Government-Backed Mortgage Loan Programs Explained
There are two primary types of mortgage loans in today’s mortgage marketplace. Those are government-backed loans and conventional. Conventional loans by far make up the majority of all residential mortgages today but the government-backed programs provide an ideal solution for those who fit the profile these loans are designed to meet. Let’s take a closer look at these three mortgage loan programs and identify the markets they serve.
These loans are referred to as government-backed because the lender who approves the loan is provided a level of compensation should the loan ever go into default. As long as the lender approves the loan using proper lending protocol the guarantee is in effect. It’s important to note the individual lender approves the loan using these guidelines.
The most popular of the three mortgage loan programs is the FHA loan. Originally introduced in 1934 as a way to help jump start the economy as well as provide some universal guidelines banks could use when approving a loan, the FHA loan is ideal for those wanting to come to the closing table with as little cash as possible. The minimum down payment for an FHA loan is just 3.5 percent of the sales price of the home.
The lender guarantee is financed with two separate mortgage insurance premiums. The first premium is calculated at 1.75 percent of the loan amount but does not have to be paid for out of pocket and is rolled into the final loan amount. There is also an annual fee of 0.85 percent of the outstanding loan balance and paid in monthly installments. This fee is for a 30 year fixed rate loan. The annual premium is lower in the instance of a 15 year fixed rate loan. In the event of default, the lender is compensated for the loss.
The Department of Veteran’s Affairs provides lending guidelines first introduced as part of the original G.I. Bill back in 1944. The VA home loan does not require a down payment whatsoever and the veteran is restricted from paying certain types of closing costs. This means less cash to close compared to other loan programs. No money down and reduced closing costs with competitive rates. The guarantee is funded by what is referred to as the Funding Fee and can vary based upon the type and term of the loan. For someone using the VA home loan benefit for the first time with no money down and taking a 30 year fixed rate loan, the funding fee is 2.15 percent of the loan amount and rolled into the final loan amount. Unlike the FHA loan, there is no annual premium and therefore no additional monthly installment payment. The VA will back the loan to 25 percent of the loan amount to the lender.
The third of the trio is the USDA home loan program. This loan is designed to help those finance properties in rural and semi-rural areas. The United States Census Bureau identifies these areas using data collected from the nationwide census taken every 10 years. The subject property must be located within the approved zone. Interestingly, as cities grow and outer areas populated, an approved area can look nothing like a rural or semi-rural due to this growth. To determine if a property is in an approved area contact me directly and provide a property address and we’ll see if the home can be financed with a USDA loan. There are also income limitations for those living in the household. This income limit is set at 115 percent of the median household income for the area. The guarantee is financed with two premiums, a one-time Guarantee Fee of 1.0 percent of the loan and rolled into the final loan and an annual premium of 0.35 percent, paid in monthly installments. The guarantee to the lender is 100 percent of the loss.
Finally, it’s important to note these three government-backed mortgage programs can only be used to finance a primary residence and cannot be used to buy an investment or rental property. We’re the experts in government-backed mortgage programs and if you feel one of these loans are just right for you, call me directly and let’s discuss.