Loan Programs for Purchase
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Michigan Mortgage Programs for Home Buyers

For the purpose of this guide, we will break down the available mortgage programs into 5 categories; Conventional Loans, FHA Loans, USDA Rural Development (RD) Loans, VA Loans, & Renovation Loans.

Each category will cover the following requirements; minimum down payment, mortgage insurance requirements, minimum credit score, debt ratio, and maximum sellers concessions. There are additional requirements but these are the main ones.

When it comes to making an offer on a property, there’s kind of a pecking order to the type of financing that gets accepted in a home purchase. Assuming there are multiple offers on the property and each offer is for the same amount, the seller would choose the buyer with the cash offer first because there is no lender involved which means less resistance.

If there was no cash offer, the seller would choose the buyer that is approved for conventional financing because that is the path of least resistance next to cash. Next in the pecking order would be government insured loans including FHA, VA, and USDA RD Loans.

Last on the pecking order is the renovation loan. This type of loan takes longer to complete and requires a lot of buyer interaction because you have to get bids for the repairs and work with a licensed contractor. This makes this type of financing less attractive to sellers.

This information can be a little dry and can be easily explained in a quick phone call. If you don’t feel like reading the information provided you can always call us at (248) 674-6450.

Conventional Loans

A conventional loan is basically a loan that is not insured by the federal government. This means that if you aren’t able to put a least 20% down, you will be required to pay for Private Mortgage Insurance or PMI for short. PMI is a fee that is paid by the borrower to insure the lenders risk of that borrower defaulting on the loan.

Conventional Loans also offer the best financing options including a low rate and lower PMI. This can provide you with a lower monthly payment as well as the least amount of resistance during the mortgage process.

Down Payment Requirements

The minimum down payment for a Conventional Loan is 3%. However, qualifying for a 3% down payment is quite restrictive from a credit and debt ratio perspective. This is why most conventional borrowers put down 5% or more.

Conventional loans also have strict policies when it comes to getting a gift for your down payment. These policies state that the borrower must contribute at least 5% of their own funds towards the down payment unless the gift will be for down payment of 20% or greater.

Mortgage Insurance Requirements

Conventional loans require that you pay PMI on a monthly basis if your down payment is less than 20% of the purchase price. The PMI monthly payment will be determined by the amount you put down, the term of your mortgage and your credit score. It’s calculated based on a small percentage of your loan amount, usually between 0.27 – 1.1%, divided by twelve.

Example

You’re buying a $150,000 home with a 5%, or $7,500 down payment. This leaves us with a loan amount of $142,500. We’ll assume the PMI is 0.67% which would give us the following PMI Calculation;

PMI = $142,500 x 0.67% = $954.75 ÷ 12 = $79.56 per month

You won’t know your PMI percentage until you get pre-approved. As stated earlier, it will be based on your credit score, your loan to value, and the term of your mortgage. The monthly PMI payments automatically cancel when you pay your loan down to 78% of the original loan amount.

Credit Score Requirements

The minimum credit score for a Conventional Loan is 660 but can sometimes go lower with compensating factors such as a high down payment, large cash reserves, or a low debt ratio.

Debt Ratio Requirements

The maximum debt ratio for a Conventional Loan is 45% with no exceptions.

Sellers Concessions

The maximum sales concession for a Conventional Loan is 3% with less than 10% down and 6% if you put more than 10% down.

FHA Loans

An FHA loan is a mortgage loan backed by Federal Housing Administration mortgage insurance. FHA insured loans are a type of federal assistance and have historically allowed lower income Americans to borrow money for the purchase of a home that they would not otherwise be able to afford.

FHA Loans also have restrictions on the loan amount of which you can borrow. These maximum loan amounts are based on area specific census data including median household income. Most of Michigan has a max loan amount of $271,050 but some areas are lower.

In order to qualify for an FHA loan, you will be required to pay an upfront mortgage insurance premium as well as monthly mortgage insurance. We’ll break down the math for the FHA Mortgage Insurance Premium below.

Down Payment Requirements

The minimum down payment for an FHA Loan is 3.5%. Unlike conventional loans, this 3.5% down payment can be a gift and you don’t have to have any of your own money in the transaction.

Mortgage Insurance Requirements

As stated above, the FHA Mortgage Insurance is charged both up front and on a monthly basis. The upfront Mortgage Insurance Premium is 1.75% of the loan amount and it gets financed into the mortgage. The monthly Mortgage Insurance is 0.85% of the loan amount divided by twelve.

Example

You’re buying a $150,000 home with a 3.5%, or $5,250, down payment. This leaves us with a loan amount of $144,750.

First we have to determine the upfront FHA Mortgage Insurance which is 1.75% of $144,750, or $2,533. This $2,533 will be financed into your loan making the total loan amount $147,283 ($144,750 + $2,533).

