Monday, August 5, 2013

Residential Financing in a Nut Shell: Conventional and Government-Guaranteed Mortgages

Generally, you can finance a home through a conventional mortgage, a government-guaranteed mortgage, or through seller financing.  This article focuses on residential financing through the use of conventional mortgages and government-guaranteed mortgages.

Q:       What is a conventional mortgage, and how can I get one to finance my home?
A:        A conventional mortgage is a loan that a lender (such as a bank or a mortgage company) makes to a buyer. A conventional mortgage generally follows guidelines set by Fannie Mae or Freddie Mac, two mortgage associations that the U.S. government originally created to raise home ownership levels. Although created by the government, Fannie Mae and Freddie Mac do not guarantee home loans (unlike VA and FHA loans, which the government guarantees). When shopping for a conventional mortgage, you will compare interest rates and terms. Most conventional mortgages have fixed or adjustable interest rates. Typical fixed-rate loans have a term of 15 or 30 years. A shorter-term loan generally carries a lower interest rate. Adjustable-rate mortgages (ARMs) fluctuate, so your monthly payments can go up or down according to the rate of a standard financial index. Before agreeing to give you a conventional mortgage, the lender will review your financial history, income and credit score. Generally, you will need an excellent credit score to qualify for a conventional mortgage with a good interest rate. The standard down payment for a conventional loan is currently 20 percent of the purchase price.

Q:       What are the benefits of getting a conventional mortgage?
A:        Typically, conventional mortgage loans are less expensive over the life of the loan than government-guaranteed loans. 

Q:       What are the drawbacks of a conventional mortgage?
A:        Some borrowers have difficulty qualifying for a conventional mortgage because they cannot meet credit score or other documentation requirements.
Q:       What is a government-guaranteed loan, and might I qualify for one?
A:        Government mortgages are guaranteed either by the Federal Housing Administration (FHA) or the U.S. Department of Veterans Affairs (VA). This means that the government guarantees that the value of the home will be high enough to repay the lender in the event of foreclosure.  To qualify for a government loan, you must meet the requirements of the loan program you choose.  VA loans are for military veterans.  FHA loans are typically for first- time home buyers and have income limitations.

Q:       What are the benefits of getting a government-guaranteed loan?
A:        There are two primary benefits. Initially, and for many new home buyers, the most important benefit is that the lender will loan you a much higher percentage of the purchase price. FHA and VA loans typically cover nearly 100 percent of the loan as compared to the home’s value, while a standard mortgage covers no more than 80 percent of this “loan-to-value” ratio. Secondly, a government program generally doesn’t require as high a credit score as conventional financing does.

Q:       Are there any drawbacks to financing my home through government -guaranteed loans?
A:        Yes. The government insurance component is not free. As a borrower, you would pay an insurance premium to the government that can be as much as three percent of the loan amount, depending on the loan-to-value ratio. Also, not everyone qualifies for government-guaranteed loans. A VA loan is intended for veterans and FHA loans are restricted to those who qualify according to income and other criteria. Additionally, government-guaranteed loans require inspections by certified inspectors and will require certain repairs to be made. Many sellers do not like working with buyers who use government-guaranteed loans because of these requirements and because some fees traditionally paid by buyers are required to be paid for by the seller.

Q:       What if I don’t qualify for a government-guaranteed loan and don’t have 20 percent down payment money for a conventional mortgage?
A:        You can also consider getting private mortgage insurance so that you can borrow more than 80 percent of the value of the home you want to buy.  Private mortgage insurance increases the overall cost of the loan, and this cost is built into your payments or financed through a higher interest rate.

Q:       How do I find out which loan is right for me?
A:        Any reputable, full-service mortgage lender will offer both standard financing and government- guaranteed financing, and will be able to explain the product options to you.
            The Department of Housing and Urban Development (HUD) provides information about mortgage loan shopping and the home buying experience. HUD’s mortgage borrower’s information booklet is available at:

This “Law You Can Use” column was provided by the Ohio State Bar Association. It was prepared by Dublin attorney William C. Heer III, vice president and counsel for First American Title Insurance Company. Articles appearing in this column are intended to provide broad, general information about the law. Before applying this information to a specific legal problem, readers are urged to seek advice from an attorney.

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