Government Loans v. Conventional Loans
Which is best for you?
My Community Mortgage and Flex 97/100 are conventional loan alternatives (offered via Fannie Mae and Freddie Mac) to government loan programs such as VA, USDA and FHA.
Generally speaking, KMG Mortgage Group prefers to put borrowers into the corresponding government loan program, if the borrower and property qualify for them.
Why? There are several reasons, but here are just a few:
1) Underwriting guidelines:
Government loan programs are more flexible in terms of underwriting guidelines than conventional loans. While conventional loans rely almost exclusively on historical statistics to project whether or not a borrower is a high risk, government loans recognize that each borrower is an individual with unique situations and circumstances. In the industry it is often referred to as "common sense" underwriting.
2) Private Mortgage Insurance:
Government loans do not require Private Mortgage Insurance (PMI). While VA and USDA loans do require a "Funding Fee" and FHA requires "Up Front Mortgage Insurance", these are typically VASTLY more affordable than Private Mortgage Insurance (PMI) -- which is offered by insurance companies looking to turn a profit and are accountable to their shareholders.
3) Interest Rates:
Interest rates on government loans are often more competitive than those of conventional loans. Conventional loans tier interest rates and swing widely on a number of factors such as loan-to-value and credit score.
|
Loan |
Conventional Loan Program |
Government Loan Alternative |
Why one versus the other? |
|
100% |
My Flex 100 |
VA or USDA |
If borrower is neither a Veteran (VA) nor live in a rural qualifying area (USDA) and requires 100% financing, MCM and Flex 100 is an option. However, please read note about FHA below... |
|
97% |
My Flex 97 |
FHA |
Generally, FHA loans require 3% contribution of the borrower's own funds. HOWEVER! Per FHA guidelines, the 3% can be gifted and the seller can contribute up to 6% of the sales price toward closing costs. In other words, it is possible to get into a house using FHA financing with $0 out of pocket. And, unlike USDA loans (which are limited in their geographic scope) and VA loans (which are limited to current or past military personnel), FHA loans are accepted everywhere! |
Maryellen Garasky
Mortgage Broker
KMG Mortgage Group
(208) 664-3600
(509) 638-3455
www.kmgmortgagegroup.com
There are many potential buyers out there in this same boat. Good job history but had a difficult time at the beginning of this foreclosure crisis...these are the people who are forgotten in the so-called "stimulus packages".
Thanks for your consistently good input on AR!
Kent,
You have asked a couple of loaded questions, but I will do my best to answer them here. As a note before I begin, you may want to call our office and talk to Kevin. Since FHA and USDA loans pride themselves on "common sense" underwriting, each situation is different. And, what one underwriter will accept as reasonable, may be what another underwriter deems as unreasonable.
Here we go, regarding your two questions:
1 - Depending on the circumstances around the foreclosure, but yes, a USDA loan makes sense for this type of buyer. Per USDA guidelines, the foreclosure must be more than 36 months out AND they must have re-established good credit in the last 12 months. (*Note: the re-established good credit must be for at least 12 months.) Now, that does NOT mean that ALL that credit must be reporting on their credit report - but some of it must. The beautiful thing about USDA and FHA loans is that they allow for non-traditional credit.
Rent, utilities, cell phones, and other items they pay on a regular basis that are not being reported to the major bureaus can be taken into consideration - as long as we can obtain non-biased "3rd party" proof that the debt is being paid on time and as agreed (for example: "3rd party" proof can include canceled checks).
2 - I'm not entirely sure what you mean by your second question. USDA and FHA loans are NOT limited to "first time" home buyers. You cannot have more than one at a time on a primary residence, but I could get a USDA loan on a home and sell it 3 months later and still qualify for another USDA loan on another home (assuming, of course, the property is located within a USDA approved area). FHA is the same way.
So, I hope I answered your questions. I tried to keep it short and simple (K.I.S.S.), but, since USDA and FHA are "common sense" underwrites, it's not really black and white like the conventional world - and that, alone, is the reason we steer our borrowers to government loans.
Have a great night and thanks for stopping by.
Maryellen
Kent,
I has to edit my answer above just a tad. I wrote it late last night and I came back to re-read it this morning. I noticed I left out a few key words that had an impact on its meaning.
Also, do you know if their previous foreclosure was on a government loan? It doesn't exclude them entirely, but it does have an affect on the underwriting.
Have a great day!
Maryellen
Also...my understanding is that even if you have owned a home in the past, you can still qualify as a "1st time homebuyer" if you have not owned a home for a period of 3 or 4 years (I don't know the exact time frame). Is this correct?
Thanks!
Kent,
It might take a phone call for me to understand your question regarding first time home buyers. Your meaning might get lost in translation when I read your comment.
Are you thinking first time home buyers (years between owning a residence not a factor here), get special treatment when it comes to USDA loans?
Maryellen
Maryellen, thanks for posting a great and easy-to-understand tutorial for answering some basic questions. I reblogged it, thanks!
Kent - Thanks for the vote of confidence!
Janna- Glad I could help! Your blog is AWESOME, so to have you re-blog it truly a compliment!
Maryellen