Monday, May 24, 2010

Choosing a Government Loan Option in 2010

As interest rates continue to flirt with record lows, homebuyers turn to government-backed loans to finance their mortgages. With three major programs in place—VA loans, USDA loans and FHA loans—several demographics are given a helping hand to buy a place to call home.

Qualifying for government-backed loans tends to be easier than doing so for conventional loans. Credit requirements are less stringent, and borrowers usually don’t need huge financial reserves. Debt-to-income ratios are even more flexible.

VA Loans
In 1944, Congress created the Veterans Affairs Home Loan Guaranty program exclusively for our nation’s military service members. Still popular today, the program offers lower monthly payments thanks to competitive interest rates and the elimination of private monthly mortgage insurance. Borrowers qualifying for mortgage guidelines can even purchase a home with no money down, which is cited by borrowers as the program’s greatest strength.

For active-duty military members, VA loans come with interest rate caps. When borrowers close a deal with a VA loan, sellers may cover up to 6 percent of closing costs.
If VA loan borrowers want to make prepayments on the loan, they can do so without any penalty. Before borrowers default on a loan, the VA offers counseling and several options to avoid foreclosure.

With all of these benefits, it’s no wonder why VA loan volume surged 80 percent last year.
USDA Loans
Despite its temporary hiatus, the Rural Development program is designed to help low- and middle-income families in rural communities purchase homes. When the USDA designed the program in 1987, few lenders operated in rural areas, and now the program is too popular for its own good.

These loans are the only other no-money-down options. When borrowers need to pay money down, USDA loans allow family and non-profit organizations to pitch in. Just like VA loans, there is no mortgage insurance and interest rates are often lower than conventional financing options, and borrowers can finance 100 percent of the appraised value of a home. In 2009, the USDA insured more than 115,000 loans, which was more than double the 2008 figure.
FHA Loans
The oldest of the government-backed loans, FHA loans still draw plenty of prospective homebuyers. Interest rates for FHA loans don’t differ more than 0.125 percent from conventional loans. Unlike the other two government loans, FHA loans include a mortgage insurance, but one that is less expensive than a private insurance. The fee is included in monthly payments.

In some instances, borrowers can combine FHA loans with other loans, resulting in 0 percent down. Even with imperfect credit, borrowers can expect smaller down payments than those of conventional loans, as low as 3 percent. Much like USDA loans, borrowers can get down payment assistance from relatives and non profits.

Given the breadth of financial upsides built into government-backed loans, prospective homebuyers everywhere should consider one of these options. Check with a lender to help determine your eligibility for any government program.