Guaranteed mortgage loans: What they are and how they work

Quick insights

• Guaranteed mortgages are loans backed by the assurance of a third-party guarantor.
• These loans are typically part of government programs, with specific requirements regarding the applicant’s background and/or financial profile and property which can be purchased.
• To apply for a guaranteed mortgage, confirm your eligibility by checking program requirements and plan to apply with an approved lender.

A guaranteed mortgage is a type of home loan where a third party (typically a government agency) promises to repay the loan if the borrower does not. In a guaranteed mortgage, this promise can provide the assurance a lender needs to offer home loans to individuals who may not otherwise qualify.

In this article, we’ll further explain how guaranteed mortgage loans work and offer examples. We’ll also describe some of the pros and cons associated with this type of loan.

How guaranteed mortgages work

Guaranteed mortgages often come with impactful benefits which can make it easier for certain homebuyers to afford a home. However, these loans typically have detailed eligibility requirements and restrictions on how the funds can be used. As a point of clarification, the guarantor (often a government entity) does not provide the funding for the loan itself. Homebuyers need to work with an approved lender who is able to provide these loans.

If you are approved for a guaranteed mortgage, funds from the loan can be used to buy or improve a home in accordance with program requirements. During the repayment phase, the borrower will repay the lender directly. In the event of a default, the guarantor must pay for the remaining cost of the loan.

Getting a guaranteed mortgage

To receive a guaranteed mortgage, you will need to explore each program and confirm your eligibility before applying with an approved lender. While the application process for different types of guaranteed loans will vary by program and lender, each will include the provision of certain personal details and financial documentation for lender review.

Key benefits of guaranteed mortgages

Each guaranteed loan type is different and will have unique perks. Features that come with a guaranteed mortgage loan may include:

• Lower down payments: Guaranteed loans often require lower down payments compared to conventional loans, sometimes as low as 0% of the home’s purchase price.ec-va-gov-purchase-loan
• More favorable interest rates: Because a third-party guarantor lowers the lender’s risk on these types of loans, lenders may offer lower interest rates compared to traditional mortgages.
• Easier qualification criteria: A guarantor on a loan can also make it easier for lenders to approve loan applicants with low incomes and less-than-perfect credit scores.

Considerations and potential drawbacks

While guaranteed mortgages can have significant perks that differentiate them from traditional mortgages, they often come with unique restrictions and requirements. These may include:

• Mortgage insurance premiums (MIP): In some circumstances, a guarantor is not enough to back a loan, and the borrower may need to pay an additional price to further insure their loan.
• Loan limits and property restrictions: Guaranteed loans may have limits on the amount that can be borrowed or the types of properties that can be purchased.

Types of guaranteed mortgage programs

A guaranteed mortgage may also be designed with select groups in mind (such as military service members) to provide premium rates and terms to these individuals based on their status.

Three programs for guaranteed mortgages are Federal Housing Administration (FHA) loans, Veterans affairs (VA) loans and U.S. Department of Agriculture (USDA) loans.

• FHA loans: FHA loans are government-backed loans targeted for low-to-moderate income borrowers. These loans often require a lower down payment (as low as 3.5%) and have easier credit requirements compared to standard loans.ec-cfpb-fha-loans However, the home you buy with an FHA loan must fit certain criteria, and your loan may be subject to additional MIP costs.
• VA loans: VA loans are available to qualifying veterans and active military members. These guaranteed loans generally do not require a down payment or private mortgage insurance, which can be a significant advantage for buyers.ec-va-gov-purchase-loan
• USDA loans: USDA loans are designed for rural and suburban homebuyers. Like VA loans, USDA loans include zero down payment options and lower interest rates as key features.ec-rural-development-sfhglp Chase does not offer USDA loans.

Keep in mind that the details related to these programs are presented as part of a general overview. Be sure to check official government sources (with a .gov address) for official program information relating to each loan type in your state.

In conclusion

Guaranteed loans may have certain benefits because of their third-party backing. This can result in lower interest rates, lower down payment requirements or other advantages. While these loans can be very desirable for certain borrowers, they typically have specific restrictions which limit how they can be used and who can qualify. Chase does not offer USDA loans; however, consider working with one of our dedicated Home Lending Advisors regarding FHA and VA loan eligibility.