Government Mortgages Versus Conventional Loans

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This ARTICLE On Government Mortgages Versus Conventional Loans Was PUBLISHED On June 26th, 2020

Many mortgages often get confused about Government Mortgages Versus Conventional Loans.

  • Government mortgages are private home loans originated and funded by private lenders but are partially guaranteed by a government agency
  • Due to the government guarantee, lenders are often motivated and eager to offer government mortgages with little to no down payment at low mortgage rates
  • The three government loans today are FHA, VA, USDA loans
  • FHA loans allow homebuyers to purchase homes with a 3.5% down payment
  • VA and USDA loans do not require any down payment

Lenders offer 100% down payment on VA and USDA loans due to the government guarantee.

Government Mortgages Versus Conventional Loans: What Is A Government Guarantee?

What is the government guarantee?

  • Government guarantee means FHA, VA, or USDA will partially guarantee losses to lenders if the borrower defaults on their mortgage and the property go into foreclosure
  • The government agency will partially cover the loss sustained by the lender if the borrower defaults on their mortgage loans
  • Government mortgages are only for owner-occupant properties
  • Second homes and investment properties do not qualify for government loans

In this article, we will discuss and cover Government Mortgages Versus Conventional Loans.

Benefits Of Government Mortgages Versus Conventional Loans

Government loans are home mortgages that are backed by a government agency.

  • Private lenders originate, process, underwrite, fund, and service government loans
  • The only role the government agencies play on government loans is they protect and partially insure the loans private lenders fund against defaults on payment

Due to this government guarantee, it makes government loans easier to qualify and get approved than conventional loans.

Types Of Government Loans

There are three types of Government loans:

  • FHA loans
  • VA loans
  • USDA loans

Government mortgages are for owner-occupant borrowers only. Second homes and investment homes do not qualify for government mortgages.

FHA Government Mortgages Versus Conventional Loans

FHA loans are the most popular loan in the Nation.

  • FHA loans are insured by the Federal Housing Administration
  • HUD is the parent of FHA
  • The role of FHA is to promote homeownership for renters
  • The loan guarantee by FHA motivates private lenders to offer FHA loans to homebuyers with a 3.5% down payment, less than perfect credit, at great mortgage rates
  • FHA loans are ideal for first-time homebuyers, borrowers with less than perfect credit, low down payment, credit scores down to 500 FICO, and high debt to income ratio borrowers
  • Lending requirements on FHA loans are much lenient than conventional loans
  • One to four-unit residential homes can qualify for FHA loans

The main reason why home buyers choose Government Mortgages Versus Conventional Loans is that it is easier to qualify. Lending guidelines on government loans are laxer than conventional loans.

Government Mortgages Versus Conventional Loans: Minimum FHA Agency Guidelines

Here are the minimum agency mortgage guidelines on FHA loans:

  • Borrowers can purchase, refinance, or renovate a single-family or multifamily home as a primary residence with FHA loans
  • FHA allows a 3.5% down payment FHA home purchase mortgage with a minimum credit score of 580 FICO
  • Homebuyers need to put a 10% down payment for homebuyers with a credit score of 500 to 579 FICO
  • There is a two-year waiting period after Chapter 7 bankruptcy to qualify for an FHA loan
  • There is a three-year waiting period after foreclosure, deed in lieu of foreclosure, short-sale to qualify for an FHA loan
  • The front-end debt to income ratio cannot exceed 46.9% and back-end debt to income ratio cannot exceed 56.9% to get an approve/eligible per AUS

Outstanding collections and charged-off accounts do not have to be paid.

HUD Chater 13 Bankruptcy Agency Guidelines

Borrowers in Chapter 13 Bankruptcy repayment can qualify after making 12 timely payments to the bankruptcy trustee:

  • Chapter 13 bankruptcy does not need to be discharged
  • There is no waiting period after Chapter 13 Bankruptcy discharged date to qualify for an FHA loan

Any Chapter 13 bankruptcy that has not been seasoned for two-years needs to be a manual underwrite.

