The Federal Housing Administration, the United States Department of Veterans Affairs and the United States Department of Agriculture are backing several types of mortgage loans, designed mostly to help those who can’t afford a conventional loan. The government insures these loans against default, meaning that if the borrower stops making monthly mortgage payments, the government becomes responsible with paying the lender.
Regular mortgage loans have very strict qualification requirements and require large down payments. Normally, borrowers are required to make a minimum of 20 percent down payment, but those with good credit scores can qualify for lower down payments. However, if a borrower makes a lower than 20 percent down payment, he or she will have to pay for Private Mortgage Insurance (PMI), which could actually make the overall value of the mortgage loan higher.
The government has designed several mortgage loans designed to help those who can’t afford the high down payment and the strict requirements. Because these loans are insured by the government, borrowers are not required to pay for Private Mortgage Insurance anymore. This article will discuss the main advantages of government-backed mortgages, helping you decide which mortgage loan is better for your situation.
The FHA Mortgage Loan
FHA mortgage loans are backed by the Federal Housing Administration and are mostly geared towards those who can’t come up with a large amount of money to make the down payment, or those who can’t afford to make a lower than 20 percent down payment and end up having to pay for Private Mortgage Insurance.
FHA mortgage loans require a much smaller down payment than conventional loans, making them very attractive for many home buyers. The down payment, which can be a gift, can be as small as 3.5 percent of the loan amount. Closing costs, which can be a bit high, can be financed, and will be included in the loan amount. The downside to this is that you will have to pay interest for those costs as well. This type of loan has more flexible requirements than conventional loans, and can be used to finance single or multi-family homes, condos, or manufactured homes. One downside to FHA mortgage loans is that you can’t borrow as much as you would with a conventional mortgage loan, but these limits differ from one area to another.
The VA Mortgage Loan
VA mortgage loans are insured by the United States Department of Veterans Affairs and are designed to help active duty or retired military personnel become home owners. VA loans require the borrower to use the home bought with a VA loan as a primary residence. VA loans can also help spouses of military members who died in active duty.
Like FHA loans, VA loans eliminate the need requirement to pay PMI, but require a 2 percent founding fee, which can be financed. Unlike conventional loans and even FHA loans, VA loans don’t require a down payment. Also, there is no limit to how much you can borrow on a VA loan.
The USDA Loan
The United States Department of Agriculture also comes to the help of low-income families by insuring a loan for those who wish to buy a home in a rural area. This type of loan can only be used to finance a home which is located in a rural area, in order to increase home ownership in those parts of the country.
Like with VA loans, the borrower who buys a home using a USDA loan must use that home as a primary residence. Another requirement is that the home buyer must be unable to qualify for a regular mortgage loan and pay PMI. USDA loans don’t require a down payment and the closing costs can be financed by including them into the loan amount.
For those who can’t qualify for a conventional mortgage loan, or for those who find these types of loans more attractive, the FHA, the VA, and the USDA loan are great options. These mortgage loan requirements are generally less strict, which will save you a lot of trouble and even money in some cases. So before applying for a regular mortgage loan, take a look at government-backed mortgage loans, which might prove to be a great alternative.