Given today’s mortgage rates, it might be a good time to buy that home you’ve been eyeing for months. Notwithstanding the many mortgage programs available today, government mortgage loans remain a viable option. These are mortgages backed, insured or guaranteed by the federal government to make homeownership more widespread and accessible. Let’s meet the three main government-backed loan programs and their basic points. »Which mortgage loan is right for you?»
FHA: The Representative Government Loan
When you think of government mortgage loans, FHA loans would be the first thing that comes to mind. The Federal Housing Administration (FHA) has been providing low-down payment, low-closing cost and easy-to-qualify-for loans since 1934.
- Borrowers: FHA loans are designed for individuals and families with (i) low and very low income and (ii) a less-than-perfect credit.
- Down Payment: It can go as low as 3.5%. But how high or low your down payment is anchored on your credit score.
- Credit Score: The minimum credit score is 580. To take advantage of the 3.5% down payment, your credit score must be 580 and above. If your credit score is between 500 and 579, you must come up with a 10% down payment.
- Interest Rate: It is influenced by your credit score as well as income and monthly debts (debt-to-income ratio). Since the FHA insured the loans and thus reduce lenders’ risk, FHA loans come with competitive rates.
- Loan Limits: The maximum loan limit varies per county and state. The loan limit floor is $271,050 and the loan limit ceiling is $625,500.
- Mortgage Insurance: FHA loans require mortgage insurance premiums (MIPs): (i) UFMIP – an upfront fee that can be paid in full or financed into the mortgage and (ii) Annual MIP – an annual fee that is paid every month.
VA: The Zero Down Payment Loan
To date, the U.S. Department of Veterans Affairs has helped millions of veterans and their families own homes through its loan guaranty program. VA loans provide military homebuyers access to affordable mortgage financing with no down payment!
- Borrowers: VA loans are for military borrowers: veterans, servicemembers, and their families/spouses. A borrower must present a Certificate of Eligibility (COE), which serves as a validation that he/she is eligible for a VA-guaranteed loan.
- Credit Score: Sufficient credit is required for VA loans. But if you have a not-so-good credit report, you may still qualify; owing to the loan program’s easier qualification process.
- Down Payment: Zero down payment. This makes VA loans 100% financing-loans.
- Interest Rate: A VA rate depends on the credit score, DTI ratio, loan term, and prevailing market conditions. But because each VA loan carries government backing, lenders can offer lower interest rates that may be 0.5 or 1 percent lower than conventional loan rates.
- Loan Limits: Based on VA’s 2016 limits, the general maximum limit for a one-unit residence is $417,000. But areas with high-cost of living have a higher VA loan limit.
- Mortgage Insurance: The government backing makes a private mortgage insurance not necessary. However, VA loans require a funding fee to help the VA loan program up and running.
USDA: The Affordable Rural Loan
The U.S. Department of Agriculture Rural Development encourages people with low and moderate income to own decent, safe, and adequate housing in eligible rural areas. There are two main types of USDA loans, as discussed further below:
1. Guaranteed loans: The USDA provides guarantees to mortgage loans made to low- and moderate-income households to buy homes in pre-defined areas. This is in the form of a 90% loan note guarantee to lenders to somehow reduce their risk of making 100% financing to borrowers.
2. Direct loans: The USDA directly issues loans to homebuyers with low and very low income, providing payment assistance that is a subsidy given to reduce mortgage payments for a certain period of time.
- Borrowers: To qualify for a Guaranteed Loan, the borrower must meet the income requirement. A Direct Loan requires a borrower to have an adjusted income that is at or below the low-income limit of the area where the property is located.
- Credit Score: USDA Loans generally require borrowers to demonstrate an ability to repay their mortgages. For Guaranteed Loans, lenders may require a credit score of 620, as it varies.
- Down Payment: There is no down payment requirement; it could be little or none. Guaranteed Loans for one can provide up to 100% financing.
- Interest Rate: USDA Loans come with fixed interest rates with a payback period of between 33 and 38 years for Direct Loans and 30 or 15 years for Guaranteed Loans. For those that qualify for a payment assistance, the interest rate may be as low as 1%.
- Loan Limits: The maximum loan amount of a USDA Direct Loan is dependent on the borrower’s repayment ability but it should not exceed the applicable area loan limit.
- Mortgage Insurance: Like FHA’s, USDA Loans require mortgage insurance premiums in the form of an upfront fee that may be paid in cash or financed into the loan, and an annual fee.
Do you qualify for any of the government mortgage loans? »Talk to a lender now!»