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What do VA , FHA, USDA and PMI have in common?

Saturday, March 23, 2013 - Article by: Lender411 Member

You may be surprised to find out that VA,FHA and USDA loans aren't really loans. Rather, they are a form of mortgage insurance.

The Veterans Administration does not loan money. They "Guarantee" the loan in the event the loan goes into default and the home forecloses. Think of it as an insurance policy. If the loan defaults the VA pays the lender up to 25%of the loan amount to offset their losses.

The Federal Housing Administration also does not loan the money. FHA "Insures" the loan for the same reasons.
USDA is the same thing , they "guarantee" the loan for the same reasons.

PMI is private mortgage insurance, meaning a private company not the government insures the loan.
PMI is used on conventional and jumbo loans (non government insured)
In most cases the borrower pays for the insurance on government insured loans by financing their fee. These fees change regularly based on needs imposed by the regulating agencies. Example: FHA used to collect a 1% UFMIP. Currently it is 1.75%.

  • VA calls their insurance a Funding Fee or VAFF

The VAFF amount varies based on military service and if the Veteran/Active Military has 10% or more service related disability the VAFF is waived. There is no monthly mortgage insurance.

  • FHA calls their insurance "Up Front Mortgage Insurance Premium" aka UFMIP which is an up front fee financed into the loan amount and in addition, collect a monthly mortgage insurance premium.
  • USDA collects a "Guarantee Fee" an upfront fee that is financed into the loan and in addition, collect a monthly mortgage insurance premium.

Conventional loans are insured using PMI. PMI is not financed into the loan. It is paid at closing either in full as one lump sum, nothing paid at closing and all of it paid on a monthly basis until the LTV drops to 78% or split premium where some is paid at closing to reduce the monthly amount and then a lower monthly PMI payment is made.

Which program is better? In my opinion, none of them they are merely different. Each program has different requirements to qualify. If you qualify for more than one program I suggest seeking a licensed loan officers assistance to determine the best program for your situation.

Feel free to contact me with any questions.

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