Government underwritten vs. Conventional mortgages

Government underwritten loans are insured or guaranteed by an agency of the U.S. government. The Federal Housing Administration insures loans made by private lenders to qualified buyers of properties that meet minimum standards. The Veterans Affairs guarantees loans made by such lenders to veterans. A 1% user fee charge is made by the VA for a guarantee. The FHA charges a premium for loan insurance, as described below.

1. FHA-insured mortgage
2. VA-guaranteed mortgage
3. Conventional mortgage

1. FHA-insured mortgage

The Federal Housing Administration was created under the National Housing Act of 1934. Under this act the FHA was granted the authority to insure mortgage loans made by private lenders. It is important to understand that the FHA issues an insurance policy, whose premi¬ums are paid by the borrower, which guarantees that the lenders will receive their money in the event the mortgagors fail to make their payments. There are several types of FHA mortgage programs including low-income housing, nurs¬ing homes, cooperative apartments and condominium apartments. The most common FHA program is for single-family homes as authorized by Title 11, Section 203, of the National Housing Act. Under this program the borrower pays a one-time insurance pre¬mium based on several factors. This premium may be financed over the life of the loan if the seller pays the closing costs. The premiums for FHA insurance are deposited in the Mutual Mortgage Insurance Fund. The FHA reimburses a lender from this fund if a bor¬rower defaults, the mortgagor's interest has been foreclosed and the Secretary of HUD has taken title to the property. The FHA then must sell the property. Lenders will generally loan a higher percentage of the appraised value with an insured mortgage. There may be times when a potential home buyer does not have a sufficient down payment to qualify for a conventional loan. In this case, an FHA-insured mortgage may be appropriate. However, the insurance premium is an added expense to the bor¬rower.