Buying a home and navigating the mortgage process can be difficult, especially if you can’t come up with a down payment or your credit score isn’t perfect. But, while the process isn’t easy, it’s not impossible, especially with the help of government home loans. Government-backed loans can give people who have a hard time acquiring a conventional mortgage the opportunity to make their homeownership dreams come true.
What Are Government Home Loans?
Government home loans are backed by… you guessed it: the United States government (aka Uncle Sam). The U.S. government (through designated federal agencies) agrees to guarantee or “back” the loans in case you default or can’t make your payments.
This reassurance makes lenders more willing to offer these loans to borrowers who may have lower credit scores or can’t make a 20% down payment on a home.
You can get government home loans through approved private lenders, like banks, credit unions and online lenders. It’s important to note these loans don’t come directly from the government but instead are insured by the various agencies.
What Kinds of Government Home Loans Are Available?
There are three key loan programs available through the federal government:
Backed by: The Federal Housing Administration
Who qualifies: Open to all home buyers who are U.S. citizens
Why they’re awesome: FHA loans are especially helpful for home buyers who have lower credit scores, are carrying higher levels of debt or have experienced financial difficulties, like bankruptcy.
FHA loans can be used to:
- Buy an existing home
- Refinance a current loan
- Renovate or repair a fixer-upper
- Build a new home
- Make a home more energy efficient
- Help older adults draw equity from a home with 50% equity or more
Backed by: The Department of Veterans Affairs
Who qualifies: Members of the U.S. armed forces and National Guard who meet the qualifying service requirements as well as their surviving spouses (if the service member died in the line of duty or from a service-related injury).
Why they’re awesome: VA loans are one of the many benefits available to qualifying veterans. VA loans offer increased opportunities and flexibility for veterans and their surviving spouses to:
- Buy an existing home
- Refinance a current loan
- Renovate or repair a fixer-upper
- Build a new home
- Borrow against the cash (aka equity) in the home
Backed by: The U.S. Department of Agriculture
Who qualifies: All U.S. citizens who want to buy or build a home in a USDA-designated rural area and earn no more than 115% of the median household income for the area.
Why they’re awesome: The USDA is responsible for helping to maintain and revitalize America’s rural communities. You may be surprised to learn that 72% of the U.S. is considered rural. That means there are lots of thriving rural communities out there where you can find a home.
One of the things that make USDA loans so attractive is their affordability. They offer lower interest rates than many conventional loans. And you can get a loan with no down payment and lower upfront and annual fees compared to FHA and VA loans.
3 Government Loans: A Side-by-Side Comparison
Here’s a handy side-by-side guide of the main types of government home loans.
|FHA Loan||VA Loan||USDA Loan|
|Who qualifies?||Open to all applicants||Eligible U.S. veterans and surviving spouses||Open to applicants interested in buying or building in a rural community|
|What credit score do I need to qualify?||580 or higher (with 3.5% down)500 (with 10% down)||No required minimum (580 or higher preferred)||No set credit score requirement (640 preferred)|
|What debt-to-income (DTI) ratio do I need to qualify?||57% or lower||No set limit (41% or lower preferred)||41% or lower preferred (can be higher at the lender’s discretion)|
|How much will mortgage insurance and/or annual fees cost? (% of loan value)||1.75% upfront – 0.45% – 1.05% of loan value annually (based on loan value and terms)||1.4% – 3.6% one-time funding fee||1% upfront – 0.35% annually|
|What is the minimum down payment requirement?||3.5%||0% unless required by lender||0%|
|What are the loan limits?||Between $420,680 – $970,800 (based on area)||Based on your income||Based on county loan limits|
|Are there maximum income requirements?||No||No||Yes (115% of the median income for the area)|
|Is proof of income required?||Yes (2 years minimum)||Yes (alternate sources considered)||Yes (2 years preferred)|
|Is a home appraisal required?||Yes (The appraisal must be performed by a HUD-approved appraiser)||Yes (The appraisal must be performed by a VA-approved appraiser)||Yes (The appraisal must be performed by a HUD-approved appraiser)|
|Who can I get the loan through?||FHA-approved lenders||VA-approved lenders||USDA-approved lenders|
Why Should I Consider a Government Home Loan?
Government loans offer lots of benefits – especially for first-time home buyers dealing with higher levels of debt or are house hunting while housing prices are high.
Let’s look at some other reasons why aspiring homeowners should consider government-backed loans:
Lower credit score requirements
Most conventional lenders require a credit score of 620 or higher to qualify for a home loan.
Government-backed loans have lower credit score requirements, making it possible to qualify for a home loan with a credit score as low as 500.
Higher debt-to-income (DTI) ratio allowed
Your DTI is measured as the amount of money you owe each month divided by your monthly gross income. The lower your DTI, the easier it is to qualify for a mortgage.
Conventional lenders prefer DTIs of 36% or lower but may consider a DTI as high as 50%.
Government-backed loans accept DTIs as high as 57%.
Lower down payment requirements
Conventional lenders prefer a down payment of 20%, though some loan programs allow for as little as 3% down.
Government-backed loans allow you to get approved with as little as 3.5% down for FHA loans and 0% for VA and USDA loans.
