What is a guaranteed mortgage?
A guaranteed loan is a loan supported by a party other than a lender. If the borrower suspends repayment of a loan or default, a third party (also known as a guarantor) will pay the lender some or all of the outstanding obligations.
Guaranteed mortgages are funded by private sector lenders, but the guarantor is usually a government agency.
Guaranteed mortgage mechanism
Because the mortgage is guaranteed, the third party agrees to guarantee or be liable for some or all of the loan if the borrower is the default. The guarantee protects the lender, not the borrower.
Guaranteed loans are mostly supported by the US government, namely the Federal Housing Administration (FHA) and the Veterans Affairs Office (VA). The Department of Agriculture also guarantees USDA loans in eligible regions.
Ultimately, this guarantee allows lenders to approve borrowers who have not paid a significant down payment.
However, a guaranteed mortgage must meet underwriting criteria established by the lender and third parties, and the lender may have stricter requirements than the guarantor. For example, FHA requires a minimum credit score of 580, allowing borrowers to drop by 3.5%, while some lenders will place them at the top at a minimum of 620.
Current guaranteed mortgage rates
Guaranteed mortgage fees are not always slightly lower than traditional or unguaranteed mortgage rates.
For example, at the time of this writing, the average mortgage rate for a traditional loan over the course of 30 years is 6.91%, the average rate for a VA loan is 6.99%, and the average rate for an FHA loan is 7.08%.
Types of guaranteed home loans
There are multiple guaranteed loan programs, each with different features and qualifications.
FHA loan
FHA loans are intended for borrowers who may struggle to qualify for a traditional loan.
- Down payment requirements: Borrowers can only get down 3.5% as long as they have a credit score of 580 or higher.
- Credit score requirements: You can qualify for an FHA loan with a low credit score of 500, but you will need to pay a 10% down payment.
- Debt Income (DTI) Ratio Requirements: Borrowers can qualify for a 43% debt-to-revenue ratio or a “compensation factor” of up to 50%.
- Fee: FHA borrowers are required to pay mortgage premiums, including a 1.75% advance premium for the loan principal and an additional amount to their monthly mortgage payments. In many cases, you cannot delete your annual premium unless you refinance yourself with a different type of loan or pay off your FHA loan completely.
VA loan
VA loans are available to eligible active service members, veterans and surviving spouses.
- Down payment requirements: None, most of the time
- Credit score requirements: The VA does not set a minimum credit score, but lenders do so frequently. Usually it’s 620.
- DTI ratio requirements: Under 41%
- Fee: VA loan borrowers will be required to pay the advance funding fee. You can also be exempt from fees in certain circumstances.
USDA loan
USDA loans are for low- and middle-income borrowers who purchase in defined rural areas. The term “country” can be surprisingly broad, so check if your area qualifies.
- Down payment requirements: none
- Credit score requirements: 640
- DTI ratio requirements: Under 41%
- Fee: USDA loans have both prepaid fees and annual fees, which is the percentage of the loan principal. These fees are billed to the lender, but are usually handed over to the borrower.
Pros and cons of a guaranteed mortgage
Like most forms of borrowing, there are advantages and disadvantages associated with a guaranteed mortgage.
Guaranteed mortgage pros
- Decreased payment: A guaranteed mortgage usually requires little or no down payment of a home.
- More advantageous terms: If you have a low credit score or a high DTI ratio, you may be able to get better terms with a guaranteed loan than a traditional loan.
Cons of a guaranteed mortgage
- Limitations on Eligibility and Use Cases: Only certain borrowers affiliated with the military can qualify for a VA loan, and USDA loans require you to borrow from purchasing a home in a qualifying rural area.
- Additional charge: The guarantee protects the lender, but the guarantor may require you to pay for the pot. All FHA, VA, and USDA loans require advance payments and/or annual fees.
What home buyers should know about today’s guaranteed loans
Median home prices are above $400,000 and prices remain relatively high, making it more difficult for the average renter to buy a home. However, if you’re looking to buy, experts often recommend doing it earlier than later. After all, rates are unlikely to return to pandemic-era lows any time soon, and home prices continue to rise in many parts of the country.
In this market, guaranteed loans can help you get into the home earlier than you would expect and start building your equity more quickly.
If you have a guaranteed loan may be suitable for you:
- Low credit scores and income and are not eligible for other mortgage programs
- You need more favorable loan terms than you can get with a traditional loan
Loans can help you determine which options are appropriate based on your credit and financial situation.
