There are two basic types of mortgage loan programs, conventional and government-backed. A conventional loan is one where the issuing lender assumes the risk of making the mortgage. Should the loan ever go into default and the lender is forced to foreclose, the lender is on the hook for the entire loss. There is in fact private mortgage insurance used for low down payment conventional loans, but the insurance policy only covers the difference between 80% of the value of the property and the actual down payment. With a 5% down payment, 15% of the loan amount will be covered.
Not so with government-backed loans. These loans are FHA, VA and USDA. So, given these three choices which one is best? The answer is each one is best given the proper scenario. Let’s look at the first choice, the FHA loan. This is a program from the Federal Housing Administration. It’s highly popular with first time buyers because the loan only asks for a down payment of just 3.5% of the sales price, however the program can be used by anyone. Low down payment conventional loans will require private mortgage insurance. The FHA loan also asks for private mortgage insurance in the form of an upfront and annual mortgage insurance premium. This premium compensates the lender for the total loan amount.
The VA loan program is reserved for those who are eligible. Eligible borrowers are veterans of the armed forces, active duty personnel, those with at least six years of service within the National Guard or Armed Forces Reserves and unremarried surviving spouses of those who have died while serving or as a result of a service-related injury. While the FHA loan asks for a 3.5% down payment, the VA program requires no down payment whatsoever. Zero. But again, only for those who are eligible. If someone is not a member of a qualifying group, the VA loan cannot be used. VA loans also provide a guarantee to the lender but at only 25% of the loan amount. This guarantee is financed by a one-time premium that is rolled into the loan amount. This is referred to as the Funding Fee.
The USDA loan is one managed by the United States Department of Agriculture and designed to finance homes that are located in rural or semi-rural areas. These areas are designated every 10 years after the latest Census Bureau counts are reviewed. USDA loans also require no down payment. The attraction of the USDA loan is its inherent ability to finance properties located in sparsely populated areas. Areas where a conventional loan would not be a fit. FHA loans are also more difficult to be used in rural areas. USDA loan guarantee to the lender compensates the lender for the remaining loan amount and financed by two separate mortgage insurance premiums, just like the FHA program. This program is the ideal choice to finance a rural property.
Each of these three programs address an important need in the housing sector and each carries its own unique characteristics. Lastly, all three programs can only be used by those who intend to occupy the property as a primary residence and cannot be used to finance investment properties.