Flexibility with past credit problems
If you have a bankruptcy or other financial issues on your credit history, a conventional lender may have you wait 4 years or more before you can apply for a mortgage. With a government loan, that wait can be less than a year.
First-time home buyer assistance
There are home buyer assistance programs at the state and local levels. The programs provide buyers with home buying education and resources. Borrowers can also take advantage of grants and loan programs offered through down payment and closing cost assistance programs.
But, to qualify for many of these programs, you need to use a government-backed loan.
Using gift money for down payment assistance
Conventional loans allow you to get gift money for your down payment from your family, domestic partner and fiancé(e).
Government-backed loans allow you to get down payment assistance from all of the above and:
- Labor unions and employers
- Your state housing finance authority (HFA)
- Charities and community organizations
What Do I Need To Know About Government Loans?
A government home loan isn’t for everyone. There are restrictions on what kinds of property you can buy and what size loan you can get.
Some of these requirements can add time and expense to your approval process, adding to your costs in the long run.
A more involved application process
Government home loans require additional paperwork and the application process can take 60 – 90 days to complete.
The government wants to make sure that the property you’re buying is safe and livable, so you’re usually required to have your home appraised for health, safety and structural soundness by a HUD- or VA-approved appraiser.
They’ll also assess the fair market value to make sure it meets loan requirements.
All relevant issues (anything from lead paint to a broken handrail) discovered by the appraiser will have to be fixed by the seller. Who pays for the repairs – as well as how and when the repairs need to be made – can be negotiated.
Government home loans (FHA, VA and USDA loans) require you to pay an upfront mortgage insurance premium (UFMIP) or upfront fee (either can be rolled into your mortgage loan along with other closing costs). FHA loans have annual premiums and USDA loans come with annual fees. You pay your annual premium or fee in monthly installments.
You pay your premium or fee for a limited time or the life of the loan. It all depends on the type of loan you get and the size of your down payment.
Some government home loans have limits on how much you can borrow based on your geographic area. In low-cost areas, the loan limit may be $200,000 – $300,000. And in high-cost areas, the limit may be $800,000 – $900,000.
There are rules about the types of properties you can buy with a government home loan. Most loans are restricted to single-family homes that will be used as primary residences. There are some exceptions, including being able to buy a multiunit property as your primary residence.
Can I Renovate or Rehab With a Government Loan?
The government wants you to turn fixer-uppers into valuable, livable housing. That’s why most government loan programs offer options to help you renovate your current home or rehab a home that you plan on buying.
For example, an FHA 203(k) loan can allow you to borrow as little as $5,000 to put toward home improvements.
Can I Refinance a Government Loan?
Government loans offer refinancing options that can help you lower your interest rate or pay less in mortgage insurance.
If you can get a better deal with a conventional lender, you can refinance your government-backed loan into a conventional loan.
Can I Take Out Home Equity With a Government Loan?
Government loans also have options that allow you to draw on your home equity in the same way you would with a home equity loan, a home equity line of credit (HELOC) or a cash-out refinance.
The FHA even has a program that’s similar to a reverse mortgage. It allows older adults to take advantage of their home equity and cover the cost of their retirement or other approved activities.
Buying a Home With Uncle Sam
Depending on your situation, buying, building, renovating or refinancing a home with a government loan could make it easier to achieve your dream of homeownership.
You don’t have to run around to different government agencies either. You may be able to source all of your loan options from the same lender or mortgage broker. They can help you figure out which loans you qualify for and which options are the best for your home buying journey.
USDA Economic Research Service. “Nonmetro population change has remained near zero in recent years.” Retrieved September 2021 from https://www.ers.usda.gov/data-products/chart-gallery/gallery/chart-detail/?chartId=99693
USDA Rural Development. “Single Family Home Loan Guarantees – What does this program do?” Retrieved September 2021 from https://www.rd.usda.gov/sites/default/files/fact-sheet/508_RD_FS_RHS_SFHGLP.pdf
Federal Deposit Insurance Corporation. “203(b) Mortgage Insurance Program.” Retrieved September 2021 from https://www.fdic.gov/consumers/community/mortgagelending/guide/part-1-docs/203b-mortgage-insurance-program.pdf
U.S. Department of Veterans Affairs. “VA Guaranteed Loan.” Retrieved September 2021 from https://www.benefits.va.gov/BENEFITS/factsheets/homeloans/VA_Guaranteed_Home_Loans.pdf
U.S. Department of Housing and Urban Development. “APPENDIX 1.0 – MORTGAGE INSURANCE PREMIUMS.” Retrieved September 2021 from https://www.hud.gov/sites/documents/15-01MLATCH.PDF
U.S. Department of Veterans Affairs. “VA funding fee and loan closing costs.” Retrieved September 2021 from https://www.va.gov/housing-assistance/home-loans/funding-fee-and-closing-costs/
USDA Rural Department. “USDA Rural Development Reducing Fees Make Home Loans More Affordable.” Retrieved September 2021 from https://www.rd.usda.gov/newsroom/news-release/usda-rural-development-reducing-fees-make-home-loans-more-affordable
U.S. Department of Housing and Urban Development. “MAXIMUM MORTGAGE LIMITS 2022.” Retrieved December 2021 from https://www.hud.gov/program_offices/housing/sfh/lender/origination/mortgage_limits