Conventional loans are the foundation of the mortgage industry. In a recent week, only about one in four prospective borrowers applied for a government-backed loan, according to survey data from the Mortgage Bankers Association.
The Federal Housing Administration and the Department of Veterans Affairs basically insure home loans made by participating lenders. These loans tend to have more lenient credit and underwriting requirements compared to conventional loans, which carry no government backing.
FHA and VA loans feature benefits that can be the right fit for the right buyer at the right time. To be sure, they also come with their own drawbacks. But there are misconceptions surrounding government-backed loans that can cloud the home-buying process and hurt both buyers and sellers.
Let’s take a quick look at three benefits of government-backed loans that tend to fly under the radar.
They Have Lower Average Interest Rates
Many buyers assume they can get the best interest rate with a conventional mortgage. Depending on your credit, the size of your down payment and other factors, that might be exactly the case. But every buyer’s credit and asset picture is different.
More important — and perhaps surprisingly — average interest rates actually tend to be lower on government-backed loans.
In February, the average note rate on a 30-year fixed conventional loan was 4.08 percent, according to mortgage technology firm Ellie Mae. That was the lowest average rate since June 2013. In comparison, the average rate for a fixed 30-year FHA loan was 3.94 percent, while the average for VA loans was even lower, at 3.77 percent.
Monthly averages are just that — averages. The rate you are quoted will depend on the lender, your credit and finances and more. But don’t automatically rule out a government-backed loan when you’re shopping for the best deal. In fact, government-backed borrowers with fair or so-so credit might be able to tap into the same or similar interest rates as a conventional buyer.
They Don’t Take Forever to Close
Another common misconception about government-backed loans is that they take forever to close. This one is probably rooted in some old truths, mostly because of the paperwork and bureaucracy that can accompany these loan types.
But automation, online systems and a greater focus on efficiency has helped the government loan programs catch up. For buyers, the “time to close” clock starts once you’re under contract on a home. At that point, on average, there’s really no difference between a conventional mortgage and a government-backed one.
The average conventional purchase loan closed in 39 days in February, according to Ellie Mae. For VA and FHA loans, it was a day longer.
On the refinance side, FHA refinances closed in 33 days on average, surpassing both conventional loans (36 days) and VA loans (37 days).
They’re More Likely to Close
Sellers and lenders want to see prospective buyers make it to closing day. Veterans, service members and the historic VA home loan program all stand above the rest when it comes to closing success.
A full 73 percent of the VA purchase loan applications made over the previous 90 days went on to close, according to the February data from Ellie Mae. That’s compared to 68.8 percent of conventional purchase applications and just 62.8 percent of FHA applications.
Government-backed loans aren’t the solution for every buyer. In fact, only a relatively small percentage of the population is even eligible for a VA home loan. But getting a better understanding of all your mortgage options is key to getting the best deal. Don’t let stereotypes or misconceptions keep you from making the strongest home loan comparison possible.