What Is A Guaranteed Mortgage Loan? Bankrate Caret RightMain Menu Mortgage Mortgages Financing a home purchase Refinancing your existing loan Finding the right lender Additional Resources Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Bank Banking Compare Accounts Use calculators Get advice Bank reviews Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Credit Card Credit cards Compare by category Compare by credit needed Compare by issuer Get advice Looking for the perfect credit card? Narrow your search with CardMatch Caret RightMain Menu Loan Loans Personal Loans Student Loans Auto Loans Loan calculators Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Invest Investing Best of Brokerages and robo-advisors Learn the basics Additional resources Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Home Equity Home equity Get the best rates Lender reviews Use calculators Knowledge base Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Loan Home Improvement Real estate Selling a home Buying a home Finding the right agent Additional resources Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Insurance Insurance Car insurance Homeowners insurance Other insurance Company reviews Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Retirement Retirement Retirement plans & accounts Learn the basics Retirement calculators Additional resources Elevate your Bankrate experience Get insider access to our best financial tools and content Advertiser Disclosure
Advertiser Disclosure
We are an independent, advertising-supported comparison service. Our goal is to help you make smarter financial decisions by providing you with interactive tools and financial calculators, publishing original and objective content, by enabling you to conduct research and compare information for free - so that you can make financial decisions with confidence.
Bankrate has partnerships with issuers including, but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Make Money
The offers that appear on this site are from companies that compensate us. This compensation may impact how and where products appear on this site, including, for example, the order in which they may appear within the listing categories. But this compensation does not influence the information we publish, or the reviews that you see on this site. We do not include the universe of companies or financial offers that may be available to you. SHARE: RichLegg/Getty Images November 20, 2020 Peter G. Miller is a contributing writer at Bankrate. Peter writes about mortgage rates and home buying. Suzanne De Vita is the mortgage editor for Bankrate, focusing on mortgage and real estate topics for homebuyers, homeowners, investors and renters. Bankrate logo The Bankrate promise
At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict editorial integrity, this post may contain references to products from our partners. Here's an explanation for how we make money. Bankrate logo The Bankrate promise
Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. We’ve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next. Bankrate follows a strict , so you can trust that we’re putting your interests first. All of our content is authored by and edited by , who ensure everything we publish is objective, accurate and trustworthy. Our mortgage reporters and editors focus on the points consumers care about most — the latest rates, the best lenders, navigating the homebuying process, refinancing your mortgage and more — so you can feel confident when you make decisions as a homebuyer and a homeowner. Bankrate logo Editorial integrity
Bankrate follows a strict , so you can trust that we’re putting your interests first. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. Key Principles
We value your trust. Our mission is to provide readers with accurate and unbiased information, and we have editorial standards in place to ensure that happens. Our editors and reporters thoroughly fact-check editorial content to ensure the information you’re reading is accurate. We maintain a firewall between our advertisers and our editorial team. Our editorial team does not receive direct compensation from our advertisers. Editorial Independence
Bankrate’s editorial team writes on behalf of YOU – the reader. Our goal is to give you the best advice to help you make smart personal finance decisions. We follow strict guidelines to ensure that our editorial content is not influenced by advertisers. Our editorial team receives no direct compensation from advertisers, and our content is thoroughly fact-checked to ensure accuracy. So, whether you’re reading an article or a review, you can trust that you’re getting credible and dependable information. Bankrate logo How we make money
You have money questions. Bankrate has answers. Our experts have been helping you master your money for over four decades. We continually strive to provide consumers with the expert advice and tools needed to succeed throughout life’s financial journey. Bankrate follows a strict , so you can trust that our content is honest and accurate. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. The content created by our editorial staff is objective, factual, and not influenced by our advertisers. We’re transparent about how we are able to bring quality content, competitive rates, and useful tools to you by explaining how we make money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and, services, or by you clicking on certain links posted on our site. Therefore, this compensation may impact how, where and in what order products appear within listing categories. Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range can also impact how and where products appear on this site. While we strive to provide a wide range offers, Bankrate does not include information about every financial or credit product or service. Guaranteed loans are a critical part of the mortgage marketplace, and it’s easy to see why. Generally, lenders prefer homebuyers purchase a home with 20 percent down, but many borrowers simply don’t have the cash to meet that threshold with today’s home prices. For the borrowers who can’t make 20 percent happen, a guaranteed mortgage can help. Here’s what to know. What is a guaranteed mortgage
