Government-Backed Mortgages

There are certain circumstances in mortgage shopping where the government may step in to give you an opportunity at a mortgage for a primary dwelling that you would not otherwise be able to afford or manage on your own. The government offers assistance to first time home buyers in the term of FHA loans, which provides a security to lenders in case of default, therefore decreasing their risk of loss in financing the mortgage. The same is true of the VA loan which is offered to military and retired service members to assist them with finding a mortgage loan for a home to live in.

The VA Loan

If you have served an acceptable period of time in the active duty military or reserves you may be eligible for a VA loan which is a government-backed loan that brings with it many benefits including the greater likelihood of being approved if your circumstances (low down payment or lower credit score), are not as favorable as they need to be in order to receive a conventional loan.

In order to receive a VA loan, you must first receive a certificate of eligibility from the Department of Veteran's affairs. They will provide you with a physical certificate and also enter you into a national database that lenders who participate in the VA loan program can access in order to verify your eligibility.

VA loans are offered to borrowers with a smaller down payment or who have credit issues that make them otherwise ineligible to receive a loan from a lender. This is made possible by the government's guarantee to the lender in case of a default. As a result of this guarantee, you will be required to pay private mortgage insurance, or PMI, which is an amount added to your monthly mortgage payment to serve as an insurance premium against default until you have 20% equity in your home.

The FHA Loan

FHA loans are similar to VA loans in that they are government-backed, but they are offered to a wider range of individuals who do not have to show proof of military service in the past. FHA loans are designed to help first-time home buyers if they fall into any of the following situations:

• Low down payment: If you don't have a lot of money to put down on a home.
• Low monthly payments: If you don't have a high income that would enable you to pay for a large monthly mortgage.
• Low credit score: If you are worried about whether or not you can receive approval for a conventional loan due to some prior credit issues.

Like VA loans, FHA loans come with PMI (private mortgage insurance), which must be paid along with the mortgage until the home's value exceeds the loan due by 20% or more. VA loans are to be treated like a normal conventional loan in all regards, and just because they are offered with a low (as little as 3.5%) down payment, that doesn't mean you should aim for a low down payment as you can still profit greatly by having a larger down payment if possible.