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Government Loans

Owning a house is not cheap.  To increase the number of homeowners, the Government has created programs that make it less risky for lenders to lend to people with, how shall we say, blemishes on their credit reports, imperfect work histories or not all that much money, people in areas that lenders would not lend otherwise, people who have served the country more than others.

 

 Government Loan Insurers and Guarantors
FHA Loans VA Loans USDA Loans

FHA-Insured Mortgage Loans

The FHA (Federal Housing Administration), part of HUD (The Department of Urban Development) has been helping people buy or refinance houses since 1934.  It’s been doing that by insuring peoples mortgage loans, which allows lenders to give people better deals.

That means that people who’d cannot qualify for a loan under conventional programs can qualify.  It also means that people who can qualify under conventional programs get better interest rates.  All of that with low down payments and closing costs.

FHA does not give loans directly.  It does, however, insure loans for anyone and everyone, not just first-time home buyers or people with bad credit or no credit, people with other types of issues.

(Of course, an FHA-insured loan is not a great option for everyone: people with large down payments, great income-to-debt ratios, great credit scores and history can get better deals under conventional mortgage programs. Though FHA loans have lower interest rates, they come with upfront mortgage insurance, currently at 1.75% of the loan amount and monthly insurance premiums, currently they last for the life of the loan.)

The loans can be used only to buy or refinance an existing 1-4 unit property (including mixed-use properties, assuming certain criteria are met) or buy vacant land and build a 1-4 unit property as long as at least one of the borrowers will use as primary residence.  Each year, the FHA publishes loan limits.  The limits vary by county and property type.

The minimum down payment required is 3.5%; you can get fixed-rate loans or ARM’s.

There are several FHA loan programs:

203(b) loans. These are the basic / standard FHA loans, the kind most people think of when they think FHA loans

203(k) loans. These are loans for buying or refinancing a property that needs work, from small updates / repairs all the way to razing the property to the foundation and building a new one in its place.  The only requirement is that the original foundation structure remains in place.

HECM’s (Home Equity Conversion Mortgages).  These are reverse mortgages, meant for people 62 and older.  Their advantage is that, while borrowers use the property as their main residence, they do not have to repay the loan.

Borrowers have to have enough income to take care of the home and pay property taxes and hazards insurance.  But they do not have to qualify for the loan.

VA Mortgage Loans

Guaranteed by the United States Department of Veterans Affairs (the VA, VA loans exist to help a variety of current and former members of the Army, Navy, National Guard and, under certain circumstances, spouses of current and former members of the military branches of the USA.

The qualifying criteria are not as strict as those of conventional loans, loans can be as high as 100% of the value of the home (so, no down-payment loans), and there’s no private mortgage insurance.

VA loans can be used to buy or refinance an existing 1-4 unit property or to buy  buy vacant land and build a 1-4 unit property on it as long as at least one of the borrowers is going to be living in that property.

Since the VA does not lend directly, borrowers not only have to meet VA’s minimum requirements but those of lenders too.  Though some lender’s minimum requirements are the same as VA’s, many add one or more overlays.  (such as: the borrower must have at least 2 credit scores, or if the credit score is under 600, gifts are not allowed for the down payment).

USDA Mortgages

The lending guidelines for these mortgages are set by the United States Department of Agriculture.

They offer low rates, affordable payments and 100% financing.  But they are available only in specific areas (rural and some suburban).  And only to people who earn 115% or less of the median income in their area (the income of all family members is taken into account, even that of your ungrateful, eternally morose teenagers).

Despite the word ‘agriculture’ involved, these are are loans for houses (including new manufactured homes), townhouses, condos, 2-4 unit buildings and not for working farms…  The value of the land can be no more than 30% of the value of the property.

You can find out if the property you want a USDA mortgage against is in the ‘right’ area, click on this link: https://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do?pageAction=sfp.

These loans are attractive to lenders because the U.S. government guarantees them.  Because the U.S. government guarantees them, there’s a guarantee fee (1% of the loan amount as of 10/2016) and an annual fee (0.35% of the loan amount).  Which offsets the lower interest rates (without, however, making this type of loan a bad loan – 0.35% of $100,000 is $29/month).

So, the upfront costs and monthly fees of USDA loans are lower than those of FHA.

The are less risky than other government loans because only fixed-rate, 15 and 30-year amortization is allowed.

The draw-backs of USDA Mortgage Loans, compared to FHA especially?

  1. The debt-to-income ratios cannot be more than 29%/41% (FHA’s DTI’s are 47%/56%).  In other words, the same income buys more house under FHA than under USDA programs (occasionally, a lender will over-write these limits… due to great credit or lots of money in the bank).
  2. Credit scores must be 640 or higher (middle credit scores, that is).