How much do you know about government home loans? First, when we say that, what we really mean is that the loan is backed by the full faith and credit of the federal government. If you default on the government home loan, the US government reimburses the lender for most of the loan balance.
Government-backed home loans are popular because the government guarantee of the loan makes lenders more flexible about issuing credit to people with lower credit scores and incomes.
Government mortgage loans help to encourage the housing market because it increases the availability of credit to millions more Americans. Not everyone has the financial ability to get a conventional mortgage with a 20% down payment and high credit score.
If you are considering a government home financing to buy a house, use this guide on the various options to help you make a decision about which loan to use.
The Major Types of Government-Backed Home Loans
There are three basic types of home loans that are guaranteed by the federal government:
The Federal Housing Administration insures FHA mortgages under the most popular government home financing in America. According to some estimates, 40% of home loans in the US are FHA-insured loans. This government loan program is guaranteed by the Federal Housing Administration. Lenders who are approved to provide FHA insured mortgages have the ability to give credit to people who may not otherwise qualify for a home loan. Some of the major benefits of this government home loan program include:
- Low down payment of 3.5% in many cases.
- 500 minimum credit score for home loans with 10% down payment
- 580 minimum credit score for home loans with 3.5% down payment
- Loan is assumable, meaning that a buyer can take over the FHA lien at sale, if they qualify
- Low interest rates that are often lower than conventional rates
- Flexible debt to income ratios, so if you have a lot of debt, you still may qualify
- No maximum income and no minimum income – as long as you can show that you have the steady income to pay your mortgage and other obligations
- Both more expensive homes and fixer uppers may qualify, depending upon the area
- Renovation loans with the FHA 203k program may be available to qualified applicants.
Note: If you have a bankruptcy or foreclosure in the last several years, you will definitely want to strongly look at FHA financing. If you can show you are back on your feet financially, these negative financial marks on your record can be overcome.
VA loans are guaranteed by the Veteran’s Affairs Administration, and are intended for military veterans and many active duty military. Some of the benefits of the VA program are:
- No mortgage insurance required, as with the FHA program
- Very low interest rates that are well below the market average
- No down-payment is required for many vets
- You can use your VA benefit more than once, although you only can have one VA loan at a time
- No minimum or maximum income
- Flexible credit with home loans for people with low-credit and debt to income standards
This program is designed for lower income borrowers with credit challenges. It is made for people who are buying a home in a more rural area of the country. But some homes outside of major US cities also may qualify in some cases. Major benefits of this program are:
- Flexible credit standards, with a 620-credit score being the typical number to shoot for as a borrower
- Flexible debt to income ratios
- Flexible income standards, although there is a maximum income based upon a percentage of the median income in the area
- Homes must be designated in a rural area by USDA
- 100%-financing with no money down is available in many cases
- Home can be a fixer upper
That is a basic overview of the major government home loans available in the US today. Should you consider a government backed home loan? We think you should if you do not have perfect credit and a lower income. Here are the reasons we think you should consider one of these programs:
More Likely to Close
Never underestimate the importance of the US government backing your home loan. The lender knows that if you do not pay the loan, they will get paid back most of what they stand to lose. This allows them to take a larger risk on a larger percentage of their home loans.
Once you are approved by the lender, it is very likely that the loan will eventually close. Conventional loans fall through more often.
Are Low Rates Available with Government Home Loans?
Most people think if they have a low credit score that they will pay a high interest rate. With a government home loan, you actually can pay lower than market average rates. Again, the government mortgage lender can offer a lower rate because they know they will get repaid if you do not pay the loan.
Faster to Close
Some think that a government loan must take forever to close, but this is not usually true. A typical conventional loan takes 49 days to close, while a VA mortgage and FHA insured loan take about 50 days.
The Skinny on Government Home Financing
Anyone who has credit issues in their past may want to consider a government home loan. It is much easier to qualify for these loans, they have low rates and they close faster.
References: 3 Things You Probably Didn’t Know About Government Backed Home Loans. (n.d.). Retrieved from http://www.intercaplending.com/about-government-backed-home-loans/