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Published by Contour Mortgage on March 01 2021

What Is a Government-Backed Mortgage & How Do I Qualify?

Topics: Veterans, Home Buyers, Reverse Mortgages, 203k Loan, USDA, FHA

There are several consideration factors when choosing the right mortgage, such as qualifications, requirements, down payments, and interest rates. Whether you’re a first-time home buyer, or looking to scale up or down, government-backed loans offer several advantages. 

Insured and subsidized by federal agencies, the most common are offered through the Federal Housing Administration (FHA), U.S. Department of Agriculture, (USDA), and Veterans Affairs (VA) for active and retired U.S. military personnel. 

While each boasts unique benefits, all can aid borrowers with home purchases, improvement and rehab projects, or refinancing.

Learn more about the benefits, qualifications, and requirements of government-backed loans offered through Contour Mortgage.

 

Benefits

Government-backed loans are only available through approved lenders, such as Contour Mortgage. Offering less stringent requirements due to federally funded subsidies and insurance, these protect borrowers and lenders from loan default or other issues.

Additional benefits include lower credit ratings and debt-to-income (DTI) ratios. Some lenders might also consider previously resolved financial issues, such as bankruptcies, liens, and foreclosures.

Borrowers with good or excellent credit, balanced DTI, and down payment of 20 percent or more, can achieve extra closing cost allowances and credits.

These loans also offer first-time homebuyer purchase and improvement project grants through various state, local, and nonprofit organizations. Visit the U.S. Department of Housing and Urban Development (HUD) website, or check with the aforementioned agencies to learn more.

 

Qualifications & Requirements

FHA and USDA loan recipients putting more than 20 percent down are exempt from purchasing private mortgage insurance (PMI) or upfront mortgage insurance premiums (UFMIP). VA loans are excluded from these requirements, regardless of down payment amount.

All three can finance single-family homes, multi-family dwellings, and condos and co-op used as primary residences. This also applies to home improvement or rehabilitation projects, refinancing, and reverse mortgages. 

 

Types

As aforementioned, the three most common government-backed loans are available through the FHA, USDA, and VA. Depending on your goals, it’s best to work with a Contour Mortgage representative to understand which loan is right for you.

FHA

Originally established during the Great Depression to promote home ownership for young families, FHA loans are available with down payments as low as 3.5 percent. 

Mainly offered as 30-year, fixed-rate mortgages, qualified recipients often experience quick approvals and closings.

Not all FHA loan limits are the same throughout the United States. These can also vary by county, depending on market conditions and cost-of-living expenses. Consult the FHA Mortgage Limits Tool for specific amounts. 

Credit ratings usually aren’t a factor when applying for a FHA loan. Closing costs and other fees could also be paid by sellers, builders or lenders, where applicable.

FHA loans are assumable—meaning an outstanding mortgage on a home from a seller with a current FHA loan can be transferred to the new buyer. 

HUD updated its prepayment penalties on FHA loans in 2015. The department ruling states borrowers will only be responsible for interest charges through the date the mortgage loan was paid.

Family members, friends, or other donors with no vested interest in the property can give borrowers up to 100 percent of this loan. The FHA deems this acceptable, provided the funding is used for home purchases or improvements, closing costs, and other fees. 

Donors exceeding the Internal Revenue Service (IRS) $15,000 limit  will also be required to claim gifts or donations on applicable income tax returns

Learn more about gifting on the HUD website, or contact a Contour Mortgage representative for assistance. 

203(k)

Utilized to finance a fixer-upper or rehab property, FHA 203(k) home improvement loans are based on the home’s anticipated value following improvements and upgrades.  

Covering up to $625,000 of the home’s purchase and accompanying improvements, these could include increased living space, cosmetic updates, foundation and structural fixes, and other enhancements. 

Reverse Mortgages

Those aged 62 and older can switch to an FHA-sponsored reverse mortgage if they’re currently living in their primary residence with a low loan balance. Available as a Home Equity Conversion Mortgage (HECM), it taps into the home’s equity as cash toward remaining principal or home improvement debts.

Borrowers aren’t required to make monthly payments provided they remain in the home with no loan defaults.

 

USDA

Fostering home ownership in rural and sparsely populated communities, USDA loans are backed by the Rural Development Guaranteed Housing Loan Program.

Geared toward low- to middle-income borrowers in rural areas, this loan doesn’t require down payments and closing fees, or mortgage insurance.

Borrowers can only purchase homes up to 2,000 square feet, and income levels must be below the limit for your metropolitan area and family size. 

USDA loans also require two years of steady income, favorable credit history, and a balanced DTI for total living expenses and mortgage payments.

 

VA

As a VA-approved and military-friendly community lender, Contour Mortgage is honored to assist active service members, veterans, and eligible surviving spouses in achieving home ownership. 

Established during World War II to ensure those who served could effectively care for their families, VA loans are suitable for veterans, active-duty service personnel, reservists, and National Guard members.

Suitable for primary residence home purchases or improvement projects, borrowers must have served at least six months active duty. Reservists and National Guard members are eligible after six years, or active duty for a minimum 181 days. Combat military personnel serving 90 days could also qualify.

Similar to USDA loans, these don’t require a minimum down payment or mortgage insurance. Additional benefits include lower closing costs and DTI requirements, and credit counseling. 

Existing VA loans acquired after March 1, 1988 can also be assumed by qualified borrowers.

 

Which Is Best?

If you’re still not sure which government-backed loan is best for you, contact a reputable mortgage lender to help navigate the accompanying requirements, qualifications, and benefits.

 

Contact Contour Mortgage for a free consultation and to learn more about required information and financial documentation for government-backed loans.

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