Choosing the right mortgage may seem like a daunting task, but with the right preparation and complete education about your options, you’ll be able to pick the right plan and fit it nicely in your budget. The mortgage you choose will affect your household budget for years to come, however, if your financial situation changes down the road, you may be able to refinance to ensure that your monthly payments fit your current financial goals. One decision you’ll need to make when getting your mortgage is whether you want a conventional loan or a government loan.
What’s the difference between a government home loan program and other mortgages?
The main difference is that government loan programs are insured by the government (state or national) so that lenders can often offer lower prices to home buyers. For example, some national government loans are insured by the U.S. Department of Housing and Urban Development (HUD).
Since these loans are insured, lenders are often able to offer financing with lower down payments, lower closing costs, and easier credit qualifying standards. If you’re concerned about qualifying for a mortgage because of your FICO score or the amount of cash you have up-front, a government loan could be a great option!
On the other hand, these programs can come with extra fees in the monthly payment or a small extra fee up-front. Many government loans require Private Mortgage Insurance (PMI) in addition to the principal and interest mortgage payment each month. Generally speaking, if you get a mortgage with less than a 20% down payment, it is likely that you will pay PMI in your payment each month. Some programs that don’t require PMI, still require an additional “funding fee” to reduce the cost to taxpayers for the government-sponsored loan. Below are some examples of national government loans.
FHA loans are sponsored by the Federal Housing Administration, a sub-department of HUD. They are a good choice for many first-time home buyers because the only require a low down payment of 3.5% of the home purchase price, and can be used for your primary residence. For example: If you plan to purchase a home wirth $100,000, you could use an FHA loan to purchase it, even if you only have $3500 to pay up front for the down payment. FHA loans do require Private Mortgage Insurance to be paid in addition to the mortgage (principal and interest) payment.
VA loans are sponsored by the Department of Veterans Affairs and are available to qualified veterans, surviving spouses, and active duty military personnel. In addition to credit and income qualifications, a Certificate of Eligibility (COE) is required for a VA loan. With a VA loan, you can purchase a home with as little as a 0% down payment. VA loans also do not require Private Mortgage Insurance, however, they do require a “Funding Fee.” This is a relatively small up-front fee which must be paid at closing.
USDA loans are sponsored by the United States Department of Agriculture. These loans are intended specifically for people who are purchasing homes in rural areas. So in addition to the normal income and FICO qualifying standards, the location of the house must also qualify for this type of loan. Like the VA loan, the USDA loan can allow buyers to purchase a house with $0 up-front. Like FHA loans, USDA loans also require the payment of Private Mortgage Insurance monthly.
In addition to these popular national programs, state governments often sponsor home loan programs as well. If you have questions about these or other mortgage options, contact us! We’re always happy to help.