Next we have to determine your Monthly Mortgage Insurance at 0.85% of the loan amount using the calculation below;

PMI = $144,750 x 0.85% = $1,230.36 ÷ 12 = $102.53 per month

FHA Monthly Mortgage Insurance is paid for the entire term of the FHA loan and does not cancel like conventional mortgage insurance.

Credit Score Requirements

The minimum credit score for an FHA Loan is 600 but it would require a manual underwrite which can be harder to get approved. However, anything under a 640 score will require a verification of 12 months rental history. If you have a low credit score we can help you, just call Michigan Mortgage solutions at (248) 796-0622.

Debt Ratio Requirements

The maximum debt ratio for an FHA Loan is 45% but it can go higher if there are compensating factors such as a high credit score or a large amount of assets.

Sellers Concessions

The maximum sales concession for an FHA Loan is 6%

USDA Rural Development Loans

A USDA Rural Development Loan is a mortgage loan backed by the United States Department of Agriculture. Just like the FHA Loan, the RD Loan also requires an upfront and monthly mortgage insurance. We’ll break down the math to determine the RD Loan mortgage insurance below.

USDA RD Loans also have income restrictions based on what city you’re looking to buy in as well as how many people are in your household. One important factor to keep in mind when considering the USDA RD Loan is it’s only available in certain geographic locations that are considered Rural. With that being said, the maps used to determine rural areas have not been redrawn in over 20 years so you may be surprised when you find out what is considered Rural.

Down Payment Requirements

There is no minimum down payment for an RD Loan since this product offers 100% financing. This is actually the only available Zero down option besides a VA loan which is only available to Veterans.

Mortgage Insurance Requirements

As stated above, the RD Mortgage Insurance is charged both up front and on a monthly basis. The upfront Mortgage Insurance Premium is 2.0% of the loan amount and it gets financed into the mortgage. The monthly Mortgage Insurance is 0.4% of the loan amount divided by twelve.

Another difference between FHA and RD mortgage insurance is that FHA mortgage insurance cancels at 78% loan to value where as RD mortgage insurance is paid for the full term of the mortgage, there is no cancellation.

Example

You’re buying a $150,000 home with no down payment. This leaves us with a loan amount of $150,000.

First we have to determine the upfront Mortgage Insurance which is 2.0% of $150,000 or $3,000. This $3,000 will be financed into your loan making the total loan amount $153,000 ($150,000 + $3,000).

Next we have to determine your Monthly Mortgage Insurance at 0.4% of the loan amount using the calculation below;

PMI = $150,000 x 0.4% = $600 ÷ 12 = $50 per month

Credit Score Requirements

The minimum credit score for an RD Loan is 620. However, anything under a 660 score will require a verification of 12 months rental his

Debt Ratio Requirements

The maximum debt ratio for RD Loans is 41% with no exceptions

Sellers Concessions

The maximum sales concession for an RD Loan is 6%

VA Loans

A VA loan is a mortgage loan in the United States guaranteed by the U.S. Department of Veterans Affairs (VA). The VA loan was designed to offer long-term financing to eligible American veterans or their surviving spouses (provided they do not remarry). The basic intention of the VA direct home loan program is to supply home financing to eligible veterans and to help veterans purchase properties with no down payment.

Down Payment Requirements

There is no down payment requirement for a VA loan since this product offers 100% financing to any United States veteran or their surviving spouse.

Mortgage Insurance or VA Funding Fee Requirements

VA loans don’t require a monthly Mortgage insurance but they do require something similar to upfront Mortgage Insurance which is called a Funding Fee. This VA Funding fee is 2.125% of the loan amount and it will be added to the loan and financed over the term of the mortgage.

Example

You’re buying a $150,000 home with no down payment. This leaves us with a loan amount of $150,000. To determine the VA Funding Fee which is 2.125% of $150,000 or $3,188. This $3,188 will be financed into your loan making the total loan amount $153,188 ($150,000 + $3,188).

Credit Score Requirements

The minimum credit score for a VA Loan is 620. However, anything under a 660 score will require a verification of 12 months rental history

Debt Ratio Requirements

The maximum debt ration on VA Loans is 45%

Sellers Concessions

The maximum sales concession on VA Loans is 6%

Renovation Loans

Renovation Loans were established to allow buyers to finance the purchase of a home as well as any repairs necessary to make the home livable. These repairs can range from a new kitchen, new windows, a new roof, or simply replacing carpet and flooring. In some cases, you can even finance new appliances into this type of loan.

There used to be a lot more options for renovation and construction financing but we are now limited to two programs; Fannie Mae’s Homepath Renovation Loan and FHA’s 203K loan. These loans are fairly similar in how they work but the financing is a little bit different and we will cover those differences below.

However, there are some very important things to know about renovation financing before deciding it’s the way you want to purchase your home. One issue is that the appraisal will cost more money because you’ll be required to get an after repair value as well as an existing value with no repairs.

