The Three Government-Backed Mortgages Explained

There are two primary categories for residential mortgage loans in the Alpharetta, GA mortgage marketplace. Those two categories are conventional and government-backed. Conventional loans are those using guidelines set by Fannie Mae and Freddie Mac. Government-backed loans are those underwritten to VA, FHA and USDA guidelines. They're called government-backed because there is a level of guarantee to the lender in case of default. As long as the lender followed proper underwriting guidelines, the guarantee will apply. Conventional loans have no such guarantee. Let's take a closer look at these three programs.

VA loans are available to veterans of the Armed Forces, active duty personnel with at least 181 days of service, National Guard and Armed Forces Reserves with at least six years of service and un-remarried surviving spouses of those who have died while serving or as a result of a service-related injury. The VA loan program is one of two government-backed loans that does not require a down payment.

As it relates to the guarantee, should the loan go into default the lender is compensated at 25 percent of the loss. This guarantee is financed with a form of mortgage insurance called the Funding Fee. This fee can vary based upon different factors but for first-time buyers taking out a 30-year loan and no money down, the funding fee is 2.15 percent of the sales price. This fee is rolled into the loan amount and does not have to be paid for out of pocket.

The FHA program is under the auspices of the Department of Housing and Urban Development. There is a minimal down payment of 3.5 percent of the sales price and there are no restrictions on who can apply or where the property must be located. Although the FHA loan is the program of choice for most first time buyers, there are no restrictions based upon first-time status. There are two types of mortgage insurance with the FHA program, an upfront mortgage insurance premium that is rolled into the loan amount and an annual premium that is paid in monthly installments. Should the loan go into default, the lender is compensated for the loss. The upfront premium is currently 1.75 percent of the sales price and the annual premium for most borrowers and the annual premium with a minimum down payment of 3.5 percent is 0.85 percent of the loan amount. For loan terms 15 years or less, the annual premium is reduced to 0.45 percent per year.

The last of the three government-backed programs is the USDA loan. This program is designed to assist buyers finance properties in rural and semi-rural areas. The USDA loan requires no down payment and offers a 30 year fixed rate loan. Borrowers must meet income limits at 115 percent of the median income for the area and the property must be located in an approved zone. Borrowers should consult with their loan officer to find out if a prospective property is located in an approved area by providing the loan officer with a property address.

Finally, with all three government-backed programs, only a primary residence can be financed and cannot be used to buy and finance a second home or rental property. Conventional loans can finance such properties, but government-backed programs are reserved for a primary residence.