There are three government-backed loan programs available today, the USDA, VA and FHA programs. They’re referred to as government-backed because the lender is guaranteed to be compensated should the loan every go into default. Each of these three have their own special niche that is filled. USDA loans are used to finance a property in a rural area and pretty much the primary choice for financing such a property in an area sparsely populated. If the home is not located in one of these preapproved areas the USDA loan is not a choice. If it is in an approved area and the applicant’s the required income limitations, then the USDA is without a doubt the ideal choice. As long as a 30 year fixed rate is okay with you because that’s the only term the program offers.
Next up is the one coming from the Department of Veteran’s Affairs, commonly referred to as the VA loan. The VA loan has been around for a long time, specifically since 1944. As soldiers returned from the battlefields of WWII, Congress enacted the Servicemembers Civil Relief Act and was designed to help those returning soldiers more easily assimilate back into civilian life with programs to start a business, higher education and assistance with buying and financing a home.
By far, the VA home loan program has been the most popular of the three original entitlements written into the act. The VA loan also carries a guarantee to the lender which is equal to 25 percent of the loss. This guarantee is financed with a Funding Fee to provide a form of mortgage insurance. All VA loans require a funding fee, the only exception is for those receiving disability pay. For someone with VA eligibility, this program is hard to beat. And, the borrowers get a variety of loan choices from fixed rate terms to adjustable rate mortgages.
FHA loans are also an excellent government-backed loan program and are not restricted to any type of government service or must be located in a particular area as does the USDA loan. The FHA loan is the most popular choice among first time buyers but is not limited to someone buying a first home. The popularity is due to the low down payment required, just 3.5% of the sales prices, along with somewhat relaxed credit guidelines. There are also no income limitations in order to qualify for the loan.
The FHA guarantee to the lender is funded with two separate mortgage insurance policies, an upfront premium that is rolled into the final loan amount and an annual premium that is paid in monthly installments. FHA loans are also available in fixed and variable terms.
Okay, so all three have their advantages. But when are they not such a good choice? As it relates to the USDA program, if the home isn’t located in an approved area it can’t be used at all. Or, the home is located in an approved area but there is too much household income in order to meet the USDA required income limitations.
The VA loan as well as the FHA loan may not be the best choice if the applicant’s intend to make a down payment more than what is required. For example, someone looking at a conventional loan and has a down payment of 20% of the sales price of the home, a VA loan probably wouldn’t make the cut. Why? Because the VA loan still requires the payment of the Funding Fee even in the presence of a down payment. The same with the FHA loan, if there is a down payment made greater than the FHA minimum of 3.5%, say a 5% or 10% down payment, a conventional loan might be the better choice.
All three programs have been around for decades and have served the industry well. It’s just that sometimes they’re not the ideal choice. Before you get too far into the home buying process, call me first and let’s look at all available options. One of these might very well be your best choice, but let’s identify all available financing programs that can fit your particular situation.