10: Government Lending Programs
- Page ID
- 177213
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\(\newcommand{\avec}{\mathbf a}\) \(\newcommand{\bvec}{\mathbf b}\) \(\newcommand{\cvec}{\mathbf c}\) \(\newcommand{\dvec}{\mathbf d}\) \(\newcommand{\dtil}{\widetilde{\mathbf d}}\) \(\newcommand{\evec}{\mathbf e}\) \(\newcommand{\fvec}{\mathbf f}\) \(\newcommand{\nvec}{\mathbf n}\) \(\newcommand{\pvec}{\mathbf p}\) \(\newcommand{\qvec}{\mathbf q}\) \(\newcommand{\svec}{\mathbf s}\) \(\newcommand{\tvec}{\mathbf t}\) \(\newcommand{\uvec}{\mathbf u}\) \(\newcommand{\vvec}{\mathbf v}\) \(\newcommand{\wvec}{\mathbf w}\) \(\newcommand{\xvec}{\mathbf x}\) \(\newcommand{\yvec}{\mathbf y}\) \(\newcommand{\zvec}{\mathbf z}\) \(\newcommand{\rvec}{\mathbf r}\) \(\newcommand{\mvec}{\mathbf m}\) \(\newcommand{\zerovec}{\mathbf 0}\) \(\newcommand{\onevec}{\mathbf 1}\) \(\newcommand{\real}{\mathbb R}\) \(\newcommand{\twovec}[2]{\left[\begin{array}{r}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\ctwovec}[2]{\left[\begin{array}{c}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\threevec}[3]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\cthreevec}[3]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\fourvec}[4]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\cfourvec}[4]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\fivevec}[5]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\cfivevec}[5]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\mattwo}[4]{\left[\begin{array}{rr}#1 \amp #2 \\ #3 \amp #4 \\ \end{array}\right]}\) \(\newcommand{\laspan}[1]{\text{Span}\{#1\}}\) \(\newcommand{\bcal}{\cal B}\) \(\newcommand{\ccal}{\cal C}\) \(\newcommand{\scal}{\cal S}\) \(\newcommand{\wcal}{\cal W}\) \(\newcommand{\ecal}{\cal E}\) \(\newcommand{\coords}[2]{\left\{#1\right\}_{#2}}\) \(\newcommand{\gray}[1]{\color{gray}{#1}}\) \(\newcommand{\lgray}[1]{\color{lightgray}{#1}}\) \(\newcommand{\rank}{\operatorname{rank}}\) \(\newcommand{\row}{\text{Row}}\) \(\newcommand{\col}{\text{Col}}\) \(\renewcommand{\row}{\text{Row}}\) \(\newcommand{\nul}{\text{Nul}}\) \(\newcommand{\var}{\text{Var}}\) \(\newcommand{\corr}{\text{corr}}\) \(\newcommand{\len}[1]{\left|#1\right|}\) \(\newcommand{\bbar}{\overline{\bvec}}\) \(\newcommand{\bhat}{\widehat{\bvec}}\) \(\newcommand{\bperp}{\bvec^\perp}\) \(\newcommand{\xhat}{\widehat{\xvec}}\) \(\newcommand{\vhat}{\widehat{\vvec}}\) \(\newcommand{\uhat}{\widehat{\uvec}}\) \(\newcommand{\what}{\widehat{\wvec}}\) \(\newcommand{\Sighat}{\widehat{\Sigma}}\) \(\newcommand{\lt}{<}\) \(\newcommand{\gt}{>}\) \(\newcommand{\amp}{&}\) \(\definecolor{fillinmathshade}{gray}{0.9}\)10.1 Government Backing of Loans
A government loan is one insured or guaranteed by a federal agency, in contrast to a conventional loan, which carries no such backing. The government does not, in these programs, lend the money itself; private lenders make the loans, and the government agency insures or guarantees them, reducing the lender’s risk of loss. That reduced risk allows lenders to offer more lenient terms, such as smaller down payments and more flexible qualifying, than they would on a conventional loan, which serves the public purpose of expanding access to homeownership for borrowers who might not qualify conventionally. The three principal programs are the FHA-insured loan, the VA-guaranteed loan, and the USDA rural housing loan.
The distinction between insurance and a guaranty is worth noting. FHA insures loans, charging the borrower a premium that funds the insurance. The VA guarantees a portion of the loan, backed by the borrower’s eligibility as a veteran rather than an insurance premium of the FHA kind, though the VA charges a funding fee. In both cases, the government’s backing is what persuades the private lender to accept terms it would not accept on an unbacked conventional loan.
