What Is a Loan Guarantee?
Loan guarantees are very common in the mortgage industry. Due to all of the available resources available from government-backed programs, loan guarantee services dominate much of the mortgage industry. However, many consumers do not understand exactly what a loan guarantee service is, or what it entails. Prior to applying for a mortgage loan, it's important to understand the ins and outs of loan guarantee services.
Other People Are Reading
-
Significance
-
Loan guarantee services are offered when using FHA, VA, Fannie Mae or Freddie Mac loans. They allow for lower down payments and lenient restrictions on mortgages by providing a measure of insurance for the lender in the event of a buyer default.
FHA Guarantee
-
FHA loans are underwritten by the Federal Housing Administration, giving home buyers the opportunity to own a home for as little as 3.5 percent down. The guarantee service collects a mortgage insurance fee each month that goes into an escrow account with FHA in the event that the buyer defaults on the property loan.
-
VA Guarantee
-
The Department of Veterans Affairs offers lenders a loan guarantee service in the event that a buyer defaults on a mortgage. There is no monthly fee that the buyer is obligated to pay toward this insurance, but the VA does charge a funding fee for the loan equivalent to up to 3 percent of the sales price to hold in escrow.
Fannie Mae and Freddie Mac Guarantee
-
Fannie Mae and Freddie Mac loans are conventional loans that have private mortgage insurance attached to them. Private mortgage insurance is 0.5 percent of the purchase price, paid to Fannie Mae or Freddie Mac monthly in order to pay out to lenders in the event of loan default.
Misconceptions
-
Many home buyers believe they will have to pay mortgage insurance premiums or private mortgage insurance for the life of the loan. In fact, homeowners will only have to pay this fee for the first five years of the loan.
Benefits
-
Mortgage insurance allows lenders to relax down payment guidelines and certain credit restrictions, allowing for higher percentages of home ownership and loans originated. This helps to stimulate home purchases and is helpful to the economy overall.
-
