Government loans are guaranteed loans by one of two federal agencies, allowing lenders to lend money with minimum risk. The government does not lend money. They only guarantee repayment to the lender against any potential loss if the loan goes into default and subsequently foreclosure. There are two types of government loans.
- Federal Housing Administration or FHA.
- Veterans Administration or VA.
FHA loans are helpful for people who do not qualify for a conventional loan. They may be first time home buyers without established credit, have a low down payment, a short credit history, or have had a bankruptcy or foreclosure in the past. An FHA is easier to qualify for and allows a borrower to finance more of the loan amount than a non-government loan. With a conforming loan a borrower may only qualify to finance 80% of the loan amount while a FHA loan could allow up to 96.5%.
The two advantages of using a VA loan is that the VA allows borrowers to finance 100% of the loan amount and the VA only requires proof of veteran status to qualify. The disadvantage is that mortgage insurance is required on all loans regardless of the loan to value ratio. Unlike conventional and jumbo loans where payment of mortgage insurance is determined by the amount of equity a borrower has in his home.
FHA loans are offered in 15 and 30 year fixed, a 1 year ARM, and four hybrid ARM’s of 3, 5, 7, or 10 years where the rate is fixed for the initial period and changes annually afterward. The advantages of FHA loans are their low down payment requirement and less stringent qualification requirements. Although FHA loans are not restricted to first-time homebuyer’s they are well suited for the first time buyer. The FHA 1 year ARM product is particularly appealing due to its adjustment interval cap of 1% vs. 2% on most conforming ARM’s and its lifetime cap of 5% vs. 6% on most conforming ARM’s.