Choose between government loans: FHA or USDA
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By Scott Sheldon  July 13, 2012 12:00 am

Any home buyer putting less than 20 percent down today has probably researched (or has been offered) the possibility of using a government loan to buy a home. Government loans offer flexible financing alternatives to the standard 20 percent down conventional loan. Although government loans contain monthly mortgage insurance, these options allow for a more complete story when trying to secure a mortgage loan in today’s strict credit market.

Depending on the location of the property, the most common types of government loans you’ll be presented with include FHA loans or USDA loans. VA loans are another government loan program offered for veterans only. For our purposes, we will be looking at loans offered by the Federal Housing Administration (FHA) and the US Department of Agriculture (USDA).
The following are some unique characteristics of both programs:

FHA loans
• These loans can be used virtually anywhere in Sonoma County.
• The down payment requirement is 3.5 percent of the purchase price.
• Having a previous short sale, bankruptcy or foreclosure OK.
• The credit score requirement is 640.
• Seller is permitted to pay closing costs up to 6 percent of the purchase price.
• Property must meet certain health and safety regulations set by US Department of Housing and Urban Development.
• Minimum property requirement must have central operational heat source and an operational stove.

USDA loans
These loans can be used in certain parts of Sonoma County. Some of the more popular areas include Windsor, Healdsburg, Cloverdale and Sebastopol.
• Subject to certain annual income limitations and family dependents.
• No down payment is required - truly “100 percent financing.”
• A previous short sale, bankruptcy or foreclosure OK.
• The credit score requirement is 640.
• Seller is permitted to pay closing costs up to 6 percent of the purchase price.
• The property must meet certain health and safety regulations set by US Department of Housing and Urban Development.
• Minimum property requirement must have central operational heat source and an operational stove.
Which government loan is most suitable?
This depends on several key factors. The primary factor is “location” because that’s an indicator of which mortgage program will be the most suited for that type of home buyer. On the other hand, if maximum purchase price for the lowest possible monthly payment is a bigger factor, that changes the program as well. Looking at the following two examples using

$350,000 as the benchmark purchase price, we can ascertain the most appropriate government loan program.

Example 1: An FHA loan scenario requires a minimum down payment of $12,250. The total monthly mortgage payment - assuming an interest rate of 3.75 percent - provides a monthly total in the amount of $2358 per month. Note: when we say “total payment,” we mean principal and interest, monthly mortgage insurance, monthly property taxes and monthly fire insurance.

Example 2: A USDA loan scenario requires no down payment. The total monthly mortgage payment (assuming an interest rate of 3.75 percent) is $2,155 per month.

Mortgage payment key differences - monthly mortgage insurance on the FHA loan is $352 per month versus the USDA loan monthly premium of $87 per month.

The FHA loan is $265 per month more financed over the life of the loan. This has the ability to limit purchasing power if location is not as strong a factor as mortgage payment.Here’s why:
The monthly mortgage insurance premiums on FHA Insured loans is 95 basis points higher than its USDA counterpart, meaning, if taking on a higher mortgage payment in exchange for being in the perfect location is more important than having the lowest payment in a less desirable location, then the FHA loan becomes more advantageous.

On the flipside…If your order of priority for home buying is based on the lowest total mortgage payment, followed by location, then the USDA loan becomes more advantageous.

Advantages/disadvantages to government loans
Advantages:
• Can be used in any location.
• Monthly mortgage insurance is usually tax-deductible (speak with a tax professional).
• Monthly mortgage insurance is not permanent over the life of the loan.
• Low down payment or no down payment choices.
• Earned money used in the purchase offer to buy a home will be refunded at the close of escrow or applied towards buyer’s closing costs.
• Previous credit challenges and/or derogatory credit is usually permitted.
• Provides for expanded debt-to-income ratios for loan qualifying.
Disadvantages
• Monthly mortgage insurance is required regardless of down payment amount.
• Monthly mortgage insurance increases total monthly mortgage payment, affecting purchasing power.
• Monthly mortgage insurance must be in place a minimum of 60 months as mandated by HUD.
• Government loans cost more than a standard, conventional, 20 percent down loan.

If you are looking to buy a home, and the down payment and location are of equal importance, you’ll want to try get pre-approved using both types of loan financing. This gives you the best of both worlds so if you find a property in a less industrialized, more rural location, you can have the benefit of potentially using no down payment, staying more liquid or if you find a property in a more centralized location, you can go in with 3.5 percent down on a loan insured through the Federal Housing Administration.

Ultimately, the loan program with the highest degree of sustainability over time is the most suitable government loan program. See which government loan makes the most sense for you by first getting a no obligation mortgage rate quote.

Scott Sheldon is a local mortgage lender, with over six years of experience helping people purchase and refinance primary residences, second homes and investment properties. Visit him at www.sonomacountymortgages.com.

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