There are different types of mortgages, but they can be divided into two main categories of loans: government-backed and conventional. Since the government aims to make homeownership more attainable for everyone, government-backed loans are usually more affordable, come with lower interest rates, and are easier to qualify for. These reasons make government-backed loans more popular.
This article is a short guide to everything you need to know about the most popular government-backed loans.
As mentioned earlier, government-backed loans are secured by a federal agency. Several federal agencies offer mortgage programs, including the Federal Housing Administration, the Department of Agriculture, and the Department of Veterans Affairs.
In government-backed loans, the agencies do not act as the lender but act as the guarantor for each mortgage loan taken out. The backing agency insures, or guarantees, the loan amount, which protects the lender if a borrower can’t make good with their payments. Since significant risk is taken out of the picture, it’s now easier for lenders to offer lower rates and lower-to-no down payment options.
Types of Government-Backed Loans
FHA loans are mortgage loans backed by the Federal Housing Administration and usually involve lower down payments and credit requirements than most conventional loans. This makes it accessible to more people, especially first-time homebuyers. For example, you can get an FHA loan with as little as a 3.5 % down payment, depending on your location and the cost of your home. A low credit score (below 580) is also not a hindrance in getting approved for an FHA loan subject to certain conditions, such as, but not limited to, taking out separate mortgage insurance.
The United States Department of Veterans Affairs backs VA loans. VA loans exist so that current military personnel, veterans, and surviving spouses will have a fair chance at homeownership. While there are no minimum credit score requirements for VA loans, it is safe to assume that most lenders will still require you to have a credit score of at least 580.
A unique feature of VA loans is the cash-out refinance programs where the borrower is allowed to utilize the equity you’ve built in your home. With a VA cash-out refinance, you can refinance your current VA (or conventional loan) at a lower rate while extracting cash from your home’s equity.
USDA loans are backed through the Rural Development Guaranteed Housing Loan Program and help borrowers with low to moderate-income qualify to buy a home in a suburban or rural area. What’s great when choosing a USDA-guaranteed loan from a private lender is that no down payment is required. That being said, you must have a credit score of 580 or above to qualify. You can check your potential home’s eligibility via the USDA website. One drawback in choosing USDA-backed loans is that mortgage insurance is a requirement. That being said, it’s a little price to pay for the other benefits you’ll be enjoying.
With government-backed loans, you can see the government’s desire to give more people the opportunity of homeownership. Many opportunities are opened for everyone because the government guarantees these loans since lenders no longer have to fixate on their possible risks. However, since these loans are intended for those who need them, strict limitations are in place to filter those who qualify. So, make sure to consult with an experienced lender such as TLC Lender to help you check the veracity and completeness of your requirements.