Conventional versus government mortgages
It is the most feared phrase in the English language, Ronald Reagan famously said:
"We're from the government, and we're here to help."
If government aid is evil, there are certainly some exceptions. Home mortgages insured by the Federal Housing Administration have helped put more than 34 million Americans into their own homes since the since the 1930s. Millions more have benefited from zero-down VA loans from the U.S. Department of Veterans Affairs and from the Department of Agricultures Rural Development loans. Mortgage guarantees and down payment assistance are also doled out by municipalities and state programs such as California's Housing Finance Agency.
It's hard to generalize about their pros and cons with so many government-enabled loans out there. But when we compare them to conventional (non-government) loans, a few observations arise.
FHA loans normally demand higher interest rates than conventional mortgages because of the increased risk of default. The "spread" between FHA and conventional loans can be as high as a point, or 1 percent, which is a lot. Borrow $200,000 for 30 years at 5 percent fixed and you'll pay $1,073 monthly. Make it 6 percent and you'll pay $1,199. It's an extra $45,360 over 30 years.
Why have so many buyers chosen FHA loans? Not because they like higher interest. It's about lower down payments. An FHA-backed loan today can be had for about 3% percent down, even by someone without stellar credit. The same borrower might be asked for 20 percent down by a lender without the FHA guarantee.
But there are complicating factors. FHA borrowers must pay an upfront fee of 1.5 percent of the loan amount, plus an annual insurance premium of 0.5 percent. That premium is about the same as what's paid by a conventional borrower who must carry Private Mortgage Insurance (PMI).
A higher-interest-rate FHA mortgage may cost less in the long run than a conventional mortgage with PMI, but there is no overarching rule. You have to run the numbers and compare. For many borrowers, the deal "maker" or "breaker" won't be the interest rates or monthly payments. For many, with conventional lenders now demanding 10 or 20 percent down, it's all about down payments.
In theory, it's possible to avoid PMI with a piggyback mortgage structure - by borrowing 80 percent of the property value in one loan and 10 percent on a second for example. (This trick was common in the loose-lending days of old but today (in 2009), it's much harder to find second-position lenders at loan-to-value ratios like these.
Two other brands of government-guaranteed loans are offered by federal agencies. The Department of Veterans Affairs will insure zero-down, 100 percent financing as a benefit to military veterans (even if they served in peacetime). The interest rates are similar to FHA loans.
Zero-down financing is also backed by the U.S. Department of Agriculture under its Rural Development program. The audience for RD loans is limited. They're intended to help low-income people buy, build or renovate homes in rural areas. Houses must be modest in size, design and cost, according to the agency. The interest rates are similar to FHA and VA loans, combined with 100 percent financing. Great terms for the needs of many people if they qualify.
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By Trulia | 15 Comments
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FHA wins hands down with less than perfect credit - and the PMI companies can make certain of that these days!
A USDA loan was referenced above and as of last week USDA announced they will be out of money to fund any new USDA loans by the end of April. They do not know when they will receive additional funds for that loan program.
I suggest going with a FHA loan over a USDA loan as of today. I would hate for someone to get all the way through underwriting only to find out that USDA cannot issue a loan commitment because they are out of funds.
There are several types of FHA loan programs available including the $100 down payment program and a 203k rehab loan program. If you find the right house you can combine both of those loan programs on one purchase - get into the house for $100 down , have the seller to pay for most of your closing costs and get some extra funds to do repairs on the home you are purchasing. Sounds like a deal to me!
On October 1st, the up-front MIP fee on FHA is going down to 1%, however the monthly MIP fee is going to increase. I have not seen anyone yet who has put out a chart to show what the up-front will be on each LTV. If it is all the same, the factor is .90, if it depends on LTV, we may see that at lower LTV's, the factor is much less. If you are on the verge of either refinancing or purchasing, get your FHA case number now to avoid these changes.
Do the same with conventional loans so We can see it in paper.
Your loan amount will be $96,500. The interest rate will determne your payment amount. Example: 5% for 30 years would be approx $523.40. 5.5% for 30 years would be approx $553.59. 6% for 30 years would be approx 584.56 per month. Plus you would add on taxes, insurance and PMI. So, depending on the home you buy, the payments with taxes, insurance and PMI, would add to your monthly payments. Ex: 1200 a year on tases would be $100. per month. 600 a year for insurance would add another $50.00 per month. And PMI of approx $55.00 would make your total payment at 5% interest rate approx. $728.40 per month Does this make since for you?
Conventional is the same, just subtract your down payment of 20% or more. Your loan amount will then be $80,000 versus $96,500. And your payment will reflect the differnce, but the taxes and insurance will remain the same, using my prediction of $100 per month for insurance and $50 per month for insurance. You will not have to pay PMI, due to the 20% down payment. So at 5% interest your payment will be $429.45 + 100+50 for approx $728.40. Hope this helps you!!
Aram Arakelyan
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I am disgusted. If they don't have money for a down payment, how are they going to maintain the home...pool, decks, huge lawn, ornamental trees and shrubs?
They'll let the place go downhill, eventually sell something that will need lots of TLC and sell at a lesser price than they paid. The neighborhood will suffer more loss.
The government continues to cripple the market.
We have neighbors who have a true financial stake in their homes. They continually work to improve their property and maintain curb appeal. But, they can't refinance because the mortgage meltdown caused by allowing 'the no money down purchase' has brought their home values to two thirds what they were prior to 2008.
I won't sell to anyone with an FHA loan.
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Unfortunately, my broker is saying that the VA Loan benefit will not be OK in a short sale which is "as is" making me completely uncompetitive in bargains which need any TLC. Most REOs are in better shape and tend to be better potentials but I also have to ignore any house with a wood deck attached ot the house. I assume this is all true but the VA website doesn't mention it and is not very specific in its FAQs. So, I trust my broker as she was interviewed and recommended by a best friend (who is also a broker in the luxury property market here though well outside my range). I can more than afford the mortgage payments on most houses (with my non taxed disability benefits) I've seen but I have to ignore more than half of the bargains due to these VA criteria which I can't find written anywhere on the VA site or published regs.
Even more unfortunate than the VA website lacking in info is that every real estate website which discusses Government loans almost exclusively (including Trulia) talk a lot about FHA loans, etc. but barely mention the VA benefis criteriat, the issues of veterans (especially disabled ones whose income is generous yet "unearned"), the intricacies of VA Loan Guarantees, or even mention anything about "Cal Vet loans" - a CA benefit I'd never heard existed - though I hear they are slow to approve. It's already hard shopping from SF County an hour NE for these great houses in Upper Solano County (I also have some ambulatory problems related to my disabilities) but I can't seem to find anything specifically useful to using my VA Housing Loan benefit.
Can anyone aim me in a direction where a veteran can get more info? There are a LOT of us and as Iraq and Afghanistan draw down there will be a whole more of us looking to use this benefit or understand what a CalVet loan is ... where are we supposed to go to get an analysis from outside each government agency? Thanks in advance.
Is it possible to get loan approve with 1099 with 20 present down. Is conventional loan is the way to go.