Let’s face it, home lending can be complicated to understand. Every industry has its own jargon but the home mortgage industry can be particularly perplexing. Some of this comes from the fact that two large entities are involved in the process; banks and the government. When these two entities combine, you just know there are going to be lots of letters flying around. Let’s try to decipher some of the many terms you will hear when applying to get your new home loan.
Some of the More Common Acronyms
HUD – The Department of Housing and Urban Development was established in 1965. Its purpose is to provide housing and community development assistance and to make sure everyone has access to “fair and equal” housing. It oversees or participates in many programs intended to support homeownership, increase safe and affordable rental housing, reduce homelessness and fight housing discrimination. While HUD does some loan guarantees on its own, its focus is on multifamily units, not individual homes. This is what the FHA is for.
FHA – While HUD is not a lender, it does have a branch known as the Federal Housing Administration. Its purpose is to ensure home loans made by private lenders. These loans are commonly called FHA loans. To get an FHA-guaranteed mortgage, you must go to an FHA-approved lender, typically a bank. FHA backed loans are popular because you don’t have to have perfect credit. Even with a bankruptcy or foreclosure, you may be eligible for an FHA loan depending on how much time has passed and whether good credit has been re-established. Borrowers with a credit score of at least 580 qualify for an FHA loan but lenders can require a higher score. If you are approved with a FICO score of at least 580 you may only be required to put down 3.5% of the home’s purchase price in cash. (NOTE: This isn’t a construction loan)
VA – Another government organization that pops up is the Veterans Administration when it comes to home loans. In support of veterans and service personnel, the VA will guarantee a maximum of 25 percent of a home loan amount up to $113,275. This limits the maximum loan amount to $453,100. Generally, the reasonable value of the property or the purchase price, whichever is less, plus the funding fee may be borrowed. Being a veteran doesn’t make a homebuyer automatically eligible for a home loan, you must meet both service requirements and credit/income requirements to be eligible. (NOTE: This isn’t a construction loan)
USDA – Even the United States Department of Agriculture is a player in guaranteeing home loans. The USDA has a division known as RD, or Rural Development, that guarantees home loans in rural areas. The USDA loan is a zero down payment mortgage option available to homebuyers in the United States who wish to purchase in a qualified rural or suburban area. These loans are issued by private lenders and guaranteed by the USDA. The USDA’s purpose is to provide affordable homeownership opportunities to low-to-moderate income households to stimulate economic growth in rural and suburban communities throughout the United States. (NOTE: This isn’t a construction loan)
FNMA – The Federal National Mortgage Association’s purpose is to create a secondary market for the trading of mortgages. In 1968, Fannie Mae (the nickname of the FNMA) transitioned from a government entity to a quasi-governmental, federally chartered corporation in order to buy mortgages other than those insured by the Federal Housing Administration (FHA). The Federal National Mortgage Association purchases pools of mortgages from lenders and resells them in the form of mortgage-backed and other securities to investors. Purchases are generally restricted to conforming loans. These loans meet certain size limits and other conditions. It may sound complicated but what this does is allow lenders to “sell” their loans and then make that money available to lend to more home buyers.
And then there are Construction Loans…
A construction loan isn’t a long term loan. It is a short term loan that is used to build a home. A construction loan is a loan against something that doesn’t exist… yet. The home buyer and home builder are incrementally buying the ingredients for a recipe that will ultimately create a finished home in less than a year. In that timeframe, anything can happen marital status changes, financial changes, zoning issues, etc. Building a custom home is a dream come true for a home buyer… but for a bank, it means higher risk. When a bank sees a higher risk the first thing they do is mitigate it. They do this by increasing down payment requirements, increasing credit score requirements, and making sure borrower credit histories are outstanding.
All of the government entities above guarantee loans, they don’t make loans. Since construction loans can be riskier, there are no government backed construction loans. What this means is that many of the users of the loans above may struggle to qualify for a construction loan that will allow them to build a home. There are programs available that may help, but home buyers need to talk with lenders in advance to make sure they can qualify.
Modular Just Mean More
When it comes to mitigating risk, modular homes do it best. Building a home outside in the elements is risky. Bad weather can lead to delays. Tools and materials lying around a home site invite theft. Driving to a remote home site increases construction times and labor costs. By building a home in a factory all of this is mitigated.
Modular has now become the way forward for the home construction industry. Gone are the days when a “stick built” home was defined as the best way to build a home. Today it is becoming seen for what it really is, the remnants of the old way of building. Great home designs, energy efficiency and fantastic value are just some of the characteristics of today modular construction. It’s time to learn why modular just means more!