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When you hear the term ‘government-backed’ don’t get confused, it isn’t a guarantee that someone is going to get a mortgage because it’s backed by the federal government.
These types of mortgages are different from ‘conventional’ mortgages.
Most conventional loans are those underwritten to Fannie Mae or Freddie Mac standards. The loan is sold to either Fannie or Freddie individually or ‘in bulk when a lender makes a loan based upon these guidelines.
Nearly two-thirds of home loans issued today are conventional loans.
The others fall into the government-backed category and another smaller percentage are called ‘portfolio’ loans where the lender has no intention of selling the mortgage but instead keeps it in-house.
There are three prominent types of government-backed mortgages and they are the VA, FHA, and USDA.
These loans do carry some guarantees, not for the borrower but the guarantee is issued to the individual lender. During an instance of a default, the guarantee compensates the lender for part or all of the loss sustained.
VA loans are 25% of the loss. Meaning if a VA loan goes into default and suppose the loan amount is $200,000, the guarantee to the lender would then be $50,000, and this guarantee is financed with the VA’s Funding Fee.
The funding fee changes depending upon the number of times the borrower has used the VA program to buy a home. Of the initial loan amount currently, the funding fee is 2.30% but it is rolled into the final loan amount.
The Federal Housing Administration’s FHA home loan program also carries a guarantee and here the lender is compensated for the outstanding loan balance.
There are two such fees for the FHA program, along with the regular mortgage payment an upfront fee and an annual fee paid in monthly installments.
Of the base loan amount, the upfront premium is 1.75% and the annual premium is based upon the original down payment amount and the actual term of the loan.
Each year, the annual premium is recalculated for the coming year as the mortgage balance is paid down.
The United States Department of Agriculture or USDA is the third loan. This USDA loan also provides full compensation to the lender in case of default and like the FHA program, this too has two separate fees.
Based upon 1.00% of the initial loan amount of the upfront fee and the annual premium is 0.35% of the outstanding loan balance.
Reference Source: Reality Times
