Government-insured Loans

The potential for rising mortgage rates was a concern going into 2017, but as we’ve witnessed so far, rates aren’t skyrocketing as was feared. As compared to 2016, mortgage rates are actually expected to be just marginally higher, not even enough of an increase to make a drastic difference in loan amounts or payments. Today’s buyers, especially those committing to a government-insured loan such as FHA, USDA, or VA, are still ensured an affordable mortgage with great terms.

FHA, USDA, and VA loans are able to offer competitive mortgage rates because they are backed by government agencies: Federal Housing Administration, U.S. Department of Agriculture, and U.S. Department of Veterans Affairs, respectively. Lenders who offer one or all of these loans to homebuyers are promised an extra level of protection from defaults because the agencies will cover the cost if a buyer forfeits their mortgage. This is made possible, in part, due to the mandatory mortgage insurance paid by borrowers who put less than 20% down, with the exception of VA loans, which require no mortgage insurance. Buyer-paid mortgage insurance helps keep FHA and USDA loan programs afloat. For both mortgages, the mortgage insurance rates are very affordable. FHA loans require 1.00% upfront and .85% annually and USDA requires .50% upfront and .35% annually. The upfront fee is a percentage of the loan total that is due at closing. For example, a $200,000 loan will require a $2,000 fee for FHA and $1,000 for USDA. The annual percentage is rolled into the loan amount and paid over the terms of the mortgage. For USDA loans, the upfront fee is also rolled into the total mortgage. So, for a $200,000 USDA loan, the $1,000 will be broken into 360 small payments and included in the monthly amount. Both FHA and USDA loans require mortgage insurance for the life of the loan, but fortunately a homebuyer can refinance their mortgage into lower rates and terms if the rates ever drop. In 2016, mortgage insurance rates were decreased for both FHA and USDA. The Fed analyzes rates annually and adjusts as necessary.

Many buyers today are choosing a government-insured loan because they are affordable and have easy qualification standards. Due to their government-insurance, FHA, USDA, and VA lenders are able to accept riskier borrowers without fear of mortgage defaults. Buyers who would be turned down by other banks may be qualified for one of these government loans.

Exemplary credit isn’t a requirement for FHA, USDA, and VA. Scores as low as 580 are accepted in some cases. Derogatory credit events such as bankruptcies, foreclosures, judgements, and collection accounts aren’t cause for disqualification. Compared to Conventional loans’ 7-year wait after discharge from a bankruptcy, FHA and USDA only require 3 years. Buyers with a limited credit history may be approved for a USDA loan if they have alternative lines of credit not being reported to the credit bureaus such as rent and utilities.

These loans are lax in acceptance standards compared to comparable programs, but there are a few restrictions. VA loans are available only to eligible active duty members and veterans of the U.S. armed forces. Surviving spouses and children of fallen soldiers may also be eligible. The VA loan is one of the best benefits offered to members of the military. It is a zero-down mortgage program with excellent terms and no required mortgage insurance.

USDA loans are available to anyone residing or wishing to reside in a rural area. Since the loan is insured by the USDA, eligible properties must exist within a rural area as defined by the USDA. These properties have no maximum purchase price limits and can be new constructions, existing homes, or foreclosures. Finding an eligible home isn’t as daunting a task as it may seem initially; over 97% of the U.S. falls in a rural-eligible area. Most suburbs outside metropolises and cities and towns with small populations are typically eligible. Additionally, USDA buyers’ incomes must not exceed the limits set for their region. The limits vary from county to county within each state, but they are typically around what the average per capita income is for the particular area. The maximum allowable income increases with each additional family member, so households with multiple members will have a higher income limit. Many people who earn moderate wages find their income still qualifies for a USDA loan, however.

Despite requiring a 3.5% down payment as opposed to zero-down as with USDA and VA, FHA loans are still widely popular. Buyers who, at first, are interested in the USDA loan but find their income exceeds the limit or their chosen house is outside an eligible area choose the FHA loan because it’s still very affordable. Just 3.5% of the purchase price is due as a down payment, and this money can come from a family member or approved organization. Compared to the traditional required down payment in excess of 20%, 3.5% is a welcome change for many buyers. FHA loans will also insure a multitude of properties including single-family residences, multiple-family residences, condos, townhomes, and apartments. There are no geographical restrictions.

Among the plethora of available mortgage programs, the FHA, USDA, and VA loans remain highly sought after and affordable options. With guaranteed competitive mortgage rates, affordable mortgage insurance, and lenient approval standards, the dream of homeownership can become a reality for many eligible Americans.