10.2 FHA-Insured Loans
The Federal Housing Administration, part of the Department of Housing and Urban Development, insures home loans made by approved lenders. The FHA insurance protects the lender against loss if the borrower defaults, which allows the FHA program to offer features attractive to borrowers with limited cash or imperfect credit. FHA loans are known for a low minimum down payment, more flexible credit qualifying than many conventional loans, and limits on the loan amount that vary by area.
The cost of FHA insurance is borne by the borrower in the form of mortgage insurance premiums. There is typically an upfront premium, which may be financed into the loan, and an annual premium paid monthly. Unlike conventional PMI, FHA mortgage insurance is structured differently and, depending on the loan terms and the era of the rules, may remain for much or all of the loan term rather than canceling automatically at a particular LTV. The licensee should understand that FHA insurance is a real and continuing cost, and that whether and when it ends depends on the program’s current rules, which must be checked.
FHA loans serve borrowers who lack a large down payment or whose credit is too thin or imperfect for the best conventional terms. They are common among first-time buyers. The tradeoff is the ongoing insurance cost in exchange for accessibility.
10.3 VA-Guaranteed Loans
The Department of Veterans Affairs guarantees home loans made by private lenders to eligible veterans, active-duty service members, and certain surviving spouses. The VA guaranty, a promise to reimburse the lender for a portion of any loss, substitutes for the down payment and mortgage insurance that protect lenders on other loans, and it allows the program’s signature benefit: eligible borrowers can often obtain a loan with no down payment.
VA loans carry several borrower-friendly features. The possibility of zero down payment is the most prominent. The VA does not require monthly mortgage insurance of the kind FHA and conventional high-LTV loans carry, though it charges a one-time funding fee, which may be financed and which is reduced or waived for certain borrowers such as those with service-connected disabilities. The VA also limits certain closing costs the veteran may pay and imposes its own appraisal, which establishes the property’s value and confirms it meets minimum standards. Eligibility is established by the borrower’s service record through a certificate of eligibility.
VA loans are a powerful benefit for those who qualify, frequently the most advantageous option available to an eligible veteran. The licensee working with veteran clients should ensure they know the benefit exists, because a veteran unaware of it might needlessly choose a costlier loan.
10.4 USDA Rural Housing Loans
The United States Department of Agriculture operates rural housing loan programs that support homeownership in eligible rural and some suburban areas. These programs, through guaranties and in some cases direct loans, can offer no-down-payment financing to borrowers within income limits who buy in designated areas. The USDA program serves a different niche from FHA and VA: it is defined by geography and income rather than by the borrower’s service or by a low down payment alone. The licensee should know the program exists and that its eligibility turns on the property’s location in a designated area and on the borrower’s income falling within limits, details that must be checked against current USDA designations and figures.
10.5 Comparing the Programs
The government programs are best understood by what each is for. FHA serves borrowers with limited down payment or imperfect credit, at the cost of ongoing mortgage insurance. VA serves eligible veterans and service members, often with no down payment and no monthly mortgage insurance, at the cost of a funding fee. USDA serves moderate-income borrowers in designated rural areas, often with no down payment. Conventional financing, by contrast, suits borrowers with stronger credit and a larger down payment who can avoid mortgage insurance and want the flexibility of the conventional market. Matching a borrower to the right program is a practical skill: a veteran with little cash should hear about the VA loan, a first-time buyer with a small down payment and fair credit should hear about FHA, a moderate-income buyer in a rural area should hear about USDA, and a well-qualified buyer with 20 percent down may do best conventionally. The professional who knows the menu can point each client toward the option that fits.
Three buyers seek advice. The first is an honorably discharged veteran with steady income, good credit, and almost no cash for a down payment. The second is a first-time buyer with fair credit and enough saved for about 3.5 percent down. The third is a moderate-income family buying a home in a designated rural area with little cash.
Match Each
The veteran is an ideal candidate for a VA-guaranteed loan, which can offer no down payment and no monthly mortgage insurance, almost certainly the most advantageous option, so the licensee should make sure the veteran knows the benefit exists. The first-time buyer with fair credit and a small down payment fits the FHA-insured program, which accepts a low down payment and more flexible credit in exchange for mortgage insurance premiums. The moderate-income rural buyer should explore a USDA rural housing loan, which can offer no-down-payment financing to income-eligible buyers in designated areas. The example shows the payoff of knowing the programs: each buyer has a best-fit option, and identifying it can save the client substantial money and make a purchase possible that might otherwise not be.
Source: Mrizek, Jeffrey A. Real Estate Finance, First Edition. Licensed CC BY 4.0. This content-only chapter copy omits learning objectives, key terms, review questions, case studies, and chapter quizzes.