest, Nuevo, Lakeview or elsewhere in Riverside County.
Also, USDA borrowers must not earn more than the USDA income limits established for their county. You can check to see if you are eligible for USDA financing in Orange County by visiting the USDA’s eligibility webpage.
USDA loan basics:
- 100% financing available (no money down required)
- Home must be in USDA-eligible area
- Borrower must meet income guidelines (it is possible to earn too much to qualify)
VA loans are backed by the Department of Veterans Affairs (VA) and are intended to help veterans and active duty service members obtain affordable homeownership. VA loans are also offered to some surviving spouses of veterans. Contact us today or visit the VA’s website to find out if you are eligible for a VA mortgage.
VA loans are another zero money down financing option, but they are only available to eligible service memebers, surviving spouses, or certain U.S. citizen who served in the armed forces of a government allied with the U.S. in World War II.
Individuals with service as memebers in certain organizations such as Public Health Service officers, cadets at the United States Military, Air Force, or Coast Guard Academy, midshipmen at the United States Naval Academy, officers of National Oceanic & Atmospheric Administration, merchant seaman with World War II service, and others may also be eligible for VA financing.
Other benefits of VA financing include no PMI, low interest rates and less restrictive credit requirements.
VA loan basics:
- 100% financing available (no money down required)
- No PMI
- Only available to eligible veterans, active duty military, surviving spouses or other eligible service members
- Can be a great option for first time buyers who meet the eligibility requirements