There are three government-guaranteed mortgages available today. They are the USDA, FHA and VA loan programs and each designed for a specific type of borrower or situation. They’re called guaranteed because the lender that made the loans is compensated for part or all of the loss should the loan ever go into foreclosure. A guarantee can often persuade a lender to issue a loan approval for an application that is considered marginal. As long as the lender approved the loan using the proper approval guidelines the guarantee will apply throughout the life of the loan.
While these guarantees are awarded to the lender it is the borrower that pays the premium for these policies. There can be upfront premiums rolled into the loan amount and there are annual premiums paid in monthly installments.
The USDA loan is part of the larger United States Department of Agriculture. The USDA loan has been in many forms and originally referred to as the Farmers Home Administration loan, or FmHA. First organized back in 1946, the mission was to help those populate rural areas with attractive loan features. Later in 1994, the USDA was chartered to oversee the program.
The USDA loan does not require a down payment and provides borrowers extremely competitive rates in a 30-year fixed rate term. USDA loans will finance a home in a rural or semi-rural area where traditional financing would be difficult. Most conventional lenders today would rather finance a property in an area where there are similar such homes in the neighborhood. Properties financed with a USDA loan must be located in a pre-approved, rural area.
The USDA loan guarantee means that should the loan go into default the lender is compensated at 100% of the balance of the outstanding loan. This loan guarantee is a form of mortgage insurance and there are two such types. An upfront premium rolled into the loan amount and an annual premium that is paid in monthly installments.
FHA loans also carry a loan guarantee. The FHA program is by far the most popular loan choice for first time buyers. The are several but one of them is the low down payment FHA loans require. The down payment requirement is just 3.5% of the sales price. FHA loans aren’t reserved for first-time buyers but are often the first choice. FHA loans can also be a bit easier to qualify for. The minimum credit score for example with a down payment of 3.5% is 580, although lenders can require their own minimum score and usually ranges from 600-620.
There are no restrictions as to the location of the property like there are for USDA loans. Like the USDA loan, there is an upfront mortgage insurance premium rolled into the loan amount and an annual one paid monthly.
The final government-guaranteed loan is the one using guidelines set forth by the Department of Veteran’s Affairs. The VA loan guarantee is 25% of the loan amount should the loan go into default. Of the three government-guaranteed loans, the VA loan is the highest performing loan, in spite of the lack of a down payment. The 25% guarantee was borne from the way VA loan limits were calculated. When a veteran applies for a VA loan, the lender then orders and receives a certificate of entitlement. Today, that entitlement amount is $36,000. The guarantee is four times the amount of entitlement the borrower has. Four times $36,000 is $144,000.
Yet the maximum VA loan calculation has been a bit outdated and was later changed to reflect whatever the prevailing conforming loan limit was for the area. Today, the maximum VA loan amount for most parts of the country is $484,350, matching the conforming limit set by Fannie Mae and Freddie Mac. This limit can change each year as conforming limits change.
However, unlike USDA and FHA loans, there is only one form of mortgage insurance providing the guarantee to the lender and not two. With VA loans, the guarantee is financed by the Funding Fee which is an upfront mortgage insurance premium that is rolled into the final loan amount. There is no additional monthly mortgage insurance premium for VA loans.
Those that qualify for a VA loan include active duty personnel with at least 181 days of service, veterans of the armed forces, National Guard and Armed Forces Reserve members with six or more years of service and unremarried, surviving spouses of those who died while serving or as a result of a service-related injury.