Don’t Get Down Over Your Down Payment: A Quick Guide to Government Backed Loans

Let’s face it, Southern Illinois isn’t like any other region in the Midwest. A mix of Midwestern and Southern culture paired with the natural beauty of Little Egypt make this one of the most welcoming and unique places to live. But our language (ain’t that right ya’ll?) and food (think Fat Patties and Pop’s) aren’t the only thing that sets us apart. We tend to finance our homes differently. Our area traditionally relies on government backed  FHA, VA, and USDA loans more heavily that areas like the Metro East or Springfield. These loans are backed by the federal government and are therefore less risky for banks than traditional mortgages, this lets you enjoy lower down payments and lower interest. I’d like to show you a few options for home financing that are commonly used around here, and explain how and why you might want to utilize each one. This article is no substitute for professional advice from your lender and Realtor, it is a quick guide to get you headed in the right direction. Next time we will cover more traditional financing.

FHA

FHA Loans

Down Payment: Minimum of 3.5%

Credit Score Range: 580 or higher in most cases. Lower scores considered with a 10% down payment or more.

Special Qualifications: Employment history for 2 years, the home must meet certain inspection requirements, the home must be a primary residence

An FHA Loan is an attractive option for people with less than perfect credit and first time home buyers. It has a relatively low down payment with the right credit score, but it comes with inspection requirements. The home must meet these standards or the seller must agree to make the repairs to bring the home of these standards. An FHA loan also requires mortgage insurance to protect the bank from potential loss on their investment. This type is very common in our area, possibly the most common.

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USDA Rural Housing Development Loans

Down Payment: 0% and closing costs may be financed

Credit Score Range: 620 preferred, 580 and below accepted with more stringent underwriting requirements.

Special Qualifications: Live in an approved area, dependable income for a minimum of two years, a good credit history with no accounts in collections for one year.

This loan is not restricted to farmers! Anyone can be eligible. For those with better credit a USDA loan can be a great option. It allows a buyer to purchase a home with 0% down. The buyer can also finance closing costs so the buyer will end up paying very little out of pocket to get started. This type of loan is restricted to certain rural areas but luckily almost all of our region is covered. This loan can also be used for improvements on a purchased property. USDA is among the top two types of loans used in our area.

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VA Home Loans

Down Payment: 0% if home does not exceed appraised value

Credit Score Range: Usually 620 or above

Special Qualifications: Service in the United States Armed Forces for a specified period of time or be the spouse of a qualifying deceased Veteran

A VA Loan is a great option for veterans. This allows you to purchase a home for almost no money down, may cover closing costs, and limits closing costs. These costs can even be payed by the seller leaving you with less out of pocket costs to close the transaction. Usually they can only be used once by a qualifying veteran. This loan will only cover the appraised value of the home. If a home is appraised at $100,000 and listed at $110,000 a veteran can still use this loan if they make a down payment for the remaining $10,000.

Regionally we tend to prefer these government backed loans to other ways of financing a home. They all have some great attributes but the requirements can be fairly stringent. This general guide should give you a little background into government backed home loans. A Realtor can help direct you towards a lender who can make these work for you. The next entry I write will cover more traditional forms of home financing and how and when you can make these work for you. Don’t be discouraged from home ownership by a down payment, there are plenty of ways to minimize or even eliminate this cost!

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Distressed Properties: A Game of Opportunities and Risks

As I was driving through DuQuoin this week I spotted a few very nice looking homes on the main route through town with a sales sign in the yard. Since I’m always on the lookout for great properties for the people I work for I stopped to take a look. These properties were all being sold by the local bank. The prices were lower than what I expected and they were in a choice location. These homes had been foreclosed on and were now sitting empty. These REO (real estate owned) homes are a product of foreclosure, they have usually been listed at an auction and have not had their minimum bid met leading to their listing on the traditional market. These homes can be often be purchased for a very fair price (often below market value) and make a great first home for a family just starting out or a smart investment property for a homeowner looking to branch out. With a little work you can have a great home for a great price.

The number one feature of an REO most people ask about is the price. The bank that owns the property is working to recoup their losses on the original loan of the property as efficiently as possible. As anyone who has owned and worked to sell an empty house can tell you an empty house can cost the owner big bucks in maintenance and taxes, because of this banks are often motivated to sell at a lower than average price so that they can stop shelling out the cost of holding the property. This can allow you to buy a larger home than you might expect because many are sold below market value, although this is not always the case.

