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Government Insured

What Is a Government-Insured Mortgage Loan?

A government-backed or insured mortgage program is when a private lender issues the loan to the borrower, and the federal government insures or warranties it. The guarantee means that the mortgage lender is protected against  a certain amount of loss if the borrower becomes delinquent or fails to repay the loan.

Top Three Types of Government-Insured Mortgages

  • The Federal Housing Administration (FHA)
    An FHA mortgage insurance program is the most popular type of government-backed home loan. This program allows mortgagors to make a down payment as low as 3.5%. FHA loans also tend to be simpler to qualify for, when contrasted to “conventional” home loans. Through the federal housing program, mortgage lenders receive insurance protection from the government via the Federal Housing Administration which is part of Housing and Urban Development (HUD) department.
  • The Department of Veterans Affairs (VA)
    The VA home loan program is for qualified military members and veterans, and in some cases their spouses. VA loans offer the advantage of 100% financing. This means borrowers can buy a house with no down payment whatsoever. These loans are partially secured by the VA, which gives the lender a level of protection should the borrower default on the mortgage.
  • The USDA home loan program
    The USDA offers financing to mortgagors in rural or low-population areas who meet certain income conditions. Largely, this means that the borrower can have a household income up to (but no higher than) 115% of the median income for the area. This government-insured mortgage program provides a 90% mortgage guarantee to approved mortgage lenders in order to lower the danger of extending 100% loans to eligible rural America home buyers.

Benefits of Government-Insured Mortgage Loans

U.S. government-backed loan programs (like FHA and VA) offer specific benefits for borrowers that make it easier for Americans to gain home ownership.

  • Minimal Mortgage Down Payments
    The VA and USDA mortgage programs allows qualified borrowers to buy a home with 100% financing. This means the borrower(s) don’t need a down payment of any kind. The FHA loan program allows for a down payment as small as 3.5%, if the borrower(s) has a credit score of 580 or greater.
  • Flexible Qualification Standards
    Borrowers often have an easier time meeting the criteria for government-insured mortgage loans, when equated to conventional mortgage financing. The FHA, VA and USDA programs give mortgage companies an extra layer of protection against borrower default, in the shape of government insurance or guarantees. So, Florida mortgage lenders are often more relaxed with their qualification requirements when making government-backed Florida home loans.

The Downside to Government-Insured Mortgages in Florida

While FHA, VA and USDA are able to help more people invest in home ownership, there are some possible shortcomings depending on your situation. Florida mortgage borrowers need to appreciate both the ups and downs in order to make an educated decision about federally back loans being right for you.

Drawbacks of using a government-insured mortgage include:

  • Additional Mortgage Insurance and Fees.
    All FHA, VA and USDA loan programs require some type of mortgage insurance or additional fee. The VA program calls this premium the VA funding fee. For home buyers who finance 100% of the purchase price (with no money down), this charge generally ranges from 2.15% to 3.3% of the loan amount. This fee can be financed or added into the loan amount. It can also be paid upfront at closing. For example. If a borrower wants to buy a home that costs $200,000 and finance the mortgage through a VA program, then over $6000 would be added as a 100% financing fee.

    Similarly, borrowers who use the USDA loan program must pay a “guarantee fee” that normally amounts to 1% of the total loan amount. This fee can also be paid at closing or financed in mortgage.

    Mortgagors who use an FHA-insured loan to buy a home have to pay extra mortgage insurance premiums. There are two premiums. Most home buyers who use this government-backed loan program pay an annual fee totaling 0.85% of the amount borrowed, along with an upfront payment of 1.75%. The fees (in call cases) can be added to the mortgage loan and financed.
  • Mortgage Size limits or restrictions
    Another drawback of government-insured mortgages is that borrowers are often capped to a certain dollar amount. FHA, VA, and USDA programs all have caps (or limits) on their mortgage products. These restrictions are mostly related to 100% financing products and to ensure that a home price fall within competitive pricing that makes sense for mortgage underwriters to make the loan.
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