There are two primary loan types available today for properties located in Virginia, conventional and government-backed. Conventional loans are those where the lender assumes all the risk for approving a loan. If a lender approves a conventional loan and the loan ultimately leads to a default and the borrowers are foreclosed upon, the lender takes full possession of the property. The lender will typically attempt to sell the home at an auction and if that fails it goes back into the lender's inventory of foreclosed homes and ultimately listed for sale. Government-backed loans carry a level of guarantee based upon the type of mortgage. There are three government-backed loan programs and they are the VA, FHA and USDA loans.
The VA home loan carries a guarantee that will compensate the lender at 25% of the loss. For example, a lender is forced to foreclose on a home and the loan balance is $100,000, the lender receives 25% of that amount, or $25,000, from the Department of Veteran’s Affairs. This guarantee is a form of insurance yet it’s the borrowers who take out and pay for the insurance policy in favor of the lender. Mortgage insurance is a policy that compensates the lender, it is not a policy that pays the mortgage should the borrowers be able to.
The VA guarantee is financed by what is known as the Funding Fee. This fee will vary based upon things such as the term of the loan and the loan amount compared to the sales price but for a first time home buyer, the funding fee is 2.15% of the sales price. However, this does not have to be paid for out of pocket and rarely is but is rolled back into the final loan amount. If for example, the sales price is $200,000, the funding fee is $4,300 for a final loan amount of $204,300. The mortgage payments will be based upon the final loan amount.
The FHA loan has two separate insurance policies, not just one like the VA loan program. There is a premium that is paid for upfront at the closing table and an annual premium that is paid out in monthly installments for the life of the loan. Like the VA loan, the upfront fee is included in the loan amount and is currently at 1.75% of the initial loan. For a $200,000 loan amount, the upfront fee is $714 for a final loan amount of $200,714 (lenders round loan amounts to an even number, so this loan would be $200,700). The annual premium takes the current loan balance and uses a 0.80% rate yielding an annual premium of $1,605, or $133 per month. This annual premium will fall as the loan balance is paid down. The FHA guarantee provides a 100% compensation to the lender in the event of a loss.
The third of the three government-backed loans is the USDA home loan program and also compensates the lender for the full amount of the defaulted loan. The USD loan guarantee is funded by the Guaranty Fee and is currently 1.00% of the loan amount and is also rolled into the final loan amount. A $200,000 purchase price will result in final loan amount of $202,000. And just like the FHA loan, there is also an annual fee equal to 0.35% of the outstanding loan balance. For the first month, the monthly premium payment would be $707 for the first year paid out in monthly installments. Finally, for all three loan programs, the premiums apply both to a purchase as well as a refinance.
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