Federal Loan Programs and How They Work
You can't get your next mortgage from the federal government because the government is not a lender. But it does something just as important: It insures and guarantees loans to borrowers who may not qualify for conventional loans due to their military status, income level, or credit history. That doesn't mean the government makes banks give away free money. But it does enable many Americans to own a home.
The U.S. Federal Housing Administration (FHA) was created in 1934 to provide mortgage insurance on loans made by FHA-approved lenders throughout the United States and its territories. It insures mortgages on single family and multifamily homes including manufactured homes and hospitals. It is the largest insurer of mortgages in the world. The nation's trend toward housing assistance continued with the creation of the Veterans Administration (VA) home loan program in 1944 and Rural Housing Service (RHS) loans in 1994.
As described in preceding sections, Fannie Mae, Freddie Mac, and Ginnie Mae are government-chartered organizations that serve as market-makers for the nation's mortgage industry. What the FHA, VA, and RHS do is sponsor actual government loan guarantee and insurance programs that ensure fairness in lending to underserved individuals and communities.
When Congress changed Fannie and Freddie's charters in 1968 to establish them as shareholder-owned companies, it also created Ginnie Mae, which it kept as a government agency under the umbrella of HUD. Since Ginnie Mae is the only one of the three agencies that is part of the government, it focuses solely on FHA, VA, and RHS loans — no commercial stuff.
What's a loan guarantee versus a loan?
A loan guarantee from a government is a statutory promise by the government to pay part or all of a loan's principal and interest to a lender or the holder of a security in case of default.
Out of the depths of the Great Depression, the FHA was created for the purpose of providing a national insurance program against home default. The insurance was funded from the proceeds of a fixed premium charged on unpaid loan balances, and those revenues were used to buy Treasury securities as a way to cover future mortgage defaults. This insurance cuts the default risk lenders face when the only down payment buyers can afford to make is well under 20 percent.
The FHA doesn't turn away borrowers who have gone through bankruptcy or faced foreclosure, but borrowers must prove that they've improved their credit history since then.
FHA loans do not cover multimillion-dollar homes. As of July 2006, FHA mortgage limits for single-family units ranged as follows:
$362,790 in high-cost areas
$200,160 in low-cost areas
$544,185 in Alaska, Guam, Hawaii, and the U.S. Virgin Islands, where housing prices are very high
The most popular FHA loan has a minimum cash investment requirement of 3 percent but permits 100 percent of that down payment to be a gift from a relative, nonprofit organization, or government agency. Sellers must pay part of the closing costs, while some of the borrower's closing costs can be included in the loan amount.
At this writing, the subprime loan controversy has forced Congressional debate over whether to increase FHA loan limits to match those on VA loans (up to $417,000) or to take limits on both programs even higher.
The main cost issue for an FHA borrower is the insurance premium, which is 1.5 percent of the loan amount at closing, with a 0.5 percent annual renewal premium paid annually over the life of the loan.
You can apply for FHA loans at conventional lenders, in person and online. Make sure you are dealing with a loan officer with specific experience in these loans. They are attractive to homebuyers who have had credit trouble in the past. The FHA demands that borrowers show two years of clean credit after declaring bankruptcy, possibly longer after foreclosure.
VA loans have been around since World War II days, when the GI Bill came into being. These loans have big advantages. Qualified veterans can buy single-family or two- to four-unit properties for no money down, as long as they live in the properties they buy.
Private lenders and mortgage companies make VA-guaranteed loans to veterans. The guarantee protects the lender if the borrower fails to repay. As of 2006, qualified veterans could get a no-down payment purchase loan of up to $417,000.
Veterans may be required to get a certificate of eligibility before they can get such a loan, so it's a good idea to discuss this possible requirement with lenders before you pick out a home.
As for the FHA, a bankruptcy discharged two years ago or more is not a restriction on getting a VA loan. Also as with an FHA loan, private mortgage insurance is required for VA loans. For more information, go to
In 1994, the Department of Agriculture Reorganization Act created the Rural Housing Service to boost home ownership in dying rural communities around the country. Also known as Section 502 Guaranteed Rural Housing loans, the RHS program requires no down payment. Loans are typically amortized over thirty years.
Section 502 loans are for low-income borrowers who want to purchase homes in rural areas. Funds can be used to build, repair, renovate, or relocate a home. They can also be used to purchase and prepare sites, including providing water and sewage facilities.
The payments are subsidized based on a 1 percent interest rate for the lowest-income borrowers. A portion of the subsidy must be repaid if the house is sold, based on the length of time the borrower lives in the property. If the borrower's income goes up, so does the interest rate. Loan limits vary depending on where the borrower lives. The USDA provides more information online, at
A break on a mortgage loan sounds great at first, but it's critical to know if you're ready to apply. Ask yourself the following questions:
Does my income and buying power qualify me for participation in this program?
Have I cleaned up any credit problems?
Have two years passed since any bankruptcy was discharged?
Am I prepared to be a responsible homeowner?
Am I prepared to take on maintenance and renovation responsibilities to maximize the value of my property?
No matter whether you're a first-time homebuyer or a borrower coming back into the market after a bout of bad credit, it is necessary to know how the mortgage marketplace works. Never be afraid to ask about things you don't understand. It's important for all potential borrowers to know the mortgage industry's strengths and weaknesses before wading in.
