Many buyers hear the term “government-backed” and balk. And can you really blame them? If you weren’t a mortgage pro who knew this terminology like the back of your hand, or if you struggled with financial education, you might just be intimidated, too.
But it’s critical to ensure your clients are clear on their various potential government-backed loan options. Let’s just take a quick look at the numbers:
The Consumer Finance Protection Bureau’s (CFPB) most recent Summary of Data on Mortgage Lending sheds some light on the sizable portion of borrowers opting for government-backed loan options. In 2022, 28.1% of home purchase loans were government-backed, including FHA, VA, Rural Housing Service, and Farm Service Agency loans. In 2021, that figure was 29.3%.
So, how can you clear up any confusion and guide these clients appropriately? Let’s dive into some of the most common borrower questions surrounding government-backed loans and their comprehensive answers:
First things first, you’ll want to get clear on terminology. Take some time to explain the concept of government-backed loans. Remember that, while this concept might be second nature to you, your clients may be clueless.
A simple script might look a little something like this:
“Government-backed refers to loans that are backed, or insured or guaranteed, by the federal government. This means that the loan operates outside of certain restrictions placed on private, conventional loans, like those backed by the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac).
Government-backed loans may come with more flexible eligibility requirements. Lenders also tend to view them as relatively safe investments. That’s because the government has lots of resources to spare, should anything ever go wrong.”
To add real-world context, cover some of the most common types of government-backed home loans:
Explain that an FHA loan is a home loan insured by the Federal Housing Administration (FHA). You can also walk them through an FHA loan calculator, so they can see first-hand what an FHA loan might mean in their situation.
Explain that a VA loan is a home loan where a portion of the loan is guaranteed by the Department of Veteran Affairs (VA). This loan is, of course, only potentially availabe to eligible current and former service members and their eligible suriving spouses.
Explain that a USDA loan is a guaranteed by the United States Department of Agriculture (USDA) Rural Development Guaranteed Housing Loan Program only available in eligible towns and rurual areas to borrowers with certain income limits. Then, send them off with some homework: playing around with the UDSA’s interactive eligibility map.
You may want to create a flyer or handout with brief, easy-to-digest information on the potential pros and cons of government-backed loans.
You can copy and paste the lists below to use as a jumping-off point:
Once you’ve walked them through the definitions, examples, potential pros, and cons, clients will probably wonder what their next move should be.
Of course, the answer to this question will depend entirely on the borrower and their unique financial situation. Walk them through all of their potential options, running the real-world numbers as you go. Check often for understanding, and always reserve some time at the end of a call or meeting for follow-up questions.
Finally, don’t shy away from showing your industry knowledge and expertise . Remember: Your guidance is what they’re there for! Your two cents are practically priceless in these moments.
So, there you have it: Some of the most common borrower questions relating to government-backed home loans, their comprehensive answers, and a few opportunities for you to go above and beyond.
Whether your client is a first-time buyer interested in an FHA loan or a former service member ready to tap into their VA benefits, a solid understanding of government-backed home loans goes a long way. And don’t worry, we’ll be here to provide loan processing support every step of the way!
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