Government underwritten vs. conventional mortgages

Government underwritten loans are insured or guaranteed by an agency of the U.S. government. The Federal Housing Administration insures loans made by private lenders to qualified buyers of properties that meet minimum standards. The Veterans Affairs guarantees loans made by such lenders to veterans. A 1% user fee charge is made by the VA for a guarantee. The FHA charges a premium for loan insurance, as described below

1. FHA-insured mortgage
The Federal Housing Administration was created under the National Housing Act of 1934. Under this act the FHA was granted the authority to insure mortgage loans made by private lenders. It is important to understand that the FHA issues an insurance policy, whose premiums are paid by the borrower, which guarantees that the lenders will receive their money in the event the mortgagors fail to make their payments. There are several types of FHA mortgage programs including low-income housing, nursing homes, cooperative apartments and condominium apartments. The most common FHA program is for single-family homes as authorized by Title 1 1 , Section 203, of the National Housing Act. Under this program the borrower pays a one-time insurance premium based on several factors. This premium may be financed over the life of the loan if the skller pays the closing costs. The premiums for FHA insurance are deposited in the Mutual Mortgage Insurance Fund. The FHA reimburses a lender from this fund if a borrower defaults, the mortgagor’s interest has been foreclosed and the Secretary of HUD has taken title to the property. The FHA then must sell the property. Lenders will generally loan a higher percentage of the appraised value with an insured mortgage. There may be times when a potential home buyer does-not have a sufficient down payment to qualib for a conventional loan. In this case, an FHA-insured mortgage may be appropriate. However, the insurance premium is an added expense to the borrower.

2. VA-guaranteed mortgage
The Veterans Affairs (formerly the Veterans Administration) was created just after World War I1 as part of the Servicemen’s Readjustment Act and was authorized to guarantee a stated percentage of loans made to qualified veterans by qualified lenders. Although the Veterans Affairs does not normally make loans, in areas where here are no lending institutions, the VA will grant loans directly to veterans. Generally, the VA guarantees loans that are made by lending institutions to veterans. When a borrower defaults, the VA will pay up to 50% of the amount of the loan when5 the loan is $45,000 or less. For larger loans the VA will pay any loss up to a maximum of $22,500 plus 40 cents per additional dollar of the loan over $45,000, to a total loss limit of S36,OOO. Because VA loans are available up to 100% of the selling price, brokers are able to sell homes to veterans who otherwise could not afford to purchase a home. In this case the veteran is entitled to only one VA loan; however, in some cases the loan can be transferred to another eligible veteran, and the original borrower’s right to a loan is restored.


3. Conventional mortgage
In recent years, the percentage of FHA and VA mortgages has been decreasing. The majority of mortgages today are conventional. Conventional loans are preferred by lenders for two reasons. First, lenders have the flexibility to create loans that reflect their own requirements. This permits individualized programs that are in the best interest of both parties. Second, more paperwork and red tape are required for loans that are guaranteed or insured, and administrative costs are higher. Generally, a conventional mortgage requires a larger down payment than an FHA or VA mortgage. In the VA program, the borrower is not allowed to pay points on a new loan. However, the borrower may be required to pay points when refinancing or rolling over. (Points are a discount from the face amount of the loan which increases the yield to the lender.) In conventional and FHA mortgages, borrowers are allowed, and in many cases do, pay loan fees, user fees or discount points.