Buying a House

Buying a House With Government or Conventional Loans

Gustan Cho Associates are mortgage brokers licensed in 48 states

This guide covers buying a house with government or conventional loans. Government loans are mortgage loans for owner-occupant primary homes backed by one of three federal agencies. There are three government-backed loans: FHA, VA, and USDA loans. Government-backed loans require little to no down payment and have lenient mortgage guidelines. A government agency does not back conventional loans but needs to conform to Fannie Mae or Freddie Mac agency guidelines, explains Dale Elenteny of Gustan Cho Associates:

Private lenders originate and fund FHA, VA, and USDA loans. However, as long as lender follow agency mortgage guidelines, the government agency will insure the loss sustained by the lender on a borrower who defaulted on their home loan.

2023 is now here, and many people have set a New Year’s Resolution and Goal that 2023 will be the year they will buy a house. The American Dream Of Home Ownership can become a reality for every hard-working American. Many people do not realize that they qualify for a home loan. They think they need tons of money for the down payment and great credit to buy a house. Some renters are paying over $1,500 per month in rental payments. $1,500 monthly housing payments are equivalent to a $300,000 mortgage loan ( principal and interest ). Housing prices are increasing yearly throughout the nation, and many homeowners can have their mortgage payments less than what they would be paying for rent. In the following paragraphs, we will cover buying a house with government or conventional loans.

Government Versus Conventional Loans When Buying A House

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Buying a house with a government or conventional loan is best recommended for first-time homebuyers due to the low down payment requirement and competitive rates. Government-backed mortgage loans are home loans insured by one of three government agencies. Three government agencies insure lenders if borrowers default on their home mortgage. Lenders can offer little to no down payment, and very low mortgage rates on government loans are due to this government guarantee to lenders. HUD, VA, and USDA do not originate mortgage loans. They act as federal mortgage insurers. Here are the three government agencies that insure home loans:

  1. HUD is the parent of FHA and insures FHA loans
  2. Department of Veterans Affairs (VA) insures VA mortgages
  3. U.S. Department of Agriculture (USDA) insures USDA loans

Conventional loans are also called conforming loans because they need to conform to Fannie Mae or Freddie Mac Guidelines. Conforming Loans are not guaranteed by any government agency. However, lenders require borrowers to conform to Fannie Mae or Freddie Mac Guidelines because these two agencies will not purchase conventional loans that do not meet their lending guidelines. FHA loans, because they are the most popular loans in the U.S. FHA loans, have the most lenient mortgage guidelines than any other loan program.

Down Payment And Credit Requirements Buying A House

Home Buyers should realize that the days when you need a 20% down payment have long disappeared, and not too many people have that kind of down payment money. All government and conventional owner-occupant mortgage programs do not require borrowers to pay outstanding collections or charged-off accounts to qualify for a mortgage. FHA loans are the most aggressive and lenient loan programs for buying a house with bad credit and lower credit scores.

Due to the government guarantee, lenders originate and fund FHA, VA, and USDA loans with little to no down payment with very lenient mortgage requirements and competitive mortgage rates

Homebuyers are buying a house with an FHA loan for as little as a 3.5% down payment. Conventional loans only require a 3% to 5% down payment. USDA and VA loans do not require a down payment and offer 100% financing. Most folks do not understand they can qualify for a mortgage with prior bankruptcy and foreclosure. Many folks have outstanding collection accounts and think they will not qualify for a home loan without paying off the old collection accounts with outstanding balances. This is so not true.

Will Collections And Charged-Off Accounts Affect Me Buying a House

Consumers do not have to pay off collection and charge-off accounts to qualify for an FHA loan when buying a house. HUD allows homebuyers to qualify for FHA loans with outstanding collection accounts. HUD, the parent of FHA, does not require that borrowers pay collection accounts and charge-offs. Many people thinking of buying a house think just because their credit scores are low that, they will not qualify for a home loan. Again, these folks are wrong. All borrowers need to qualify for a 3.5% down payment FHA home purchase loan is a 580 credit score.

First-Time Home-Buyer Concerns In Buying A Home

What concerns may first-time buyers have when buying a home

Consumers with a full-time job or other solid, stable, documented income can qualify for a mortgage and become homeowners. You do not need a large down payment and perfect credit to become a homeowner.

Two things that are required are the down payment on the home purchase and the closing costs on a home purchase. FHA requires a minimum 3.5% down payment on a home purchase.

The down payment can be 100% gifted funds by a family member or relative. Most homebuyers do not have to worry about closing costs because most or all of the closing costs can be covered through a seller’s concession towards the buyer’s closing costs. A seller’s concession is when the home seller will give the home buyer credit for the home buyer to cover all or most of their closing costs. Closing costs are all fees and costs that a home buyer will encounter when buying a home.

Typical Common Closing Costs

Examples of closing costs are origination fees, credit reporting fees, title charges, appraisal fees, inspection fees, recording charges, title charges, homeowners insurance, escrows ( pre-paid ), attorneys fees, and other third-party charges buyers can encounter when buying a house.  John Strange of Gustan Cho Associates explains seller concessions from sellers for buyer’s closing costs:

Most of homebuyers do not have to come up with closing costs. An experienced loan officer can guide the real estate agent on how to structure the real estate purchase contract with ample seller concessions so the buyer does not have to pay closing costs.

HUD and USDA allow up to a maximum of 6% of the home purchase price for a home seller to give a home buyer sellers concessions for the home buyer’s closing costs. VA allows up to 4% and many times more (contact us for further information). Seller concessions can only be used for closing costs, Seller concessions cannot be used for the down payment on the home purchase. Any overages of seller concessions need to go back to the home seller. It cannot be given as a cash allowance to the home buyer. When cases of overages of seller concessions happen, most mortgage lenders will use it to buy points to buy down the mortgage interest rates of the mortgage loan or to pay the upfront FHA mortgage insurance premium.

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