March 19, 2010, Newsletter Issue #210: Government Mortgages Explained

Tip of the Week

A government mortgage may be an excellent choice for a first time home buyer. As always, these choices depend on your particular situation at the time. On the surface the biggest advantage for a first time home buyer is the ability to get a mortgage loan with very little or no money down, as lack of a sufficient down payment is the most common problem for many trying to purchase their first house. There are two primary categories of loans commonly referred to as government mortgages:

Federal Housing Administration (FHA), which is part of the U.S. Department of Housing and Urban Development, usually known as HUD. U.S. Department of Veterans Affairs (VA), offering mortgage loans to active and retired members of the armed forces. A major feature of an FHA loan: Your down payment can be as low as three percent (3%) which helps first time home buyers who are frequently short of cash. In addition, FHA allows you to include your closing costs into your new loan. Should you want to buy a “fixer upper”, a property that need lots of TLC, an FHA loan will allow you to include the cost of these improvements in your loan. If you learn, through your required home inspection, that your prospective purchase is seriously deficient in its energy-conservation measures, you can also include the cost of remedying this problem into an FHA Energy-Efficient mortgage loan. As you can see, an FHA loan can be a perfect choice for many first time home buyers.

The VA, like the FHA, does not actually make loans directly, but guarantees part of the loan to the lender who makes the actual loan. Veterans of military service can obtain an “eligibility certificate”, which is their passport to be able to get a VA loan. Most loans require no money down, again a large advantage for first time home buyers, often strapped for cash. Another cash conservation advantage is a limit on closing costs prescribed by the VA to help more eligible veterans close loans. VA loans are also “assumable” (unlike most standard mortgage loans), which may help you when you are ready to sell your home. If you have a loan that has terms that are better than those available when you sell, a qualified buyer could take over – assume – your loan and its excellent terms. Since almost all mortgage loans have “due on sale clause” (making the loan due and payable in full if the ownership changes), this can sometimes be a wonderful advantage to a seller.

The only disadvantage of either of these two effective programs is a mortgage insurance fee (FHA) and a funding fee (VA), neither of which should deter you. The VA funding fee is two per cent of the mortgage amount (two and three-quarters per cent for reservists), but may be included in the loan at closing. The FHA mortgage insurance costs about one per cent of the mortgage amount. For a first time home buyer, these government mortgage loan programs can be a lifesaver.

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