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.

FHA Mortgages: Pros and Cons

FHA Mortgages-Pros and Cons- 150x150The Federal Housing Administration (FHA) mortgages are designed to help people with lower incomes become home owners. Tight lending requirements make it difficult for people with low incomes, less than perfect credit scores, and tight financial situations to obtain a conventional loan. The Federal Housing Administration insures the mortgage loan against default, so in the event that the borrower can’t make mortgage payments anymore, the FHA will pay.

Pretty much anyone can qualify for an FHA mortgage loan, but the amounts that you can borrow are usually close to median home prices in the area. In order to qualify for this type of loan, your debt to income ratio should be fairly reasonable and you should have a good credit score.

FHA Mortgages- Pros

FHA mortgage loans are not for everyone, but they do have a few advantages over conventional loans. FHA loans make it easier for people who can’t normally afford a conventional mortgage loan to become a home owner. Here are the most important pros of taking out an FHA mortgage loan:

  • It is easier to qualify for an FHA mortgage loan than for a conventional mortgage loan. Conventional mortgage loans have strict qualification requirements, making it harder for people with low to medium incomes and not so perfect credit scores to qualify. FHA mortgage loans, on the other hand, are designed by the government to help these people, by having less strict income and credit score requirements.
  • FHA loans require a much smaller down payment than conventional loans. Regular mortgage loans require a 20 percent down payment in order to avoid paying for insurance. 20 percent of a loan value can be a pretty hefty chunk of money, depending on how much your mortgage loan is for. Down payments for an FHA mortgage loan can be as low as 3.5 percent, making it easier for more people to become home owners.
  • FHA loans don’t come with a pre-payment penalty. Many conventional loans come with a pre-payment penalty, meaning that you will have to pay a penalty fee if you decide to pay off your loan before the end of its term. FHA mortgage loans don’t come with such a penalty, so you can pay off your loan or refinance at any time.

FHA Mortgages- Cons

FHA mortgage loans are designed to help people who can’t otherwise afford a conventional mortgage loan. Because of this, FHA loans come with a few cons, as well. Here are the most important:

  • You can’t borrow as much money as you would with a conventional loan. Because the Federal Housing Administration insures these loans, they will have to pay in case the borrower defaults. That’s why the amounts that you can borrow are lower than what you would be able to borrow on a conventional loan.
  • Many sellers don’t want to deal with buyers using an FHA mortgage loan. When the housing market is hot, sellers in a sellers’ market receive multiple offers on their properties. FHA mortgage loans are seen as a hassle by sellers, so your offer might be refused just because the seller doesn’t want to deal with an FHA loan.
  • You will have to pay a mortgage insurance premium. Conventional loans require the borrower to pay private mortgage insurance if the down payment is lower than 20 percent. FHA insured mortgage loans require an initial insurance payment of 1.5 percent of the loan value, and a monthly mortgage insurance premium of .5 percent of the loan value.

Mortgages backed by the Federal Housing Administration are a great way for those with lesser means to become home owners. Depending on each borrower’s situation, this type of loan can be a good or a bad choice. It is up to the home buyer to evaluate his or her financial situation and decide if an FHA loan is the best choice, or it would be better to look for a more conventional loan.

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.

Current FHA Rates: Which is Best, Fixed or Adjustable?

Current FHA Rates-Which is Best, Fixed or Adjustable- 150x150Federal Housing Administration (FHA) loans may have stricter requirements and bigger mortgage insurance premiums, but at least the interest rates are still low for now. As with conventional loans, this might be a good time to get an FHA loan because interest rates are predicted to rise in the near future. The increase won’t be substantial, but over time the small percentages will add up, making your FHA loan significantly more expensive than it is now.

What is a Federal Housing Administration Loan?

The Federal Housing Administration doesn’t actually give out the mortgage loan, but insures it against default. The Federal Housing Administration acquires the money needed to pay these claims through the mortgage insurance premiums that the homeowners are required to pay, if they acquire an FHA backed loan. Part of the mortgage insurance premium is paid up front at the time of closing, and is then paid in monthly installments after that.

FHA loans are similar to conventional loans, offered by Fannie Mae, Freddie Mac, or loans insured by the Department of Veteran Affairs. Like conventional loans, FHA loans are offered in various lengths, such as 30-year, 20-year, or 15-year; they can be fixed-rate or adjustable-rate; they can be made with full, low, or zero closing cost options.

The difference between conventional loans and FHA loans is the down payment, which is only 3.5 percent for FHA loans, and 5 percent or more for conventional loans. Another difference between the two types of loans is the fact that FHA loans don’t have such strict requirements in regards to the home buyer’s credit score. While lenders require the home buyer who applies for a conventional loan to have a high credit score, FHA loans can be given to people with lower credit scores.

Fixed-Rate or Adjustable-Rate

Current interest rates for 30-year FHA mortgage loans are lower than the interest rates for conventional loans. For example, the interest rate for a 30-year fixed-rate conventional loan is around 3.6 percent, while the rate for an FHA loan of the same length is only 3.2 percent. The interest rate for a conventional 5-year adjustable-rate loan is 2.1 percent, while the rate for an FHA adjustable-rate mortgage loan is slightly higher at 2.2 percent.

