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Government Backed Loans Versus Conventional Mortgages

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This BLOG On Government Backed Loans Versus Conventional Mortgages Was PUBLISHED On February 11th, 2019

Most people do not want too much government.

  • However, when it comes to government backed loans, everyone is all for it
  • Government Backed Loans are FHA, VA, USDA Loans
  • Government agencies does not lend on government backed loans
  • The role of FHA, VA, USDA is to insure and partially guarantee lenders in the event borrowers default on their government backed loans
  • Due to this government guarantee, lenders can offer little to no down payment mortgages to home buyers at very low interest rates

As long as lender follow government agency mortgage guidelines on the particular loan program, they are partially insured against the loss in the event borrower default on their loans.

Types Of Financing For Home Buyers And Homeowners

There are two types of traditional residential financing:

  • Government Backed Loans
  • Conventional Loans

Conventional Loans is often referred to as conforming loans.

  • This is because they need to conform to Fannie Mae and/or Freddie Mac Guidelines
  • Lenders need to conform to Fannie Mae and/or Freddie Mac underwriting standards in order for them to resell the loan on the secondary market after it funds to Fannie/Freddie
  • If it does not conform to Fannie/Freddie standards, it is called non-conforming loans
  • Fannie/Freddie will not purchase it on the secondary market
  • It then becomes a portfolio loan where the lender needs to hold it in-house
  • Or lenders can sell it as a scratch and dent loan on the secondary market
  • There is no government guarantee on conventional loans
  • The lender takes the risk if the borrower defaults
  • That is why conventional loans have tougher mortgage guidelines than government backed loans
  • For government backed loans, FHA, VA, USDA guarantees and partially insures the loss lenders take if their borrowers default

In order for FHA, VA, USDA to guarantee government backed loans, lenders need to strictly abide and follow their agency guidelines. 

VA Home Loans

VA Loans are government backed loans only available to either active and/or retired members of the United States Armed Services.

  • The Department of Veterans Affairs is in charge of VA Home Loans
  • The United States Congress passed the GI Bill in 1944 and created and implemented VA Loans as a benefit for our veterans returning from World War II
  • Veterans returning from deployment did not have the best credit nor savings
  • VA made guidelines easy and lax
  • There is no down payment requirements on VA Loans
  • VA offers 100% financing
  • It also offers sellers to contribute up to 4% in sellers concessions so buyers do not have to come up with any closing costs

If borrowers are short with closing costs from sellers concessions, lenders can offer lender credit to offset the shortage or cover the whole closing costs.

Qualifying For VA Loans

VA is the best loan program in the United States. However, you need to be an active and/or retired member of the U.S. Armed Services with a valid Certificate of Eligibility to qualify. It offers lower rates than conventional loans. Offers 100% financing with no down payment requirements. VA does not have a minimum credit score requirement or maximum debt to income ratio cap. Gustan Cho Associates at Loan Cabin Inc. has no overlays on VA Loans.

Here is a little more specifics on VA Mortgages:

In addition to honorably discharged veterans, active-duty personnel with at least 181 days of service, National Guard and Armed Forces Reserves with at least six years of service, and spouses of veterans who died as a result of service-related injuries are also eligible. Of course, the VA does not guarantee that a given borrower may have a mortgage. The borrower must still qualify for a loan based on credit and the ability to repay, among other requirements. Unfortunately and understandably, sometimes potential borrowers assume that the guarantee applies to them, not the lender. For those not familiar with the VA program, it’s important to understand the entitlement and the maximum VA loan amount. The VA will guarantee up to 25 percent of the loan amount to the lender should the loan default. Today, the entitlement issued by the VA is $36,000. As clear as these stipulations sound, there are still complexities in calculating the maximum loan amount. If a qualified borrower has the full $36,000 available, a loan officer will multiply the available $36,000 by four to calculate the maximum loan amount of $144,000. Further, the VA guarantee applies to loan amounts up to $484,350 and even more in certain cities and regions that are deemed high-cost areas. There is a one time upfront VA Funding Fee but no annual mortgage insurance premium with VA Loans.

FHA Mortgages

FHA Loans is the most popular government backed loans in the U.S. HUD, the parent of FHA created very lenient credit and DTI guidelines on FHA Loans.

  • Positives with FHA Loans is only 3.5% down payment is needed for borrowers with 580 credit scores
  • Home buyers can qualify for FHA Loans under 580 credit scores down to 500 FICO with 10% down payment
  • Negatives includes a one time upfront MIP of 1.75% and lifetime 0.85% annual FHA MIP on all 30 year fixed rate FHA Loans
  • It is much easier to get an approve/eligible per automated underwriting system with FHA Loans than any other loan programs

FHA is much more lenient when it comes to getting an automated approval via AUS with outstanding collections and charged off accounts than other government backed loans and conventional loans.

USDA Mortgage Guidelines

USDA is the third government backed loans. USDA has location and maximum income guidelines.

  • Only properties in certain rural areas designated by USDA qualifies
  • This loan program also has a maximum household income cap
  • Maximum allowable income form borrowers is capped at 115% of the median household income for the particular area
  • Great benefit of USDA Mortgages is it offers 100% financing
  • Now down payment is required
  • Sellers can offer up to 6% sellers concessions to home buyers so no closing costs is required

Lenders can also offer lender credit to borrowers for closing costs in lieu of slightly higher rates.

Qualifying For Mortgage With Direct Lender With No Overlays

Gustan Cho Associates at Loan Cabin Inc. are direct lenders with no overlays on government and conventional loans. We are also experts in alternative financing programs like NON-QM and Bank Statement Loans for self employed borrowers. If you need to qualify with a direct lender with no overlays, please contact us at 262-716-8151 or text us for faster response. We are available 7 days a week, evenings, weekends, and holidays.

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