In today’s mortgage environment, homebuyers have two primary choices for financing residential properties — conventional loans and government-backed loans. Conventional mortgages are those underwritten to standards issued by Fannie Mae and Freddie Mac, and the lender itself accepts
the risk if and when a loan goes into default. Government-backed loans aren't loans issued by the government, but are underwritten to lending guidelines set forth by the U.S. Department of Veterans Affairs (VA), Federal Housing Administration (FHA) or the U.S. Department of Agriculture (USDA).
For mortgage brokers who are new to the industry, it can be easy to get too comfortable with conventional mortgages and fail to fully explore the advantages of the aforementioned government programs. Conventional loans may make up the lion’s share of today’s origination volume, but for new
and interested brokers and loan officers, here’s a refresher course on government-backed loans.
VA loans are just one part of the original GI Bill passed by Congress in 1944 as an act of gratitude to returning veterans of World War II and to help them re-assimilate more quickly into society. Eligibility for VA loans has changed over the years, however, and the program is no longer
restricted to veterans of the armed forces. 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 $417,000 and even more in certain cities and regions that are deemed high-cost areas.
FHA loans have gotten something of a bad rap as of late due to higher mortgage-insurance premiums (MIPs). In addition, it should be noted that an FHA loan’s MIP is kept for the life of any FHA loan with a case number issued after June 3, 2013. Because of this circumstance, many loan officers
have decided that, when running the numbers, a conventional mortgage often makes better sense. Although that may be true, FHA loans still have advantages that conventional loans do not.
One of the advantages concerns gift funds. When borrowers are receiving gift funds from a qualifying source for conventional loans, they must provide evidence that they have at least 5 percent of their own cash in the transaction. For cash-strapped borrowers, especially in areas where median
home prices are higher compared to other areas, that can be a lot of money.
With an FHA loan, however, borrowers need to only have $500 of their own funds in the transaction. If clients don’t have sufficient funds of their own to put down the 3.5 percent and are not VA qualified, an FHA loan should be considered. Yes, higher insurance premiums are a negative, but if
there is little to no cash available, there may not be many options available.
A second advantage of FHA loans comes into play when a borrower needs a co-borrower to qualify for a loan. FHA loans make allowances for non-occupying co-borrowers that other loan programs do not. There are legitimate instances when a potential borrower has income that can’t be used
due to lending guidelines.
Such instances may include a college student who has a part-time job, a borrower who is recently self-employed or someone who has recently changed careers. What makes FHA lenders particularly cautious is when they’re faced with a customer who can’t provide evidence of any income, or when
a borrower’s parents have co-signed the loan but also have multiple investment properties in their portfolio.
This program is the other no-money-down option with a government guarantee. Its usage, however, has been limited. Compared to other loan types, the USDA’s lending guidelines may seem a bit quirky, if only because they have certain lending requirements that others do not.
Originators interested in this niche should know that USDA loans are limited by both location and income. Eligible locations are listed on the USDA’s website, and the maximum allowable income for all borrowers is 115 percent of the median income for the area. If you have a borrower who can meet
these two requirements, the USDA program is hard to beat. In fact, when working with someone with little available cash, it may be an ideal option.
What surprises many who begin to research the USDA program is where the properties might be located. Yes, the USDA program is considered a rural loan, but there are eligible areas that look nothing like farm property and are, in fact, suburban. You won’t find USDA eligibility in a major
metropolitan area, but you may find eligible locations in suburban areas. In other words, don’t necessarily think “rural” when thinking USDA.
USDA loans don’t have a loan limit, but they do follow specific debt-to- income ratios — the principal, interest, taxes and insurance to income ratio must be equal to or less than 29 percent, and the total debt ratio must be equal to or less than 41 percent. USDA loans are available to
purchase both existing and new construction, modular and manufactured housing, and even approved condominium projects. Credit guidelines are less stringent compared to other low- or no-downpayment programs and, in addition to the no-downpayment requirement, the USDA has a guarantee fee of 2 percent. Finally,
if a home appraises for more than the sales price, closing costs may be included in the final loan amount.
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Each of these government-loan niches can become crucial parts of your loan portfolio when you thoroughly educate yourself about them and use them with dedication. New originators may even find a government loan they’d like to exclusively specialize in, and each of these niches is large
enough to support such specialization. In any case, learning more about government loans can pay off for those who are new to the industry.
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