Expert: Diann Tonnesen - 3/29/2007

Question
Hello, thank you for taking time out of your day to read my question. I am 27 and did 4 years in the United States Navy. I got out about a year and half ago, and since then have been living in an apartment, which happened to be my first non-government funded place. I got engaged over Christmas to my beautiful fiancee Sarah. We have a puppy who got really big really fast and now we are in need of a home. We have been looking for about 5 months now, and can't seem to find one that we like. I make about 40k a year and would be applying for the mortgage on my own credit. My fico score is in the mid 600's, due to me being completely stupid when I was younger. The problem I'm having is deciding between the various types of loans out there. When I was in the service, I thought the VA loan was the only way to go. But then my lender, who happens to be the pianist at my church, told me I'd be better off with an FHA loan. I will not have any money to put as a down payment, which is why the VA loan was attractive to me. Since we weren't able to find an actual home for our money, Sarah and I have now started looking at townhouses. They seem nice, they take care of the outside, and it would be ours. Only problem I'm having is with the HOA fees, which can be an extra 150 to 200 dollars a month. For the money I would be saving buying a townhouse, I could just buy a house and that hoa fee would be going towards the loan, not a association. I guess I would just like to know some more info on VA loans, FHA loans, and first time buyer loans. What are some other things I should factor in before jumping into a lot of debt. Oh, my rent is 530 a month right now, and I would really like to stay under 700 a month with a house. HELP!!!

Answer
Hi Ben,

First of all, thank you so much for serving our country. And congratulations on your impending marriage! I will try to give you a brief summary of the differences between loans so you can make an intelligent decision. But there are many different loan programs and you should shop around.

An FHA loan is often referred to as a "first time buyer" loan. You will be required to put up a 3% down payment, and they are more forgiving of credit scores than a typical conventional loan. FHA does allow "gifts" for the down payment. This can come from close relatives like parents, grandparents or siblings. Or one creative method for people getting married is to establish a "wedding gift fund" and ask your wedding guests to put money into a special account instead of purchasing toasters or coffee makers.

A VA loan is literally no money down. Many lenders are not VA approved - I am wondering if this is the case with your lender/pianist? Very often lenders do steer their clients away from loans they are not approved for. VA also is more forgiving of lower credit scores and allows a higher loan to debt ratio. You should probably check with another lender in the area who does VA loans to find out the current interest rate and what your payments would be.

There are also conventional 100% loans that you may be eligible for, even with a FICO score in the mid 600s. If you are qualified for one of those, you may be able to get a 10 year interest only loan which would give you a lower payment and may allow you to get into a home instead of a town home. If there is any money left over at the end of a month, you can always apply that to the principal which will also decrease your next month's interest payment, as you only pay interest on the money you are using.

My best advice on loans would be to check with other lenders in your area to see what programs they might have. Try some of the big ones like Wells Fargo and Countrywide, and make sure you get a lender that has lots of experience. Your church pianist might be a wonderful person, but not necessarily the best person to do your loan. You need a professional that really knows what they are talking about. Sometimes there are also local first time buyer programs, but you would have to check with your local lenders to get information on those.

As far as the association fees on town homes, depending on what they cover, they may make up for what you would spend anyway in maintenance and utilities on a single family home on an annual basis. Check to see if water, sewer and trash are included. Find out what those utilities would cost you monthly in a single family home. Also some of the monthly fee may go towards replacing roofs, exterior painting , etc. These are items you would have to pay for as a lump sum as a single family homeowner. With an association fee you are just setting aside that money on a monthly basis. Do not assume that every association covers the same things, so make sure to read the CC&Rs thoroughly.

Hope that helps, and realize that you may not be able to afford the home of your dreams just yet. But you have to get into the market to keep up with it. Best of luck to you and your new bride!