Fixed-rate FHA loans are a great choice for new home buyers. These types of mortgage loans will have the same interest rate until the loan is paid off and, with a down payment of only 3.5 percent, they allow you to finance the rest of the loan amount. Your closing costs can be paid with a gift or it can be financed, making it easier for you to qualify for the loan. Less than perfect credit scores and not so stellar credit history are not going to matter as much as they do when applying for a conventional loan.

Adjustable-rate FHA mortgage loans feature lower interest rates, but that doesn’t necessarily mean that you will save money over a fixed-rate FHA loan. Mortgage interest rates can jump up even a few percent over the life of the loan, increasing the overall cost of the loan significantly. Of course, there is always the chance that the interest rate will decrease, but based on recent predictions, it looks like the interest rates will continue their upwards trend.

It is hard to decide between a fixed-rate and an adjustable-rate mortgage loan based solely on the interest rates. Adjustable-rate FHA loans might seem more attractive, but there is always the risk that the interest rate can rise. Whatever type of FHA loan you decide to go with, remember this: predictions say that the economy will continue its growth, making interest rates go up. Whether it’s a fixed-rate or an adjustable-rate FHA loan that you need, this year might be the last time you can take advantage of interest rates this low.

FHA Loan vs. Conventional Loan

FHA vs. Conventional- 150x150In terms of monthly payments, some conventional loans seem very similar to FHA loans, variables such as qualification requirements, mortgage insurance, down payment, or closing costs can make a big difference when choosing between the two types of loans. In recent years, because of low down payments and credit score requirements, Federal Housing Administration (FHA) loans have increased in popularity. Which option is right for you depends entirely on your particular financial situation. Both FHA and conventional loans have their advantages and drawbacks.

Put Down 3.5% on Your New Home.

FHA Loan – Pros and Cons

An FHA loan is a type of loan that is insured by the Federal Housing Administration. For many years, this type of mortgage loan has allowed Americans with a lower income to borrow money for the purchase of a home. An FHA loan has a few clear advantages over a conventional loan. Here are the most important ones:

  • Easier to qualify for a loan. As opposed to a conventional loan, requirements for an FHA loan are not as strict. People with low incomes and low credit scores have a much better chance of qualifying for an FHA loan. You can qualify for an FHA loan even if your credit score is as low as 500.
  • Lower down payment. FHA mortgage loans are very appealing to borrowers because the minimum down payment is only 3.5 percent. With down payments for conventional mortgage loans usually in the 10 to 20 percent range, an FHA loan becomes a great choice if you don’t have a lot of savings to make a bigger down payment.
  • Lower interest rate. Because the loan is backed by the government through the Federal Housing Administration, you could qualify for a lower interest rate than you would on a conventional loan. This could save you thousands of dollars over time.

This all sounds good, but FHA loans have a few disadvantages as well and are not designed to replace conventional mortgage loans. The most important ones are:

  • Mortgage insurance. If you choose an FHA loan, you will have to pay a minimum of 1.5 percent upfront mortgage insurance premium and a 0.5 percent monthly insurance. The mortgage insurance must be paid for a minimum of 5 years, and that will increase the overall cost of the loan.
  • Lower credit scores mean higher down payment. The minimum down payment amount may be as low as 3.5 percent, but only someone with a minimum credit score of 580 can qualify for that low amount. If you have a credit score between the minimum allowed for 500 and 579, you will have to make a 10 percent down payment.
  • Longer to process. Because the Federal Housing Administration mortgage loan is insured by the government, processing the loan will most likely take longer than with a conventional loan.

Conventional Loan – Pros and Cons

A conventional loan is a type of mortgage loan that is not insured or guaranteed by the government. Conventional loans are typically obtained from a financial institution, such as a bank or credit union. This type of loan can be a great choice for you, depending on your budget and situation. Here are some of the advantages of a conventional loan:

  • Better terms for people with good credit scores. A credit score minimum of 620 is required by the National Association of Mortgage Brokers in order to qualify for a mortgage loan. If your credit score is higher than 760, you will qualify for the best rates available, meaning that you will save a lot of money compared to someone with a less than perfect score.
  • No upfront mortgage insurance premium. Unlike with an F HA loan, you won’t have to pay a mortgage insurance premium, which can be as high as 2.25 percent of the total loan amount.
  • More flexible terms. With a conventional mortgage loan, you will have more repayment period term options than with an FHA loan. This can also help you save money, as interest rates will be lower if you choose a faster term, such as a 10 or 15 year repayment period.

Conventional loans can be a great option for someone who meets certain requirements, but they can also become very costly unless you exercise caution when choosing a loan type. Some of the drawbacks of conventional loans are:

  • Harder to qualify. Unless you have a really high or perfect score, the lender will either give you high interest rates and fees, which will increase the cost of the loan, or will even deny your loan application.
  • Higher down payment. The minimum down payment amount for a conventional mortgage loan may be as low as 5 percent with some lenders, but only if strict requirements are met. Typically, the down payment for a conventional loan is between 10 and 20 percent.
  • Private mortgage insurance. Borrowers who made a down payment of less than 20 percent of the total loan amount will be required to pay private mortgage ,insurance which will protect lenders in case of a default.

The conclusion is this: if you are looking for a mortgage loan that requires a low down payment and your credit score is less than good, then you should choose an FHA mortgage loan. If your credit score is perfect or close to perfect and you can afford a larger down payment, the best choice for you is a conventional loan. Before deciding what type of loan to choose, you should always educate yourself and never be afraid to shop around until you find the best type of program that suits you.

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.