December 3rd, 2018 7:53 AM by Jackie A. Graves
In today’s mortgage marketplace
there are two basic types of home loans: conventional and government-backed.
Conventional loans are those typically underwritten to Fannie Mae and Freddie
Mac guidelines while government-backed mortgages carry some level of guarantee
to the lender that approved the application. As long as the lender followed
proper protocol when underwriting a government-backed mortgage application, the
guaranteed loans are those underwritten to VA, FHA and USDA guidelines. Let’s
look at these three programs.
VA loans are available to a
select group of borrowers. Those borrowers are veterans, active duty personnel
with at least 181 days of service, National Guard and Armed Forces Reserve
members with at least six years of service and un-remarried surviving spouses
of those who have died while serving, or as a result of a service-related
injury. The VA loan program is a zero-down product, one of the few zero-down
home loans on the market. As it relates to the lender’s guarantee, should the
loan go into default – which is rare because the VA loan is one of the highest
performing in the industry – the lender is compensated at 25 percent of the loss.
This guarantee is financed by what is known as the Funding Fee and for first
time VA buyers taking out a 30 year loan and no money down, the fee is 2.15
percent of the sales price which is then rolled into the final loan amount.
FHA loans have no such
restrictions as to eligibility. FHA loans are under the auspices of the
Department of Housing and Urban Development, or HUD, and also carry a guarantee
to the lender. Should an FHA loan go into default, the lender is compensated
for the loss. This compensation is financed with two separate forms of mortgage
insurance: an upfront mortgage insurance premium and an annual premium paid in
monthly installments. These two fees have varied over the years but today the
upfront premium for FHA loans is 1.75 percent of the loan amount when the
minimum down payment of 3.5 percent is made and 0.85 percent of the loan amount
for the annual premium. The upfront premium is also rolled into the final loan
The USDA loan is the last of
the three government-backed programs and is designed to finance properties
located in rural and semi-rural areas. The USDA program is also a zero-down
loan and offers a 30 year fixed rate program. There are income limitations with
the program and is also dependent upon the number of people living in the
household. This program is considered a moderate income program limiting
household income to 115 percent of the median income for the area. Properties
must also be located in a previously approved geographical area.
Lastly, all three of these
programs are designed to finance a primary residence and cannot be used to
finance a second home or rental property.
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