Home Financing 101: Pt. 3

Government-Insured Mortgage Loans

The federal government isn’t a lender but they do help more people become homeowners through three government agencies: the Federal Housing Administration (FHA), the U.S. Department of Agriculture (USDA Loans) and the U.S. Department of Veterans Affairs (VA Loans)

Who Should Get a Government Backed Loan? Government-insured loans are ideal if you have low cash savings or less-than-stellar credit and can’t qualify for a conventional loan. VA loans tend to offer the best terms and most flexibility compared to other loan types for qualified borrowers.

FHA Loans 

An FHA loan can allow you to purchase a home with a credit score of 580 and a down payment of only 3.5%.  The low option of low down payments and more lenient credit requirements can make FHA Loans very attractive to first time home buyers, however you do not have to be a first time home buyer to qualify.

With an FHA loan, you will have to pay a mortgage insurance premium (MIP) for your FHA Loan.  Mortgage insurance is put into place to insure your FHA lender against losses if you were to default on your loan.   In most cases, mortgage insurance for the life of an FHA loan (unless you made a down payment of at least 10%, the MIP would only be on the loan for 11 years).

According to the Department of Housing and Urban Development, the maximum FHA lending amount for high-cost areas (such as large metropolitan areas) is up to $822,375, for 2021. In lower-cost areas, the FHA limit can dip as low as $356,362. Loan limits are set based on county property values. These are the limits for one-unit properties. 

Pros of a FHA Loan

- Help you finance a home when you don’t qualify for a conventional loan

- Credit requirements are more relaxed 

- You don’t need a down payment

Cons of a FHA Loan 

- Loans have mandatory mortgage insurance premiums that cannot be canceled on some loans

- You could have overall higher borrowing cost

- Expect to provide more documentation to prove eligibility

USDA Loans 

USDA loans are mortgage loans that help make purchasing a home more affordable for those living in rural areas.  The USDA believes that helping families in rural areas become homeowners creates strong communities and a better quality of life.  USDA loans have lower mortgage insurance requirements than FHA loans and allow you to buy a home with no money down. 

With an USDA loan there are specific requirements for qualifications. The loan requirements are:

- Homes financed by a USDA loan must be in an eligible rural or suburban area

- USDA loans are for families who demonstrate economic need, so your adjusted gross income can’t be more than 115% of the median income in the area

- Most lenders require a credit score of 640 or better.

Pros of a USDA

- Help you finance a home when you don’t qualify for a conventional loan

- Credit requirements are more relaxed 

- You don’t need a down payment

Cons of a USDA 

- Loans have mandatory mortgage insurance premiums that cannot be canceled on some loans

- You could have overall higher borrowing cost

- Expect to provide more documentation to prove eligibility

VA Home Loans 

VA Loans are a fantastic benefit for eligible service members, veterans and their surviving spouses.  It allows those who are eligible to qualify for a low-cost mortgage when possibly looking to purchase or refinance, even if your credit isn’t the best.  You must meet service requirements in the Armed Forces or National Guard to qualify for a VA loan.

VA loans are attractive because they don’t require a down payment, VA rates are typically lower, no private mortgage insurance, 100% loan to equity value and more lenient borrowing requirements

Pros of a VA Home Loans

- Help you finance a home when you don’t qualify for a conventional loan

- Credit requirements are more relaxed

- You don’t need a down payment

Cons of a VA Home Loans

- Loans have mandatory mortgage insurance premiums that cannot be canceled on some loans

- You could have overall higher borrowing cost

- Expect to provide more documentation to prove eligibility

Interest rates, loan requirements and credit scores can vary. For more information on which loans may be right for you please reach out to a local lender.   

Information for this blog came from: 

Rocket Mortgage - www.rocketmortgage.com
https://www.rocketmortgage.com/learn/types-of-mortgages