VA Government Mortgages Versus Conventional Loans

VA loans are hands down the best loan program for homebuyers.

  • However, not everyone qualifies for VA mortgages
  • VA loans are a privilege for active and/or retired members of the U.S. Military with a certificate of eligibility
  • VA loans are backed by the U.S. Department of Veterans Affairs
  • There is no down payment required on VA loans
  • Eligible borrowers can qualify with 100% financing with no mortgage insurance at great rates
  • VA mortgage rates are normally lower than conventional mortgage rates
  • Due to the VA guarantee, lenders can offer VA loans to eligible borrowers with 100% financing at lower rates than any other loan program
  • VA loans have lenient credit and income guidelines than any other loan program
  • There is no minimum credit score requirements on VA loans
  • There is no maximum debt to income ratio caps on VA loans
  • As of 2020, there is no maximum loan limit on VA loans

There is no annual mortgage insurance premium on VA loans. However, there is a one time VA Funding Fee that can be rolled into the VA loan balance.

Who Are Eligible For VA Mortgages?

The VA has lenient mortgage guidelines. The Veterans Administration knows that members of the U.S. military may have lower credit profiles than their civilian counterparts due to being transferred often and/or being deployed.

The following are the basic general VA Agency Mortgage Guidelines:

  • Either an active military or an honorably discharged veteran with an active certificate of eligibility (COE)
  • Surviving spouse of a deceased veteran who died in active duty may be eligible
  • Must have completed at least 90 consecutive days of service during wartime
  • Or at least 180 consecutive days of service during peacetime
  • National Guard or Selective Reserve service members are eligible if they have served for more than six years
  • Members who have served in active duty for 90 consecutive days of full-time service
  • Members of the National Guard, as well as Reservists, may become eligible
  • World War II Merchant Seamen may qualify for VA loans
  • US Public Health Service Officers may qualify
  • National Oceanic and Atmospheric Administration Officers may qualify 

Gustan Cho Associates is a five-star national mortgage lender with no lender overlays on VA loans licensed in multiple states.

Minimum VA Agency Guidelines On VA Loans

Below are the minimum VA Agency Guidelines by the U.S. Department of Veterans Affairs to qualify for VA loans:

  • Zero down payment and 100% financing
  • No mortgage insurance required on VA loans
  • There is a two-year waiting period after Chapter 7 bankruptcy, foreclosure, deed in lieu of foreclosure, short sale to qualify for VA mortgages
  • Borrowers in an active Chapter 13 bankruptcy repayment plan can qualify for VA loans during the payment period after 12 months of filing Chapter 13 and making at least 12 on-time payments via manual underwriting
  • Chapter 13 bankruptcy does not need to be discharged
  • There is no mandatory waiting period after Chapter 13 bankruptcy discharged date  
  • Any Chapter 13 bankruptcy that has not been discharged for at least two years needs to be manually underwritten 

The team at GCA Mortgage Group are experts in helping borrowers get approved for VA loans during and/or after Chapter 13 bankruptcy.

Government Mortgages Versus Conventional Loans: USDA Loans

USDA loans are guaranteed and backed by the U.S. Department of Agriculture. USDA’s mission is to promote homeownership in rural areas in the United States. Not all areas in the U.S. are eligible for USDA loans. Only areas designated as USDA is eligible for USDA loans. There is no down payment required on USDA loans. Lenders can offer 100% financing on USDA loans due to the government guarantee. The maximum debt to income ratios allowed on USDA mortgages is 29% front end and no greater than 41% back end. There is a maximum household cap on USDA loans. The household income needs to be within and/or below the low-income limit set by the government in your county. There is two underwriting process on USDA mortgages. The lender underwrites the file first. Then the file is sent to a USDA mortgage underwriter and gets underwritten there.

To qualify for government mortgages with a lender with no lender overlays, please contact us at GCA Mortgage Group at 262-716-8151 or text us at for a faster response. Or email us at gcho@gustancho.com. Gustan Cho Associates has no lender overlays on government and conventional loans.

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