Get the Lowdown on Government-Backed Mortgage Loans

Get the Lowdown on Government-Backed Mortgage Loans- 150x150The 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.

Current FHA Mortgage Rates vs. Current VA Mortgage Rates

Current FHA Mortgage Rates vs. Current VA Mortgage Rates- 150x150Both Federal Housing Administration (FHA) and Veteran Affairs mortgage loans are backed by the government and both are good alternatives to conventional loans for people with lower incomes. While the rules of handing out these types of loans are written by the government, it is still up to the individual lender to decide if you qualify, based on their own set of rules, which are usually stricter than the government’s guidelines.

Similarities and Differences Between FHA and VA Mortgages

Both types of mortgage loans were developed by the United States government in order to aid people who don’t possess the means to secure a conventional mortgage loan. Buying a home if you have low income is extremely difficult so, through these two types of loans, the government gives more people the chance of becoming home owners. People who would normally be refused a conventional loan by banks and credit unions can qualify for an FHA or VA loan with a much lower credit score. The government doesn’t hand out the loan, but insures it against a default, giving people who are regarded as a high default risk the possibility of buying a home.

The biggest difference between them is that, in order to qualify for a VA loan, you have to be an active-duty military member, a veteran, or a surviving spouse. So a person who is serving or has served in the military can qualify for both types of loans, but someone who hasn’t served can only qualify for a FHA loan if he or she meets the other requirements.

Other differences between the FHA and VA mortgages have to do with the applicant’s income, the down payment, and mortgage insurance. FHA loans have more restrictions when it comes to someone’s income than VA loans do. The money that you will have to put down as a down payment is also a big difference between FHA and VA mortgage loans. While FHA loans require a minimum 3.5 percent down payment, VA mortgage loans do not have a down payment requirement. Lastly, you will be required to pay mortgage insurance for at least 5 years, if you choose an FHA loan, while VA loans don’t have this requirement.

Current FHA Mortgage Rates

Most lenders offer 3.5 percent interest rates on 30-year fixed rate-mortgage loans, which means that FHA mortgage rates remain near historic lows. Also, most economists predict that FHA rates will remain under 4 percent for 2013. Interest rates for 15-year fixed-rate mortgage loans also remain low, in the neighborhood of 2.70 percent.

FHA mortgage rates were around 3.90 percent last year at this time, hitting a historic low at the beginning of 2013, and they remained in that range since then. Freddie Mac‘s economists say that they expect FHA mortgage rates to reach 3.75 percent by the end of the year.

Current VA Mortgage Rates

VA mortgage loans are backed by the government through the Department of Veterans Affairs, but they are not the ones who set the interest rates. VA mortgage interest rates are set by each lender who is approved by the VA. There are many factors that have an influence on what your VA mortgage rate will be, so working with a VA specialist is recommended.

Current VA mortgage rates hover around 3.25 percent for a 30-year fixed-rate VA mortgage loan and around 3 percent for a 15-year fixed-rate VA mortgage. The short-term prediction is that VA mortgage interest rates will decrease by a small percent, but they are at near record lows right now, so it is up to you if you want to risk it and wait longer.

Familiarizing yourself with the current FHA and VA mortgage rates can help you spot a good deal when the time comes. Choosing between an FHA and a VA mortgage loan depends mostly on your individual situation and your future plans. The current mortgage rates are fairly close for both loans, but you need to take into account all of the characteristics of each loan and decide to go with the one that best fits your needs.

What is the Difference Between a VA Loan and a FHA Loan?

fha and va loans-150x150Buying a home involves a long term financial commitment, so it is important to know the difference between a Veteran Affairs mortgage loan and a Federal Housing Administration mortgage loan. Both types of loans are insured by the government, and have a few similarities, but knowing the differences can save you a lot of money and headaches. While both types of loans follow guidelines written by government agencies, the final lending decision will still be made by lenders, such as banks and credit unions. Their requirements could be a lot stricter than the ones made by the government agency.

One of the similarities between a VA loan and an FHA loan is that they both are designed to provide people with lower incomes the opportunity to become home owners. Because VA and FHA loans are insured by the government, they will pay in the event of a default. Another factor that makes these two types of loans similar is the low credit score requirement. Compared to conventional loans where an almost perfect credit score is required, these loans are much more lenient. Statistically, most people that choose a VA or an FHA loan would not be approved for a conventional loan.

Differences between VA Loans and FHA Loans

While VA loans and FHA loans have a couple of similarities, there are some differences that you should be aware of before deciding which type of mortgage loan to go with. Here is what you should keep in mind before deciding between a VA loan and an FHA loan:

  • Eligibility. In order to qualify for a VA loan, you will have to be a veteran, an active-duty military member, or the surviving spouse, in some cases. Some requirements regarding time served in the military also apply. Also, if the retirement was dishonorable, you will have to pass a review before being eligible for a VA loan. FHA loans do not carry these types of restrictions.
  • Income. Because FHA loans are designed to help people with low or moderate incomes, there are only a few restrictions regarding your income. VA loans do not have such restrictions.
  • Down payment. FHA loans require a minimum of 3.5 percent as a down payment, while VA loans do not have a minimum down payment requirement.
  • Loan limits. Both VA and FHA loans have limits. Based on the cost of living in a certain area, the FHA limit can exceed $700,000. Limits are also determined by the type of home that you are buying. VA loans don’t have limits on the home value, but they are determined by eligibility criteria.
  • Fees and closing costs. While both types of loans feature lower fees and closing costs than conventional loans, FHA loans come with specific closing costs, and VA loans with more flexible closing costs and fees.
  • Mortgage insurance. Mortgage insurance must be paid for a minimum of 5 years on an FHA loan. This can drive the overall cost of the loan up by a large amount. VA loans are not required to have insurance.

VA loans and FHA loans are designed to make buying a home more affordable, but there are some big differences between them. If you qualify for both types of loans, you should take into consideration all these differences, whether they regard the qualification requirements or each program’s advantages.

VA Loans

Veteran Administration Loans (VA Loans)
VA loanIf you are a veteran you have a great advantage to getting a home loan. The VA is a government funded program specifically created for veterans. You must have a Certificate of Eligibility which is the proof of veteran status. If you do not have your certificate of eligibility your lender can order one for you. However, it does take a little time.

A VA loan can not only help a veteran, but also a surviving spouse of a deceased veteran as well. The VA administration will not allow certain fees to be charged to the home-buyer and they protect you from being taken advantage of y ensuring your mortgage rate is in line. VA loans are so specific and detailed that they do not allow any room for over charging or the raising of fees by the lender. They are guaranteed and must be for personal owner occupancy only. There is a limit to the loan amount for a VA loan, usually $240,000.

Basic entitlement for a veteran is $36,000, but it can be up to $60,000 for certain loans over $144,000.

Advantages to getting a VA loan:

  • No down payment required
  • Negotiable mortgage rates
  • Reduced and protected fees
  • Lower closing cost
  • No mortgage insurance premiums
  • Mortgage may be assumed
  • Can prepay without penalty
  • VA specific appraisers required for extra protection for home-buyer

If you’re a veteran be sure to take advantage of a VA Loan.