Financing a primary residence means having the most financing options available in today’s marketplace. For those wanting to buy and finance investment real estate there are fewer albeit very competitive choices. But with a primary residence, there are plenty and are divided into two basic categories- conventional and government-backed. A conventional loan is one where the lender assumes all the risk of issuing a mortgage. Should a conventional loan go into default the lender is forced to foreclose on the home, put it up for sale in hopes to get enough from the sale to satisfy the outstanding loan balance plus necessary legal fees.
A government-backed mortgage loan however does carry a guarantee to the lender should the loan go into foreclosure. The term is “government-backed” because different branches of the federal government oversee these three programs and issue underwriting guidelines. But it is the actual borrower who pays for the guarantee, not the taxpayer. Let’s take a closer look at the VA, FHA and USDA government-backed mortgage loans.
The VA loan has been around as far back as 1944 at the end of World War II and part of a much larger entitlement package that helped troops more quickly assimilate into society with financial programs designed to help finance a college education, start a business and including a program to help buy and finance a home in which to live. Today, the VA home loan program might be the best option of the three for those who are eligible.
The VA loan does not require a down payment and in addition restricts the types of closing costs the veteran is allowed to pay. This zero down plus restricted costs simply means coming to the closing table with less cash compared to an FHA or USDA loan. The guarantee will pay the VA 25 percent of the defaulted mortgage as long as the loan was approved using proper VA guidelines. The guarantee is financed by what is referred to as the Funding Fee. This fee varies based upon the type of loan, subsequent use, term and the presence of any down payment. For a standard zero down, 30 year fixed rate mortgage, this fee is currently 2.15 percent of the loan amount and is included in the final loan balance.
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 unremarried surviving spouses of those who died while serving or as a result of a service related injury.
The Federal Housing Administration’s FHA home loan program is also reserved for a primary residence but unlike the VA loan there are no restrictions as to who may or may not apply for the mortgage. The FHA loan carries a 100 percent guarantee to the lender in case of default. This guarantee is financed through two separate mortgage insurance premiums, an upfront premium and an annual premium. The upfront premium is currently 1.75 percent of the loan amount and the annual premium for most FHA loans is .80 percent of the loan amount. The annual premium is paid in monthly installments and is recalculated as the loan balance is paid down. There is a down payment requirement for an FHA loan of 3.5 percent of the sales price.
USDA loans were designed to help those buy a home in a rural area while at the same time promoting economic development of those areas with home ownership. The USDA loan is also a zero down loan program and also carries a 100 percent guarantee to the lender. Borrowers must meet household income limitations that review all occupants of the household that are working and at least 18 years of age. Qualifying household members cannot have income greater than 115 percent of the median income for the area.
The USDA program also designates approved areas where the property can be located. If you’re looking to buy a home in such an area and want to see if it’s in an approved area, contact me directly and provide me the address of the property you’re considering or at least the zip code where you’re thinking of buying and I can help with this guideline. Over the years, these areas can change based upon population shift which means an area that doesn’t appear to be in a rural zone still is because the USDA has yet to update its database.
All three government-backed loans are an excellent choice for those who qualify but each addresses a particular segment of home buyers. For eligible borrowers with VA eligibility and need the lowest cost loan available, the VA loan is the better choice. Financing in rural areas is typically run through a USDA approval while the FHA loan is restricted neither by the applicant or the area but does require a down payment. If you want more information, just email or call me directly.