Advantages and Disadvantages of Government Mortgage Loan Programs

Advantages and Disadvantages of Government Mortgage Loan Programs

Pan Seng Aung

Liberty University

Abstract

In this research paper, I have researched the different types of Government mortgage loan programs. I have listed advantages and disadvantages of each loan program. There are three types of government Mortgage loan program. They are a Federal Housing Authority (FHA), Veterans Administration (VA), and U.S Department of Agriculture (USDA). Each loan program requires 0 to 3.5% down payment, low interest rate, flexible credit score, and debt-to-income (DTI) ratio. I have included my personal experience as well from my work as a secondary mortgage loan processor. I have processed government mortgage loan program day to day in my work, and I knew the basic guideline of government mortgage loan programs.

Advantages and Disadvantages of Government Mortgage Loan Programs

              According to Berman (2009), the federal government mortgage loan programs' main purpose is to promote home ownership for lower income family and first-time home buyer (para. 1). The government primarily works with the private lenders and investors to insure the mortgage and providing the funds for the borrowers. Therefore, lenders and investors can sell the house to the borrowers without any doubt with lower down payments. Because of lower down payments, the borrowers may lend higher loan amounts with lower interest rate per government guidelines. On the other hand, there are advantages and disadvantages of lending money through government programs.

Berman (2009) claimed that:

Government loans tend to have easier qualification standards than those from private lenders. Federal Housing Administration loans, for example, require a lower credit score than other home loans and the down payment is usually smaller, and the debt ratios aren't as strict. (para. 2)

There are three main types of government mortgage loans: they are Federal Housing Authority (FHA), Veterans Administration (VA), and U.S Department of Agriculture (USDA). According to USA.gov (2018), there are other types of government assistance program such as Homeownership Vouchers, Indian Home Guarantee Program, and State Program. These programs help to assist target demographic background, such as low-income family and the Native Indians.

Advantages and Disadvantages of FHA loan

FHA loans are "part of U.S Department of Housing and Development, insures mortgages, making it easier for potential homeowners to afford loans" (USA GOV. 2018). FHA loan is primary for first-time home buyer that only required 3.5% of down payment, and it is a good option for family who have not saved enough for 20% conventional mortgage down payment. The requirement to qualify for FHA mortgage are credit score not lower than 580, Mortgage Insurance Premium (MIP), Debt-to-Income (DTI) Ratio greater than 43%, must be borrower's primary residence, and proof of steady income and employment at least two years. MIP is the "Mortgage insurance is a policy that protects lenders against losses that result from defaults on home mortgages. FHA requires both upfront and annual mortgage insurance for all borrowers, regardless of the amount of down payment" (FHA.com 2018). Debt-to-Income (DTI) Ratio is the determination of debts such as monthly car payment; credit card payment and other type of loan payment divide it by the total income of the borrower to get a ratio percentage. A result of the ratio percentage measures the affordability of the borrower to quality for the FHA mortgage. The government even have provided a resource for the borrower to help pays for the 3.5% down payment through Down payment Assistance Program or Down payment Gift from the borrower close relatives or family member. Down payment Assistance Program:

Make the mortgage process more affordable for eligible applicants who are interested in purchasing a home but need financial help to do so. Money is usually provided in the form of a non-repayable grant, a forgivable loan, or a low interest loan. (FHA.com 2018)

The following facts are the disadvantages of FHA loan that Balance (2014) has listed;

Lack of reward for good credit, the flip side of the same-for-all interest rate is that borrower may be missing out on a lower interest rate if borrowers have great credit. Over the life of the loan this could cost a thousand of dollars. More mortgage insurance paid because when borrower is making a lower down payment and will have to pay more private mortgage insurance (PMI) to make up the difference. With FHA loans, borrower also must pay an upfront mortgage insurance fee. This can be financed, but it will cause a mortgage insurance payment to be more expensive than with a conventional mortgage. Inspection standards: To qualify as an FHA-eligible property, a home must go through a property standards inspection. This may limit the choice of available homes and can also make it difficult or impossible to get an FHA loan for a fixer-upper. Fewer loan choices to find the variety of loan options with the FHA that would with conventional loans. This is especially true if borrower is looking for an adjustable-rate or interest-only mortgage. Lower loan ceiling, the maximum borrow amount for an FHA loan is different from county-to-county. In certain areas with low supply and high demand, borrower may find that an FHA loan would not allow buying the house borrower want because the price tag falls outside the allowable amount. Limited condo supply, if a condominium fits borrower housing needs, is aware that the list of available FHA-approved units could be short. The FHA is known to be very tough on giving the green light to condos, so be

prepared to really hunt if you go with the FHA/condo combo. (Balance 2014, para. 3). Another disadvantage according to Berman 2009, is the collection rights of the federal government that:                                                                                                        

Has more power than private lenders when it comes to collecting. A federal student loan lender, for example, can garnish your wages, levy your bank account or seize your tax refund. A private lender can file a lawsuit and win a court case against you, but can't seize federal payments or benefits. There's generally no statute of limitations to collect on federal debt, so unpaid government loans can literally haunt delinquent borrowers forever. (para. 5)