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So-called “Government Mortgages” have helped millions of people who might otherwise be shut out of the market buy homes for over 50 years. In fact, the U.S. Government does not really make any mortgage loans. They do, however, guarantee mortgage loans through the Federal Housing Administration (FHA) and the U.S. Department of Veterans' Affairs (VA). There is technically a third government program, the Rural Housing Service (RHS), administered by the U.S. Department of Agriculture which performs similar functions for rural home buyers, although this program does not have the impact of the prior two.
These mortgage loans are tailored to help prospective home buyers who have little cash for down payments and/or loan qualification issues purchase the homes they want. Those buyers who have little or no money to put down, less than perfect credit, or income issues may not qualify for conventional mortgage loans. The FHA and the VA, through relaxed down payment and credit requirements, may allow you to qualify for the mortgage loan you need to purchase the home you want. Most of the required documentation for conventional loans is also necessary for FHA and VA. There is also some additional information needed for these programs. VA loans require evidence, through a Certificate of Eligibility , that you are veteran of the U.S. military. FHA loans require a somewhat different, more extensive home appraisal than required for conforming loans.
Mortgage lenders must be approved by FHA and VA to make loans that they will guarantee. If you are considering one of these government loans, be sure ask any loan officers you speak with if they are approved to write government mortgage loans. You should also be aware that these loans have a couple of items that must be considered.
In return for their guarantees, both programs impose a fee not found with conforming programs. FHA charges an “insurance” fee (for the guarantee) of 0.50%, which becomes part of your regular monthly payment. VA charges a “funding” fee at the closing of your loan. This fee varies depending on whether you have used your Certificate of Eligibility before and the amount, if any, of your down payment. You can expect to pay around 2.0% of your loan amount for the VA guarantee. An additional quirk of the VA program which sometimes causes problems concerns closing costs.
Even with their quirks, government loans can help you purchase the home you want with little or no money down. You might even be able to include some costs to rehabilitate your new property in your mortgage loan. With the exception of the fees for guaranteeing your loan, your interest rate will be in the current market range. Government loans have served a valuable and effective purpose for years and continue to do so. If you are a military veteran or have lack of down payment issues, consider a government mortgage to achieve your goal of home ownership.