When it comes to homebuying, most people need help financing their purchase. A mortgage loan can provide you with the means to buy a house, on the condition that you pay back the mortgage lender with interest.
In some cases, such as with high-risk borrowers, the mortgage lender may require a little more assurance that you will repay the loan in-full. For many homebuyers who have trouble qualifying for conventional mortgage loans, government-backed mortgage loans can make it possible to obtain the financing they need.
Main Types of Government-Backed Mortgage Loans
Government-backed mortgage loans are guaranteed or insured by the United States government. If a borrower defaults on their loan, the government assumes the responsibility of covering the lender’s losses. Lenders are often more willing to issue loans to higher-risk borrowers when the federal government is behind them, thus allowing more people to achieve homeownership.
There are two main types of government-backed mortgage loans:
FHA Loans: FHA loans are managed by the Federal Housing Administration, which is part of the U.S. Department of Housing and Urban Development. The FHA does not issue mortgage loans. Instead, it provides mortgage insurance on home loans that are made by FHA-approved lenders. (Note that borrowers may not have to pay an upfront insurance premium, or monthly mortgage insurance premium, until the home builds up a certain amount of equity.) FHA mortgage loans also come with low down payments (as little as 3.5%) and more flexible credit score requirements. However, the FHA does place lending limits on loan amounts for different states and counties.
VA Loans: The U.S. Department of Veterans Affairs backs mortgage loans for veterans, active duty personnel, Reservists/National Guard members, and qualified surviving spouses. VA loans are issued by qualified lenders, and insured by the VA. Unique features of VA loans include no down payment and no mortgage insurance ― although a funding fee is typically assessed. VA mortgage loan programs may be used to purchase, refinance, construct, or repair a home.
Other types government-backed mortgage loans exist as well, including USDA mortgage programs and state/local housing programs ― but most homebuyers are more likely to qualify for an FHA or VA loan.
Since the financial crisis and the economic recession, government-backed mortgage loans have become increasingly popular. This is mainly because they have more flexible credit requirements and lower down payment requirements than comparable conventional loans.
Before you get a government-backed mortgage, however, it’s a good idea to consider your personal situation and what will work best for you. Keep in mind that for many homebuyers, a conventional mortgage loan might be the better choice. Look into all your options, and if you decide to go with a government-backed loan, you can check the requirements to see if you qualify.