Government Mortgages May Be the Best Choice for Homebuyers. Government backed mortgages are easier to qualify for people that have less than perfect credit, and or a more difficult financial situation. There are actually three (3) federal government agencies that offer loans. The FHA offers the most popular program. In essence, the Federal Housing Administration or FHA for short backs FHA mortgages. FHA mortgages provide borrowers with lower credit scores and lower down payments with the opportunity to purchase or refinance property.
Although the FHA loan program does require a minimum credit score, it’s significantly lower than the credit scores needed to qualify for conventional mortgages. In addition, credit scores are used to determine the minimum down payment the buyer must pay out of pocket. The higher the credit score, the lower the down payment. For example, a homebuyer with a higher credit score may only be required to put a 3.5% down payment based on the purchase price of the property.
However, a borrower with a lower credit score may be required to put ten (10) percent down payment. The Federal Housing Administration actually requires two types of PMI, or mortgage insurance premiums. One is paid upfront, and the other is paid annually for the life of the loan if the initial down payment is less than ten percent of the purchase price of the property. This holds true even when your equity position increases to ten percent of more. You need to keep in mind that this will increase the overall costs of your loan.
The United States Department of Agriculture of USDA for short backs USDA mortgages. USDA mortgages are designed to help low-income borrowers purchase homes in rural areas. That means you can only apply to purchase a home in a USDA eligible area. In addition, you also must meet particular low-income limits in order to qualify. As an added bonus, some USDA mortgage do not require a down payment if the borrower meets the eligibility requirements.
The United States Department of Veterans Affairs or VA for short backs VA mortgages. VA mortgages are only for U.S. military members including active duty, veterans, and their families. Since VA mortgages are technically a benefit to our military personnel, they are incredibly flexible, do not require a down payment, and do not have PMI even if the borrower finances 100% of the purchase price, and the closing costs are not only lower, but also can be paid by the seller. That being stated, a funding fee, that is a percentage of the loan amount, is required in order to help offset the cost of the program.
The funding fee, along with other closing costs can either be included in the mortgage amount or paid upfront at the loan closing. For example, if the funding fee and other closing costs are $5,000 that can be added to the mortgage amount and financed over the life of the loan.