Any home buyer putting less than 20% down today has probably been offered or researched the possibility of using a government loan to buy a home. Government loans offer flexible financing alternatives to the standard 20% down conventional loan. Although government loans do contain monthly mortgage insurance, these options allow for a more complete story when trying to secure mortgage loan in today’s strict credit market.
Depending on the location of the property or the area, the most common types of government loans you’ll be presented with include FHA Loans or USDA Loans. VA loans are another government loan program that are offered for veterans only, for our purposes will be looking at loans offered by the Federal Housing Administration and the US Department of Agriculture.
Following are some unique characteristics of both programs:
FHA Loans
- Can can be used in virtually anywhere in Sonoma County, Santa Rosa, Petaluma and all of the larger more densely populated areas.
- Down payment requirement 3.5% of the purchase price
- Previous short sale, bankruptcy or foreclosure ok
- Credit score requirement 640
- Seller permitted to pay closing costs up to 6% of the purchase price
- Property must meet certain health and safety regulations set by US Department Of Housing and Urban Development
- Minimum property requirement must have central operational heat source and an operational stove
USDA Loans
- Can be used in certain parts of Sonoma County. Some of the more popular areas include Windsor, Healdsburg, Cloverdale and Sebastopol
- Subject to certain annual income limitations and family dependents
- No down payment required-truly “100% financing”
- Previous short sale, bankruptcy or foreclosure ok
- Credit score requirement 640
- Seller permitted to pay closing costs up to 6% of the purchase price
- Property must meet certain health and safety regulations set by US Department Of Housing and Urban Development
- Minimum property requirement must have central operational heat source and an operational stove
Which government loan is most suitable: FHA Loans or USDA Loans?
This depends on several key factors. The primary factor -location- because that’s an indicator of which mortgage program will be the most suited for that type of home buyer. On the other hand, if maximum purchase price for the lowest possible monthly payment is a bigger factor, that changes the program as well. Looking at the following two examples we can make a reasonable ascertain into the most appropriate government loan program:
Using $350,000 as the benchmark purchase price
An FHA Loan scenario requires a minimum down payment of $12,250. Total monthly mortgage payment assuming an interest rate of 3.75% provides a monthly total in the amount of $2358 per month. *Note when we say total payment, we mean principal and interest, monthly mortgage insurance, monthly property taxes and monthly fire insurance.
A USDA Loan scenario requires no down payment. The total monthly mortgage payment assuming interest rate of 3.75% is $2155 per month.
*Mortgage payment key differences-monthly mortgage insurance on the FHA Loan is $352 per month versus the USDA Loan monthly premium of $87 per month. The FHA Loan is $265 per month more financed over the life of the loan. This has the ability to limit purchasing power if location is not as strong a factor as mortgage payment.
Here’s why:
The monthly mortgage insurance premiums on FHA Insured Loans is 95 basis points higher then it’s USDA counterparts, meaning if taking on a higher mortgage payment in exchange for being in the perfect location is more important than having the lowest payment in a less desirable location, then the FHA Loan becomes more advantageous.
On the flipside…
If your order of priority for home buying is based on lowest total mortgage payment, followed by location then the USDA Loan becomes more advantageous.
There are advantages/disadvantages to government loans.
Advantages
→Can used in any location
→Monthly mortgage insurance usually tax-deductible (speak with a tax professional)
→Monthly mortgage insurance is not permanent over the life of the loan
→Low down payment or no down payment choices
→Earnest money used in the purchase offer to buy a home will be refunded at the close of escrow or applied towards buyer’s closing costs
→Previous credit challenge and/or derogatory credit usually permitted
→Provides for expanded debt to income ratios for loan qualifying
Disadvantages
→Monthly mortgage insurance required regardless of down payment amount
→Monthly mortgage insurance increases total monthly mortgage payment affecting purchasing power
→Monthly mortgage insurance must be in place a minimum of 60 months as mandated by HUD
→Government Loans cost more than a standard conventional 20% down loan
If if you are looking to buy a home, and down payment and location are of equal importance, you’ll want to try get pre-approved using both types of loan financing. This gives you the best of both worlds so if you find a property in a less industrialized, more rural location, you can have the benefit of potentially using no down payment staying more liquid or if you find a property in a more centralized location you can go in with 3.5% down on a loan insured through the Federal Housing Administration.
Ultimately, the loan program with the highest degree of sustainability over time is the most suitable government loan program. See which government loan makes the most sense for you by getting a no obligation mortgage rate quote. Learn about Government Loans: To FHA or USDA.
