Different Types of Government Backed Mortgage Loans
Buying a home usually means choosing between a conventional loan and a government-backed loan. A government-backed mortgage loan is guaranteed in part by a federal agency, which is what allows lenders to offer lower down payments and more flexible qualifying rules than a conventional loan typically allows. Three programs make up the majority of government-backed lending in the United States: VA loans, USDA loans and FHA loans.
Direct Answer: What Are Government-Backed Mortgage Loans?
Government-backed mortgage loans are home loans that a federal agency guarantees in part, which lowers the risk to the lender and can open the door to lower down payments, lower credit score minimums or no down payment at all, depending on the program. The government does not lend the money directly. It backs a portion of the loan so approved private lenders can extend more flexible terms than they could on a conventional loan.
Key Takeaways: Government-Backed Loan Rules
VA loans are available to eligible veterans, active-duty service members and surviving spouses, and may allow up to 100% financing with no monthly mortgage insurance.
USDA loans are designed for eligible buyers in qualifying rural and suburban areas and may require no down payment.
FHA loans allow down payments as low as 3.5% for borrowers who meet the credit score requirements.
Qualification varies by lender, credit profile and property location, so the same program can look different from one borrower to the next.
What Is a Government-Backed Mortgage Loan?
A government-backed mortgage loan is a home loan guaranteed in part by a federal agency, such as the Department of Veterans Affairs, the U.S. Department of Agriculture or the Federal Housing Administration. That guarantee reduces the lender’s risk if a borrower defaults, which is why approved lenders can offer terms conventional loans often cannot, including lower down payments and more lenient credit requirements. The three most common programs are VA loans, USDA loans and FHA loans, each administered through private lenders rather than the government agency directly.
Which Loans Are Guaranteed by the Federal Government?
VA loans, USDA loans and FHA loans are the three loan types most commonly guaranteed by the federal government. Each program is backed by a different agency and serves a different group of borrowers.
Government Loans For Veterans (VA Loans)
The Department of Veterans Affairs has created mortgage programs designed specifically for military personnel, veterans, and surviving spouses of those who have so valiantly served our country. With a veteran home loan, there is no monthly mortgage insurance, and because of this, there are substantial savings over the term of the mortgage. Moreover, these types of loans are assumable, meaning you can give your loan to someone else if they are eligible for a VA loan. This option eliminates the hassle of listing and closing on your home.
- 100% VA financing with 0% down: You can finance 100% of the loan with no mortgage insurance. This can save you hundreds of dollars per month compared to a Conventional loan.
- You can also finance 100% with a cash-out refinance.
- Relaxed Home Eligibility: Home eligibility for a VA loan include stick-built houses, condos, or even manufactured homes.
- No Loan Amount Caps: Currently, there is no cap on loan amounts, so you could use your VA loan for a jumbo loan amount.*
*As of May 2021. This is dependent on veteran loan entitlement and county loan limits.
Learn More About The VA Home Loan Process!
United States Department of Agriculture (USDA Loans)
USDA loans are backed through the Rural Housing Division of the United States Department of Agriculture. They are available to millions of eligible primary home buyers with low to moderate incomes, or scarce funds for down payments.
- No Down Payment: Most mortgages require an initial down payment that is paid on closing day. Because of this, many homebuyers say that saving for the down payment was one of the hardest parts of the home-buying process. Since USDA loans require no down payment, purchasing a home with a USDA loan program may be advantageous for those with low down payment funds.
- Low Credit Score Requirement: USDA’s programs typically require a 600 minimum credit score. Direct Mortgage Loans can lend below 640, but you may need other compensating factors in order to offset the lower credit score. Furthermore, the applicant must prove that they are willing and able to repay their home loan.
- Low Origination Fee: Borrowers will pay a guaranteed fee of 1% of the total home loan amount. You can finance this fee into the loan so you do not need to pay it out of pocket.
- USDA Rates: Rates of USDA loans are usually lower than those of typical conventional home loans.
Learn More About USDA Direct Loans!
Federal Housing Agency (FHA Loans)
FHA Loans are governed by the Housing of Urban Development (HUD), which offers flexible guidelines for borrowers with limited down payment funds and an imperfect credit history.
- Low Down Payments: As little as 3.5% down will work in most instances, and 5% covers most others.
- Higher Loan Amounts: In some areas, FHA maximums can exceed conventional loan limits.
- Lower Total Cash to Close: Sellers can help pay closing costs, and borrowers can receive gift money toward their down payments.
- Streamlined and Cash Out Refinancing: Subsequent refinancing can be far easier and more lenient than with conventional loans.
- Purchase & Rehab Financing: The FHA 203k loan can be a great option for the purchase of homes needing anything from a quick spruce-up to major remodeling.
FHA 100% Financing
This program provides homebuyers with 100% financing without requiring a down payment. However, closing costs are still required. This is achieved through a combination of a 1st and 2nd mortgage. This DPA program can be used to obtain an FHA loan and the amount of the 2nd mortgage can be up to 3.5% of the sales price or the appraised value, whichever is less. The term for the 2nd mortgage is 10 years.
- Eligibility: To qualify for the program, you need to have a minimum credit score of 620 and a maximum Debt-to-Income (DTI) ratio of 45%. You must complete a Homebuyer Education course. And the eligible properties for financing are defined by FHA guidelines based on the maximum HUD county limit. The program covers single-family homes, duplexes, manufactured homes, PUDs, townhouses, and condos.
Learn More About FHA Loan Limits!
What Are the Benefits of Government-Backed Home Loans?
The main benefit of a government-backed home loan is accessibility. Because a federal agency guarantees part of the loan, lenders can extend financing to borrowers who might not meet conventional loan requirements.
- Lower down payments: Many government-backed programs require less upfront cash than a conventional loan.
- More flexible qualifying: Credit score and debt-to-income guidelines are often more forgiving than conventional standards.
- A path to build equity: Borrowers who might not qualify conventionally can still start building home equity and credit history.
How do I know if my mortgage is federally backed by the government?
If you want to find out if your loan is a federally backed mortgage, then there are a few different ways to determine this information. You can either call your mortgage lender or send a written request to your mortgage provider requesting this information.
By law, your lender has an obligation to provide you with the name, address, and telephone number of the person who owns your loan, to the best of their knowledge. Furthermore, use the Freddie Mac or Fannie Mae lookup tool online to see if your mortgage is backed by the government.
See What You Qualify For
Every borrower’s situation is different, and the right government-backed program depends on your service history, location, credit profile and financial goals. A DML loan officer can walk through your options and help you find the program that fits.
About the Author: Anna Dowling
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About the Author: Anna Dowling
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