Question: How am I to understand why I need to use a FHA or VA Addendum?
Answer: There are reasons why an FHA/VA loan should or may be used rather than a Conventional loan. First lets look at why an FHA loan may be better:
An FHA loan offers more flexible credit qualifying guidelines than other loan types. This is due to the fact that the Federal Housing Administration (FHA) insures this type of loan. FHA does not lend the money, rather they guarantee the loan. Due to the fact that the government is backing the loan, a lender is able to offer a competitive interest rate. A low interest rate can really help save the borrower a lot of money.
The requirements necessary for obtaining an FHA loan are relatively simple. The Buyer does not need to be worried about having the perfect credit score due to late payments, foreclosures, bankruptcies, tax liens, or legal judgments, in order to get an FHA loan. Currently, FHA guidelines state you only need a 580 credit score to qualify for maximum financing on an FHA loan, where a conventional loan will require at least a 620 credit score. However, this number may vary from lender to lender.
One of, if not the biggest advantage to an FHA loan is that only a 3.5% down payment is required for home loan purchase. This number is a lot smaller than other conventional types which will ask for anywhere from 5-20% of the l
In addition, the down payment does not necessarily have to come from the borrower’s pocket. The money is allowed to come from a family member, employer or charitable organization as a gift.
If you prepay your mortgage before a certain amount of time, many lenders will charge a prepayment penalty, but with an FHA loan there is no penalty for prepayment.
A big downside to the FHA loan is the Upfront Mortgage Insurance Premium (UFMIP). This is collected at loan closing but may also be financed into the loan amount. In addition, FHA loans also require payment of monthly mortgage insurance premium (MIP). In most cases MIP stays on for the life of the loan unless you put 10% down, then it’s a minimum of 11 years. With FHA, the borrower ends up paying more over the life of loan.
What about a VA Loan? A VA loan is a mortgage that is made by private lenders, (For Veterans) but partially backed by the Department of Veterans Affairs. There are no limits on how much you can borrow, but there are limits on how much the VA will guarantee.
One of the benefits of VA loans, also known as Veterans Affairs mortgages, is that they consistently offer lower rates than traditional bank financing, according to Ellie Mae.
Eligible borrowers may only use VA loans for their primary residence. You can’t finance an investment property or vacation home with a VA loan.
The main draw of a VA mortgage is that they make it easier to get financing by offering no down-payment loans and more lenient credit and income requirements than conventional mortgages. Once you have your certificate of eligibility or COE, you can apply for a VA home loan.
One of the big benefits of VA loans is that sellers can pay all of your loan-related closing costs. Again, they're not required to pay any of them, so this will always be a product of negotiation between buyer and seller.
If you are a VET you may qualify for a VA Loan. Check with your lender for more details.
The FHA/VA Addendum is used in conjunction with any Purchase Contract where the Buyer intends to use these types of loans. Some simple facts: Under section 2. Buyer shall not be obligated to complete the purchase or incur any penalty or loss of Earnest money, if the Purchase Price exceeds the reasonable value of the property established by the VA Certificate of Reasonable Value. Or if an FHA loan, the price exceeds the appraised value, the Buyer may continue to purchase the property, however neither VA or FHA will insure or guarantee over the maximum value established. Under section 3: Seller is required to make appraisal required repairs and the Buyer can ask for an amount in this section. Under section 4: if required by FHA or VA rules, Seller shall furnish Buyer with a current Pest Control Report showing the property to be free and clear of termite infestation. A Buyer can ask Seller to pay to eradicate any infestations on this line. Section 5.1 is the amount a Buyer can ask a Seller to contribute towards discount points, or other loan costs.