Even though the Federal Government is not directly in the business of financing home mortgages, they do offer a number of programs designed to help make it easier for Americans purchase a home. The main government agency responsible for administering these programs is the Federal Housing Administration (FHA.)
The FHA was created in 1934 and is primarily targeted at those who are unable to get a traditional mortgage due to a poor credit rating or low income. It was created to provide mortgage insurance on home loans made by government approved lenders in the United States. The FHA not only insured mortgages on single family homes, but also multi-family homes, hospitals, and manufactured homes.
The Federal Housing Administration is not the only government agency that provides mortgage assistance. About 10 years after the creation of the Federal Housing Administration, the Veterans Administration (VA) began offering a mortgage assistance program for enlisted personal and veterans of the Armed Services. The Rural Housing Service(RHS) also provides assistance for mortgages on homes in rural areas.
Together, the FHA, VA, and RHS work together to help people who might not otherwise be able to get a home loan by offering a guarantee to the lender. These agencies guarantee that if the borrower defaults, they will pay the remainder of the mortgage.
The Federal Housing Administration is currently the largest mortgage insurance company in the World. It was created while the Great Depression was still fresh in lawmakers minds and many citizens were unable to receive a loan.
The FHA, and programs like it, help reduce the risk of a default, specifically for borrowers who have less than 20% available for a down payment. Typically, the FHA requires only a 3% down payment, which can be a gift of contribution.
While the FHA will cover a number of different types of homes, they do not offer insurance on multi-million dollar dwellings.
Instead, they will insure mortgages for about $360,000 in areas deemed as high cost and about $200,000 for lower cost areas. In Alaska, Hawaii, the Virgin Islands, and Guam, the FHA will insure homes up to almost $550,000.
While an FHA Loan can be a great choice for someone with poor credit or who has previously filed bankruptcy, they do charge a premium for the insurance. The FHA requires 1.5% of the value of the loan at the time of closing and 0.5% annual charge over the course of the loan.
The Veterans Administration offers mortgage insurance for veterans and insure mortgages for up to $417,000.
As is the case with an FHA loan, a VA loan can be used by veterans who have limited credit or even those who have previously filed for bankruptcy, as long as it has been at least 2 years.
Rural Housing Service Loans (RHS) became available in 1994, with the passage of the Department of Agriculture Reorganization Act.
RHS Loans are intended to help stimulate rural areas that have been in a recession over the last twenty years. These types of loans are also called Section 502 Guaranteed Rural Housing Loans and do not require a down payment.
RHS loans can be used to help rebuild a rural home or prepare a site for a home, including installing water and septic facilities.
While an RHS loan can be an excellent way to purchase a rural home, the interest rate is based off of the income of the borrower and can go up if the individuals income increases. There are also may be a charge for selling the home early.