Government loans are becoming a hot topic, especially for first-time home buyers. Why is everyone talking about government backed loans? How are they different from conventional mortgages? Like any type of loan, government loans have their pros and cons. For first-time home buyers – especially those who don’t have a large down payment saved – government-backed mortgages have some benefits that can be the difference between owning a home and continuing to rent. In order to decide if a government-backed mortgage could be right for you, check out these definitions and four things you should know:
3 Main Types of Government Loans
Federal Housing Administration (FHA) Loans
An FHA mortgage is a very popular first time-home buyer loan option. Credit score and credit requirements are generally more lenient than they are for a conventional loan. An FHA loan only requires a 3.5% down payment. However, FHA loans require a monthly mortgage insurance premium, which will never drop off unless you refinance out of an FHA loan.
Veterans Assistance (VA) Loans
Created in 1944 by the U.S. Government to help returning service members purchase homes, the VA Guaranteed Mortgage program has helped more than 20 million veterans and their families with an affordable home financing situation. Although there are certain eligibility requirements that must be met to qualify, the VA Loan has distinct advantages over traditional mortgages, such as requiring no down payment and competitive interest rates.
United States Department of Agriculture
Although USDA loans used to be strictly for farmland, many rural and suburban areas are now eligible for their no money down, 100% financing. USDA guaranteed mortgage loans generally have more lenient credit standards and a very competitive interest rate. USDA loans have an up-front insurance premium that can be financed in the loan in addition to a monthly mortgage insurance premium which will be included in the monthly payment for the life of the loan.
Low or No Down Payment
Government loans have very lenient requirements for down payments. USDA loans and VA loans do not require any down payment at all. FHA loans only require a 3.5% down payment if your credit score is over 580. When you compare this to the down payment requirement for conventional mortgages which range from 5-20%, government-backed loans are much more flexible.
Lenient Credit Requirements
Credit requirements are generally more lenient for government-backed loans than they are for traditional mortgages. The requirements vary based on the type of loan, but still tend to be generally more accessible than conventional loans.
FHA Loans –
- 500-579 FICO score requirement with a 10% down payment
- 580+ FICO score requirement with a 3.5% down payment
- 43-50% maximum debt-to-income ratio depending on credit score
USDA Loans –
- 41% maximum debt-to-income ratio, although higher debt ratios may be considered if your credit score is above 680
- Applicants with a 640+ FICO score receive streamlined processing but scores below that will still be considered with more stringent underwriting standards
- Can qualify with a non-traditional credit history (rental and utilities payments, etc.)
VA Loans –
- No credit score requirement from the VA, but a common requirement for lenders who make the loans is around a 620 FICO score
High Likelihood of Closing
Since government-backed loans are subsidized by the government, meaning that the government takes responsibility if the loan defaults so that it does not hurt the lender, these loans are more likely to close than traditional mortgages.
Great Interest Rates
Some government mortgages may have high interest rates, but the majority have better rates than conventional mortgages. Just like with any other loan, the rate you receive will depend on your credit score and your lender of choice, but the lower risk to lenders usually allows for a lower rate.
Learn More about Government-Insured Mortgage Programs at Patriot Federal Credit Union
If you think a government-backed loan might be right for you and your situation, visit one of our branches or call us at 717-709-2580 to chat with one of our friendly and experienced mortgage consultants. You can also learn more about the options we offer on our website. Purchasing a home can be quite a journey and we want to be with you every step of the way – from research to getting your keys.
The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Patriot Federal Credit Union does not endorse any third parties, including but not limited to, referenced individuals, companies, organizations, products, blogs, or websites. Patriot Federal Credit Union does not warrant any advice provided by third parties. Patriot Federal Credit Union does not guarantee the accuracy or completeness of the information provided by third parties. Patriot Federal Credit Union recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions.