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. The truth is that federal home loans are very important to the American economy and a useful tool to stimulate home-ownership.
2024 is shaping up to be a year to remember for first time buyers and government home loans with FHA, VA, USDA and more.
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 loan 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 Ensuring Affordable Housing
Learn about the new credit score requirements for FHA, USDA and VA home loans for this year. There are three basic types of home loans that are guaranteed by the federal government:
The Federal Housing Administration insures FHA loans 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 FHA 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 FHA 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 backed government home 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 loan 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 mortgages available 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 with VA loans
- 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:
Government Mortgages Are 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 federal 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.
Government Home Loans Are 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.
Government-home loans feature distinct cost structures, encompassing initial charges and mandatory mortgage insurance prerequisites. Conventional loans are popular because of accessibility compared to government-insured mortgages. Government home financing come with specific prerequisites that differ from what is expected with conventional loans.
4 More Tidbits You Need to Know About Government Mortgage Loans
If you are researching a house loan, you may want to think about getting a mortgage that is backed by the federal government. The three major federal home loan programs to know about are still FHA, VA and USDA.
These loan programs are all government backed, meaning if you do not pay the mortgage, the government will reimburse the lender. That is why the lenders are willing to extend credit to those who may have less than perfect credit and finances. Overall, they are a great deal for millions of Americans who otherwise might have trouble buying a home.
Below are some helpful hints that can help you as you go through the government mortgage approval process:
Know What Your FICO Score Is
It just takes five minutes to get an idea what your credit score is. But many home buyers never bother to review their FICO score before they submit a home loan application. Even though you are applying for a government home loan, it still is good to know what your credit score is. How high your score is, even with the credit flexibility of federal home loans, can influence your rate and ability to be approved. It also can affect your down payment.
For example, federal home loans insured by the FHA are available with a 3.5% down payment if you have at least a 580-credit score. If you have a score below that, you may have to put 10% down. Having a credit score in the low to mid 600’s will make the lending process go faster, though.
VA loans do not have a minimum credit score, but you will find more lenders will work with you if you have a 620-credit score.
Looking at your credit report also will tell you if you have had any late-payments reported in the past two years. The fewer black marks on your report, the easier the underwriting process will be. Find out what the minimum credit score is for a home loan this year.
Stay at the Same Job
Things have changed in the mortgage lending business since the Great Recession. Back in the day, you could get a home loan with undocumented income and no proof of a steady job. Those days are over. Mortgage lenders, including those that are approved to issue government backed loans, are required to verify the source of your income with documented proof. They also are required to verify with your employer that you earn what you say you earn on the mortgage application.
Because of the tighter standards about income, the lender also wants to see that you have been in the same job or profession for the last year or two. It is especially important to stay in the same job for the last few months before you apply for a home loan. The worst mistake to make is to quit your job during the underwriting process. The lender needs to see you are financially stable; if they have too many home loans go south, they can be penalized by the US government, or worse: They can be prohibited from issuing government backed loans.
Pay Down Debt
You do not need to have no consumer debt to get a home loan, but the less you have, the less hassles you get during underwriting. Ideally, your credit card balances should be 30% or less of your maximum credit lines. Generally, all of your monthly debt payments should not be more than 36% of your gross monthly income. But in some government loan programs with certain lenders, you may exceed this. Check with your specific lender to see what their maximum debt to income ratios are.
Also avoid taking on new debt when you are in the underwriting process.
Get Pre-Approved for Federal Home Loans
You should get pre-approved or pre-qualified by a USDA, FHA or VA approved lender before you start looking at homes. You will know what you can spend and can afford. No point to look at $500,000 houses if you cannot get the mortgage.
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 government home loans, they have low rates and they close faster.
- 3 Things You Probably Didn’t Know About Government Backed Home Loans. (n.d.)