Guaranteed mortgage definition
A guaranteed mortgage is a home loan that a third party guarantees, or agrees to be responsible for, if the borrower defaults. These kinds of mortgages are most often guaranteed by the government, and serve to protect the lender when granting a loan to a borrower who isn’t making a substantial down payment or otherwise might present more risk. How guaranteed mortgages work
While lenders look for a down payment to protect themselves in the event of default, they also want something else: to originate as many loans as possible. Many borrowers, simply put, don’t have the down payment funds necessary to qualify them for a loan. In fact, according to the National Association of Realtors, the typical first-time purchaser in 2019 bought a home with just 6 percent down, while repeat buyers put 16 percent down — both below that ideal 20 percent. In short, without guaranteed mortgages, there would be a lot fewer home sales. So, lenders accept less money down from borrowers who have a guarantee from a third party. The most common guarantors are the Federal Housing Administration (FHA) and the Department of Veterans Affairs (VA), which back and VA loans, respectively. The Department of Agriculture also guarantees in eligible areas. One point of distinction: The program is generally considered a “guarantee,” while the program is viewed more as “insurance.” From the borrower and lender’s perspective, however, they each provide third-party backing that helps borrowers qualify for a loan. Despite the lower down payment, guaranteed mortgages must meet underwriting standards established by the lender and the third party. Lenders often have additional requirements beyond what the guarantor mandates, a practice known as “layering.” For instance, the FHA requires a minimum credit score of 580 to allow a borrower to put just 3.5 percent down, but some lenders set the minimum higher, at 620. FHA loans
The FHA loan program is popular for several reasons: Borrowers can purchase with as little as 3.5 percent down, provided they have a credit score of 580 or better. For borrowers with a credit score between 500 and 579, the program requires 10 percent upfront. Borrowers can qualify with a 43 percent (DTI); however, a large portion actually qualify with a higher DTI, sometimes over 50 percent. This is due to “compensating factors,” such as cash reserves or a higher credit score, that augment a borrower’s creditworthiness. FHA interest rates are typically lower than those of , which aren’t guaranteed or insured by the government. However, because FHA loans are insured by the government, borrowers pay two : one premium, paid upfront, equal to 1.75 percent of the loan principal; and an annual premium ranging from 0.45 percent to 1.05 percent of the balance, paid monthly. The annual premium can’t be removed unless you or pay off your FHA loan completely. VA loans
VA loans are available to eligible active duty servicemembers, veterans and surviving spouses to help finance or refinance a home with zero down — a benefit that can be used more than once. The VA as an agency guarantees a certain amount to a lender should a VA loan borrower default. VA loans give borrowers and lenders a lot of leeway. For example, VA guidelines don’t include minimum credit score standards or loan limits. Instead, lenders set their own credit score requirements and loan money to the extent the borrower is financially qualified. VA loans also have a residual income standard that helps lenders determine how much a borrower needs, after expenses, to qualify for a loan. When purchasing or refinancing, VA loan borrowers have to pay an upfront , although the fee can be waived under certain circumstances. USDA loans
USDA loans are also available to lower- and moderate-income borrowers with no money down, but only in defined rural areas. (The term “rural” can be surprisingly broad, so to find out if it qualifies.) A USDA loan has both an upfront and annual fee, which are a percentage of the loan principal, in order sustain the guarantee from the USDA. These fees are charged to the lender, but usually passed on as a cost to the borrower. Bottom line
With guaranteed mortgages, the funds come from private-sector lenders, but the loan is backed by a guarantor, typically a government agency, so that lenders can qualify borrowers with limited down payment funds or a riskier credit profile. The FHA, VA and USDA, the most common guarantors, generally don’t provide funding. Buy a home with a guaranteed mortgage, and you’re likely to find more accommodative DTI ratios, lower credit score requirements and, of course, smaller . If you’re considering a guaranteed mortgage, speak with a loan officer about which option is right for you, and what you’re likely to be preapproved for based on your credit and financial situation. Learn more
SHARE: Peter G. Miller is a contributing writer at Bankrate. Peter writes about mortgage rates and home buying. Suzanne De Vita is the mortgage editor for Bankrate, focusing on mortgage and real estate topics for homebuyers, homeowners, investors and renters. Related Articles