The Pros of Government-Insured Loans
There are a wide variety of loan options available to homebuyers and current homeowners, so it can be difficult to know the ins and outs of every type of loan. In the mortgage industry, there is a clear distinction between two different groups of home loans: conventional loans and government-insured (also known as government-backed) loans.
As the name states, government-insured loans are backed by the federal government. This guarantees repayment to the bank should a borrower default on the mortgage. Conventional loans do not have the government’s backing, so they usually come with stricter requirements.
A lender must have approval from the Federal Housing Authority (FHA) to offer FHA loans. The credit and down payment requirements for an FHA-backed mortgage are more forgiving than for conventional loans. FHA loans usually appeal to many first time homebuyers because of their 3.5% down payment requirement.
- Low down payment requirements for 1-2 unit properties
- Non-occupant co-borrowers may be on the loan; helping with higher debt ratios
- 100% of the down payment can be from gift funds
- Less restrictive credit and qualifying requirements
The U.S. Department of Veterans Affairs backs VA loans, and they are available to active-duty military, reservists, and veterans. Eligible veterans may be able to buy a home with no down payment, refinance up to 100% of the home’s value and pay no private mortgage insurance.
If you want to purchase a home, condominium or manufactured home, the VA can guarantee up to the conforming loan limit of the total loan. Keep in mind, your VA loan may have a funding fee depending on which benefits you qualify for.
Specifically, a VA home loan can help veterans:
- Buy a home or residential condominium
- Build a home
- Repair, alter or improve a home
- Refinance an existing home loan
- Buy and improve a manufactured home lot
- Add energy-efficient improvements to a home
- Purchase and improve a home simultaneously with energy-efficient improvements
- Refinance an existing VA loan to reduce the interest rate
As a thank you to those who have served us, PRM is offering an exclusive promotion on Federal VA Loans throughout the month of November.
These types of loans are perfect for smaller, rural, or suburban homes. There are certain requirements that a neighborhood has to meet to be considered eligible, but USDA loans are more flexible on interest rates and down payments.
Most USDA loans have no actual down payment requirements. Typically, the only upfront payment is for closing costs and prepaid expenses. In fact, the seller can also pay up to 6% of the closing costs and prepaids, so it’s fairly common for USDA borrowers to need very little cash at closing.
It’s Easier to Qualify: Whether it’s a lack of down payment or less-than-stellar credit, some potential homebuyers may not have the resources to get a conventional home loan.
Lenders and banks consider this group of borrowers riskier to loan to because they may not have the resources to pay off the loan. A government-backed loan helps to remove the risk of default because the government insures the loan. You can see how government-insured loans open up the possibility of homeownership to those with higher debt-to-income (DTI) ratios and lower credit scores.
Low and No Down Payment Options: USDA and VA loans typically do not require any down payment, and FHA loans require just 3.5% down. Down payments are a way of proving you can pay back a loan by putting in money upfront.
Loans with low or no down payment requirements are backed by the government to ensure repayment. Not all low down payment loans are government-backed, but all loan options backed by the government come with low down payment requirements.
Credit Score Leniency: A conventional loan typically requires a credit score of 620 or more. FHA, VA, and USDA loans are available for prospective homebuyers with lower credit scores.
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*Some state and county maximum loan amount restrictions may apply.FHA, government-insured, loan programs, USDA, VA