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Real Estate

What you need to know about home loans: FHA, VA, and Conventional Loans

For many, owning a home is an exciting dream, and one of the best ways of achieving that is through a mortgage. Taking on a mortgage is necessary if you don’t have the cash to pay the cost of a home upfront. Several real estate investment consulting firms offer incredible benefits, such as investment in property opportunity zones.

In fact, when choosing the best mortgage option, it’s crucial to have clear facts about how much money you’ll need to present, how high your credit score should be, and whether you’ll need extra money to pay for the mortgage insurance.

If you’re considering taking a mortgage but are unsure where to start, let alone which loan to take, keep reading. In this article, we discuss three of the best mortgage options–conventional loan, FHA, and VA loan–their differences and advantages.

FHA Loan

The Federal Housing Administration (FHA) insures an FHA loan. If you have low credit scores, then you should probably apply for the FHA loan. Moreover, FHA loans require a lower down payment compared to conventional loans.

To borrow the value of a home using FHA, arm yourself with a 580 credit score and a 3.5 % down payment.

With an FHA loan, you don’t get the loan directly from the FHA. Instead, the FHA guarantees and insures your loan from approved lenders, banks, or financial institutions. As such, your lender is at a lesser risk because the FHA will pay the claim if you default.

FHA borrowers who get approved must purchase mortgage insurance and make premium payments to the FHA.

FHA Loan requirements for 2021

The FHA-approved lender will gauge your qualifications as it would any mortgage applicant. However, instead of evaluating your credit report, a lender may scrutinize your work history and payment records for the past two or three years.

Additionally, you need a front-end debt ratio (your monthly mortgage payments, mortgage taxes, and insurance) at a maximum of 31% of gross monthly income and a back-end debt ratio (your mortgage payment plus all other monthly debts) at a maximum of 43% of gross monthly income.

However, it’s crucial to note that the lower your credit score and down payment, the higher the interest rate you’ll need to pay on your FHA mortgage.

Advantages

● You don’t need exceptional credit scores.
● Low down payments.
● You can build your equity sooner and stop renting earlier.
● Suffering from bankruptcy or foreclosures does not hinder your ability to get an FHA mortgage.

Disadvantages

● Since you have a poor credit score, one requirement is paying mortgage insurance upfront and annually to protect the lender from default risks.
● You’ll have to meet stringent property requirements.
● You will pay higher interest rates to compensate for the low down payment.

Conventional Loans

Like any other ordinary loan, the government does not back or insure this mortgage loan. Instead, private lenders guarantee it, while the borrower pays the insurance. Conventional loans are available through various mortgage lenders, such as banks, credit unions, and online lenders.

There are two types of conventional loans–fixed and adjustable-rate loans. A fixed-rate conventional loan charges constant interest, while an adjustable-rate conventional loan changes interest rates according to market conditions.

Conventional loans are riskier because the government does not back them. Therefore, it can be harder to meet the requirements than FHA or VA loans.

Conventional Loan qualifications

Build up your credit score to 620 and have at least a 3% down payment to be eligible for a traditional mortgage loan.

The private lenders will verify your documentation, including recent payment records, bank statements, tax returns, and other financial information. They want to ensure you have a solid income that can meet monthly mortgage payment obligations on time.

Next, the lender will evaluate your debt-to-income (DTI) ratio (other debts you need to pay each month, including loans and credit card debt). The DTI ratio should not exceed 43%, although some might exempt a ratio of up to 50%.

Advantages

● You can cancel the mortgage insurance once you reach 20% equity in the home.
● They offer flexible repayment terms.
● The conventional loan rate is lower than FHA loans.
● Conventional loans are flexible and offer options for second homes and other similar real estate investment opportunities. This means the borrower does not have to occupy the property.

Disadvantages

● They do not allow projection-based financing
● Require a lot of collateral
● They feature restrictive agreements.

VA Loans

A Veterans Affairs (VA) loan is a mortgage loan established and backed by the U.S. Department of Veterans Affairs. They are available to service members, veterans, or those who were discharged.

Private lenders, such as mortgage institutions and banks, provide these loans. However, if the borrower defaults, the VA offers a settlement.

Who qualifies for a VA loan?

You must complete 181 days of active service during peacetime and at least 90 consecutive days of active service during wartime. Alternatively, you must be the spouse of a service member who lost their lives in the line of duty or who has a service-connected disability.

Advantages

● No down payment
● Lowest interest rates
● No mortgage insurance
● You can finance the total value of the home

Disadvantages

● Mandatory funding fee
● Strict appraisal and inspection

Which is better?

To find the best option between FHA vs. Conventional vs. VA loans, you need to consider your preferences, needs, finances, and qualifications.

While the VA is exceptional as there are no down payments necessary, only war veterans or their spouses qualify. You don’t need exceptional credit history to get an FHA loan, but that also means high-interest rate payments and mandatory insurance payments.

On the other hand, a conventional loan offers flexible repayment terms, and you can opt-out of insurance payments once you get to 20% equity. Choosing one over the other will depend on your financial situation.