Additionally, there will be future inspections as work gets complete and each inspection costs you about $150. This can really add up depending on the work that needs to be completed.

The next issue is this type of loan takes longer to complete and requires a lot of buyer interaction because you have to get bids for the repairs from licensed contractors. You can not do the work yourself even if you are a licensed contractor.

The reason this is a problem is that the seller wants to close as fast as possible with the least amount of resistance. Since the renovation loan takes longer to close and requires a lot more red tape, the seller may choose to take a lower offer over yours if the other buyer is paying cash or is approved for a conventional loan. This goes back to the pecking order we discussed earlier.

Another issue is the fact that renovation loans work on a reimbursement basis where work gets completed, inspected, and then paid for through a draw process. The way this works is the repair money will be held in escrow with a title company. It will be paid in draws based off of work being completed and then inspected by the appraiser that originally appraised the home.

This means that if the home you’re purchasing requires a new kitchen costing $10,000, the contractor hired to do the job will have to install the kitchen to full functionality before they get paid anything. Once they complete the repairs, the appraiser will re-inspect the property to confirm the work is done.

After the inspection is completed and everything checks out, the contractor will get paid by the title company and sign waivers stating that they’ve been paid for the work completed. If you don’t have a contractor willing to work under these conditions, you will have to pay for the repairs yourself and then get reimbursed with a draw once the work is inspected. This is why it’s considered a reimbursement program.

Fannie Mae Homepath Renovation Loans

The Fannie Mae Homepath Renovation Loan is only available for homes that were foreclosed on by Fannie Mae. If you didn’t already know, Fannie Mae is a government sponsored entity that buys mortgage loans after they have been originated by a lender. A good portion of all mortgages are owned by Fannie Mae.

One unique feature of the Homepath Loan is that it does not require any private mortgage insurance but the interest rates are slightly higher than other loan programs.

Down Payment Requirements

The minimum down payment for a Homepath Renovation Loan is 3% of the loan amount including any repairs.

Mortgage Insurance Requirements

Homepath Loans don’t require any private mortgage insurance.

Credit Score Requirements

The minimum credit score for a Conventional Loan is 660 but can sometimes go lower with compensating factors such as a lot of equity, large cash reserves, or a low debt ratio.

Debt Ratio Requirements

The maximum debt ratio for a Conventional Loan is 45% with no exceptions.

Sellers Concessions

The maximum sales concession for a Conventional Loan is 3%.

FHA 203K Loans

Federal Housing Administration’s rehab loan product, the FHA 203K loan, was designed for individuals who want to rehabilitate or repair a damaged home so they can live in it as their primary residence. These loans are endorsed by the government to encourage lenders to offer what would otherwise be considered a risky loan product.

There are two types of 203K Loans, the Streamline 203K which allows repairs up to $35,000 and the regular 203K which allows you to go above $35,000 in repairs. The streamline 203K is a lot easier to complete because the repairs are less extensive and there is less paperwork.

FHA 203K Loans have identical guidelines to the standard FHA guidelines accept for the fact that 203K loans are more strict with debt ration and offer a slightly higher rate than FHA Loans. See below:

Down Payment Requirements

The minimum down payment for an FHA 203K Loan is 3.5% of the purchase price plus the repairs. Unlike conventional loans, this 3.5% down payment can be a gift and you don’t have to have any of your own money in the transaction.

Mortgage Insurance Requirements

As stated above, the FHA Mortgage Insurance is charged both up front and on a monthly basis. The upfront Mortgage Insurance Premium is 1.75% of the loan amount and it gets financed into the mortgage. The monthly Mortgage Insurance is 0.85% of the loan amount divided by twelve.

Example

You’re buying a home for $120,000 that will require $30,000 in repairs. This gives us a total of $150,000 which requires a 3.5%, or $5,250, down payment. This leaves us with a loan amount of $144,750.

First we have to determine the upfront FHA Mortgage Insurance which is 1.75% of $144,750, or $2,533. This $2,533 will be financed into your loan making the total loan amount $147,283 ($144,750 + $2,533).

Next we have to determine your Monthly Mortgage Insurance at 0.85% of the loan amount using the calculation below;

PMI = $144,750 x 0.85% = $1,230.36 ÷ 12 = $102.53 per month

FHA Monthly Mortgage Insurance will be paid for the entire term of the loan.

Credit Score Requirements

The minimum credit score for an FHA 203K Loan is 640 but it would require a manual underwrite which means a human will review the loan and determine the borrowers eligibility. However, anything under a 660 score will require a verification of 12 months rental history. If you have a low credit score we can help you, just call Michigan Mortgage solutions at (248) 674-6450.

Debt Ratio Requirements

The maximum debt ratio for an FHA 203K Loan is 45% with no exceptions.

Sellers Concessions

The maximum sales concession for an FHA 203K Loan is 6%