A government-issued loan is a loan that a federal government agency backs. The lender is protected if the buyer cannot repay the loan. Government-issued loans also make it easier for homebuyers to qualify for a mortgage since they have more lenient requirements, including a lower down payment.
Private lenders also offer these loans so that you can choose to get a government-issued loan from a bank, credit union, or mortgage lender. Three types of government-issued loans exist: FHA, VA, and USDA.
What is an FHA loan?
The Federal Housing Administration backs FHA loans. These loans are intended for borrowers with a limited credit history or low savings. You can qualify with a credit score as low as 580 and put as little as 3% down on your home. You may still be able to get an FHA mortgage with a credit score lower than 580, but you may have to make a larger down payment.
You can only use an FHA loan for your primary residence, so this would not be an option for vacation homes or investment properties. When putting less than 20% down on a home, you’d be responsible for private mortgage insurance (PMI), which protects the lender if the house ever has to be foreclosed.
PMI is broken up and added to your monthly mortgage payment. PMI costs range between 0.22% to 2.25% of your mortgage. You’d have to pay PMI throughout your loan term with an FHA loan. Other types of mortgages, like conventional loans, allow you to get rid of PMI once you reach a certain amount of home equity.
What is a VA loan?
The U.S. Department of Veteran Affairs backs VA loans. You must be an active-duty service member or a veteran to be eligible. Surviving spouses can also qualify. VA mortgage loans have low interest rates, limited closing costs, and no down payment requirements. There are no loan limits so long as the lender believes you can afford the amount you want to borrow.
There is also no PMI with a VA loan. You can get a VA home loan as many times as you like since it’s a lifetime benefit.
Sometimes, there is a program funding fee that represents a percentage of the total loan cost. However, Congress introduced a program that can help waive this if you meet certain qualifications.
What is a USDA loan?
The United States Department of Agriculture backs USDA loans. To qualify, you must buy a home in a rural area. The USDA has a map of eligible regions as well as income guidelines which vary by state.
With a USDA loan, the home must be your primary residence, and there are no minimum credit score or down payment requirements. Interest rates vary depending on the private lender you choose. USDA loans are only offered at 30-year repayment terms. A USDA loan is an ideal mortgage option for people who want to live in a rural area but may struggle to meet the requirements for a conventional mortgage.
Who should get a government-insured loan?
Government-insured loans are options for people who are looking to buy a home but may not be able to meet the requirements for other types of mortgages. These options allow for more lenient credit requirements and no money down.