Apart from that, one can avail several benefits through diversifying their portfolio. For example, you can save money on taxes by following the 1031 exchange process and making wise investment decisions.

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Real Estate

Section 8 Multifamily Ownership to Build Wealth

The Section 8 Housing Program offers financial assistance to access low-cost housing, sometimes referred to as the housing choice voucher program. And is one of the most reliable real estate investment opportunities known so far.

Since the government takes care of a large chunk of rent payment, the section 8 multifamily subsidized housing program has a massive advantage over traditional rental contracts. We examine how a shrewd property owner can tap into the program and build wealth.

According to the latest figures, about 2.2 million households by low-income earners receive subsidized rent through the section 8 housing choice voucher program.

What is the Section 8 Program?

Under the program, the government pays a percentage of the tenant’s rent directly to section 8 landlords whose property is in the listing. The U.S. Department of Housing and Urban Development Management (HUD) funds the program by paying, on average, 70% of a section 8 tenant’s rent and utility bills. A family must typically earn under 50% of the median income in a given area to qualify for HUD Section 8 relief.

Section 8 Multifamily Home Ownership

Homeownership and maintenance under the program can involve financial support from the HUD. The owners can also access conditional government subsidies when renovating, building new homes, or putting up properties for a mortgage.

The homeowner must set aside units to house the low-income American population under the section 8 housing list.

Section 8 landlord application can be lengthy and costly, involving a lot of paperwork, a waiting period, and property inspection. It can take up to 5 months to get approval.

Multifamily homes are properties with up top units and still qualify as a single residence from lending standards. These can be townhouses, duplexes, triplexes, or apartments with up to four units. Five units and above are multifamily but usually require a commercial mortgage.

Most multifamily dwelling property owners rent them out to residents. They are great for generating a higher monthly rental income with lower maintenance costs, so you can rely on commercial property investment to build wealth over time.

Vouchers under the Section 8 Housing Program

Section 8 includes two types of vouchers for the tenants– The Housing Choice Voucher Program and the Project-Based Voucher. The Housing Choice Voucher program allows tenants to choose any unit within the section 8 program. The Project-Based Voucher ensures that the federal rental assistance stays within the selected housing unit and is often more profitable for the owner.

Advantages of Section 8 Multifamily Home Ownership

1. Easy Bank Financing

For real estate investors with a record of handling rental assets, the bank can use the projected rental income from the units to finance down payment programs for multifamily homeownership.

2. Certainty of Rental Income

Upon qualifying for the Section 8 program, the HUD agrees with the property owner on the expected rental income, per the Fair Market Rate. The landlord will receive monthly payments from the government, even when there’s a recession.

3. Occasionally Higher Rental Rates

As an incentive, the government often includes an annual 5 to 8% incremental increase on rent payments. The rate could translate to a better deal than what they would get from the open market.

4. Increased Occupancy Rate

Qualified and listed property multifamily homeowners get access to a vast pool of would-be tenants on the waiting list. The list can have 2 million or more Americans at any given time. That means minimal vacancy issues, reducing your marketing budget significantly.

5. Stability of Rental Income

The federal subsidies make multifamily homes in the Section 8 program suitable for long-term tenancy, as the tenants are likely to stay longer in the units.

Source: Morning Invest(Youtube Channel)

Building Wealth through section 8 Multifamily Home Ownership

Among several real estate investment opportunities one can look for investing in several multifamily homes as a remarkable way to achieve long-term cumulative wealth. Here are some tips to consider when investing in section 8 multifamily homeownership:

a) Choose and manage tenants wisely

While renting out the multifamily units under Section 8, you pay off your mortgage from the tenants’ rent. Hence, liabilities go down, while in almost every instance, the property’s value goes up.

In this case, there comes a time when the mortgage is zero, and the income is primarily profit. Therefore, you can obtain more multifamily property, which you can scale to millions of dollars in wealth.

b) Ready Investors

The multifamily concept is more investor-friendly as compared to single-family units. In this case, when you need financing, you bring the deal to the table while investors bring the money on board. Later, the profits get split as agreed.

c) House ‘hacking’

When you own a multifamily home, you can live in one of the units while renting out the rest. The tenants’ rent caters to your housing expenses, and you can save up over time.

d) Add more rooms

A sure-fire way to increase your rental income is to follow the BRRRR (buy, renovate, rent, refinance, repeat) strategy. Additionally, it would be best if you thought about increasing the number of rooms.

There’s a healthy market for multifamily homes with more than four bedrooms, but a chronic shortage for them:

For example, a single home will make you $150 in profit per month, but a duplex will rake in $300, while four-unit multifamily will fetch $600 within the same timeframe.

Bottom Line

Scaling up wealth from multifamily units has a longer time horizon, is not entirely problem-free but is assured, especially when listed in the Section 8 program, whereby there is the assurance of monthly government payments. It gets better over time as you can hire property managers from top commercial real estate investment companies that also offer a few tax benefits like 1031 exchange process to run it on your behalf, and you can adjust rental prices upwards after periodic renovations.