Buying a house is a big decision. Not only will you probably be committing yourself to spending more money on one single item than you ever will again. You’ll probably also be writing a check for it over and over again each month for more than a third of your life! It’s a big responsibility. Houses necessitate a large portion of both our lifelong and our monthly expenses. It’s paramount that we choose a loan to finance our purchase that provides the best financial value for our circumstances.
There are several types of home loans available. For starters, are conventional mortgage – loans with limits set by Fannie Mae and Freddie Mac. Then there are non-conforming loans (loans over $484,350 or $726,525 depending on home location) with either fixed or adjustable interest rates. These are commonly referred to as “jumbo loans”.
There are also government insured loans. These were first introduced with Roosevelt’s New Deal as a way to make housing more affordable after the Great Depression. If you are eligible, a government-backed loan is a great option. It enables you to qualify for a loan, put down less (or even no) money and build equity all at the same time. Here’s a quick overview of the most pertinent things you should know about these types of loans:
Just What Are Government Insured Loans?
Government loans are not directly issued by the federal government, rather they are insured by the government. For this reason, lenders are more likely to take risks with their borrowers. Lenders are able to lower their lending criteria and offer money to people who might not otherwise qualify. There are three kinds of government loans:
Federal Housing Administration (FHA) loans are offered to home buyers who have the lowest credit scores. They can be as low as 500-580 compared, to the 620+ FICO score needed to qualify for most conventional loans. Typically, these buyers are purchasing their first home. They’re generally younger, with less money saved and a shorter credit history (i.e., a lower FICO score). FHA loans allow these buyers the opportunity to own a home despite the fact that they might not have a great credit score. Or a large amount of cash available for a down payment.
Indeed, with FHA loans, borrowers are only required to make a down payment of 3.5% of the purchase price. They are also often able to receive tax-free money from someone else for their down payment. They can also apply for special grants from the U.S. Department of Housing and Urban Development (HUD) to cover the funds. The only potential problem with an FHA loan is the fact that it requires an annual mortgage insurance premium. That typically runs anywhere from .70 to .85 % of the total loan amount for the duration of the loan.
Another type of government loan is the Department of Veterans Affairs (VA) loan. You are eligible for a VA loan if you or your deceased spouse falls into one of three categories. You must be an active service member, veteran or National Guard and Reserve member. VA loans require no down payment and no mortgage insurance. This makes them one of the best mortgage deals available for the people who qualify.
And for people wanting to purchase homes in less populated (designated “rural”) areas, a U.S. Department of Agriculture (USDA) loan is a third government-insured option. A “rural area” doesn’t mean the home to be purchased has to be on farmland or outside city limits. On the contrary, the USDA considers more than 95% of the country rural, and eligible for lending. Counties must meet certain population limits that only label them as such. Some might be in the country, but a lot are located in markedly residential areas.
Like VA loans, USDA mortgages require no down payment. But they do require an annual fee equaling .30% of the loan balance and an upfront guarantee fee (also called a USDA funding fee) equaling 1% of the loan amount. The upfront fee is rolled into the overall loan financing calculated at closing.
Final Thoughts on Government Insured Loans
There are additional government-backed mortgage options, including several designated especially for Native Americans, as well as disaster victims. Eligibility for all of them is stringent. However, good mortgage lenders make use of consumer insights and keep abreast of annual policy updates. That enables them to match the right person with the right loan. When you decide the time is right to purchase a home, make sure you work with an experienced mortgage lender. That will allow you to fully explore all your loan choices and receive the best advice.