Mortgages that are guaranteed fall into the government-backed category. A government-backed loan does have a degree of guarantee, but the guarantee is in favor of the lender, not the borrower. There are definite advantages for borrowers who qualify for a government-backed loan, but the recipient of the guarantee is the mortgage company issuing the loan.
There are three such national government-backed mortgages, VA, FHA and the USDA program. VA loans are reserved for veterans of the armed forces, active duty personnel with more than 180 days of service, National Guard and Armed Forces Reserve members and unremarried surviving spouses of those who have died while serving or as a result of a service-related injury. VA loans do not require a down payment nor a monthly mortgage insurance premium while still having some very competitive rates. Note, the VA doesn’t issue the mortgage, just provides guidelines lenders follow in order to obtain the loan guarantee.
With the VA loan, should the loan ever go into default (which is rare for VA loans, btw) the lender is compensated at 25 percent of the loss. This guarantee is financed by what is referred to as the Funding Fee. This fee can vary but for first time buyers with no down payment, the funding fee for 2020 and going forward is 2.30 percent of the loan amount. This fee is rolled into the final loan amount and does not have to be paid for out of pocket.
FHA loans also have a guarantee to the lender. FHA loans ask for a down payment of at least 3.5 percent of the sales price. The guarantee is financed by two separate forms of mortgage insurance, an upfront policy rolled into the loan amount and an annual policy paid in monthly installments. With the FHA loan, the guarantee applies to the entire defaulted loan amount, unlike the VA guarantee of 25 percent. Again, the Federal Housing Administration does not handle an FHA loan application but provides guidelines lenders follow. There are no requirements of the applicants other than qualifying for the loan based upon income, credit, debt and other factors. Anyone can apply for an FHA loan. And because the down payment is only 3.5 percent, it’s very popular with first time homebuyers.
USDA loans contain guidelines issued by the United States Department of Agriculture. It might seem a bit out of place for the Department of Agriculture to have anything to do with home loans whatsoever. Yet the program was and is still today designed to help buyers finance properties in rural areas where conventional financing might be more difficult to find. The USDA keeps a database showing eligible areas. USDA loans also have household income limitations. Your loan officer can provide the details.
Like the VA program, the USDA loan doesn’t need a down payment. Like the FHA program, the guarantee is financed by two separate mortgage insurance policies, a one-time upfront premium equal to 1 percent of the loan amount and an annual policy at 0.35 percent of the outstanding loan balance. In case of default, the lender is compensated for the loss.
Government-backed guarantees allow buyers to obtain competitive financing with less cash to close compared to similar conventional low-down programs. These guarantees also allow lenders to approve loans that might otherwise be turned down. As long as the lender follows the proper guidelines, the guarantee will be in place.