An REO is considered a distressed property. This means that it is in the process of foreclosure, which can be a messy situation. One of the drawbacks of these homes is that they are sold “as is”. In most cases no repairs will be done before the sale and the previous owner may have lacked the capital to perform maintenance on the property. Some of these homes are beautiful and others are pretty rough. I would recommend that a person looking to buy an REO be realistic about this. If you are not willing to bring the property up to your standards it might be best to look at a traditional home sale. Many home buyers have had a great deal of success turning an REO into a dream home, but others have gotten in over their heads with the cost of repairs. This is why it is paramount that you work with a Realtor, you need an expert to help you find an REO that fits your budget, both for the purchase price and for potential repairs. A Realtor can help you find a happy medium between a fixer upper and a move in ready REO.

The next problem you may face with an REO is a more limited supply of lenders. Many lenders will not finance a distressed property. A Realtor can guide you towards lenders that do. I am aware of several lenders like this, so we can find a range of options. Keep in mind you will also need some capital for repairs. Lenders may find these homes riskier because of this. These homes will also take a great deal more paperwork than a traditional purchase and the purchase process can take significantly longer. A Realtor can make this process a lot less painful for you.

The bottom line is this: an REO can be a great investment for you or an absolute money pit. A Realtor can help steer you in the right direction but you must be realistic about the process. I have previewed several distressed properties for buyers in the past week and I have seen some that were move in ready and some that looked like a place you’d find Jason Vorhees lurking. Both homes have a great deal of potential. One could be an amazing home with a little work and the other already looked great needing only minor cosmetic work. Think about what you want, think about your resources. Do you know much about home repair? Do you have a great contractor who can do the repairs at a fair price? Are you willing to put in a little work for big savings? If the answer is yes than an REO might be right for you. As long as you are realistic about the potential risk and rewards you will have a good experience.

If you’re curious about REO properties I’m always here to help you find one in your area and on your budget. There are a lot of these properties in places like DuQuoin, Marion, Carterville, and Carbondale, places which are seeing a lot of growth. This means that with a little investment and a little time you can grow the value of your REO home and turn it into a profitable venture or a family home. Are you ready to give it a shot? No joke, I’m here to be your guide to local REO properties.

Renting vs. Buying in So. IL

This week I’ve run into several people who are convinced there is no way out of the rental cycle. Spending a good chunk of your paycheck every month and then never seeing that money again. It’s gone. Poof! Like magic, but not as fun to watch. Many folks think it’s simply too costly to buy a home and believe they’re saving money by renting. Nothing could be farther from the truth. I’d like to go over a few myths about renting and show you how easy it can be to become a homeowner.

Myth 1: Renting saves me money!

Rentals in our area can range drastically in price. An average two bedroom apartment in Marion will run you around $575 and will require a security deposit. Over the course of a year you will be spending roughly $6,900 on rent, not to mention any money you may lose on your security deposit. After your contract ends and the remainder of your security deposit is returned all the money you spend on your rental is gone. It is in someone’s bank account, but not yours. For that amount of money you could be making payments on a home and that money would still be yours in the form of equity in your home. When the time comes you can sell your home again and get that money back, and potentially even more if conditions are right and you take care of your property. Renting is simply spending money but buying a home is a form of investment. One is giving your money away, the other is investing it.

Myth 2: Maintaining a home is way too much work and prohibitively expensive!

One of the perks of renting a home is the benefit of having someone else fix your leaky faucets, cracked windows, or scratches Fido left on your front door. People seem to think that the time put into maintaining a house is a waste, but it is a great way to maintain or add value to your investment. Any improvement you add to your home can potentially add value to the investment and make you a bit more money if you choose to sell. According to Realtor.com you can see respectable returns on your home improvements and repairs, some like fiberglass insulation can actually net more than they cost to install. Just like the payments on your home the cost of repairs and updates adds to your investment. Whereas rent money is gone forever, the money you invest in your home stays with you. Suddenly when your money reappears the magic becomes a lot more fun to watch.

Myth 3: Real Estate is a dangerous game, I’ve seen The Big Short!

While many people took a hit when the housing bubble burst in 2008 real estate remains one of the safest long-term investments you can have. I say long term because although it has ups and downs like most types of investments in the long term is provides a steady increase in value. For the most part most homes have regained their pre-crisis value and then some. Although homeowners saw loses in the short term, those that held on to their property and didn’t sell at the low point saw a return of value and in some cases even a profit within a few years of the bubble. Prices may fluctuate, but real estate remains a sound investment. You can help increase the value of your property with maintenance and improvement in any market. Rent money has a 0% chance of a return on what you put in, even with fluctuations buying remains a better option.

What it all comes down to is this: Do you want to invest your money or do you want to give it away? For a similar price and a little bit of elbow grease that monthly expense can become a monthly investment. Interest rates are still pretty low but they will most likely increase as the market continues to improves so there’s no time like the present to go from renter to home investor. Shoot me a message on my Facebook page or give me a call if you have any further questions or want details of what I can do as a Realtor to help make becoming a homeowner a simple experience!