Government-backed home loans are mortgages that are secured by some branch of the US government. This means that the government guarantees the lender that the loan will be repaid.
The purpose of government-backed home loans is to reduce the risk for lenders so that they will be more willing to loan money to special groups of buyers (like first-time buyers, American veterans, or buyers in rural areas). The government is willing to do this because homeownership contributes to a stable economy, and it’s in the country’s best interest to provide a path to homeownership.
If you qualify for a government-backed home loan, you get extra benefits like lower down payment options. But it’s not always easy to qualify.
So let’s look at the three primary types of government-backed home loans, what it takes to qualify for each, and how qualified buyers can benefit from each.
VA Loans
VA loans are backed by the Department of Veteran’s Affairs to make sure American military service members, veterans, and their families are able to buy a home. To qualify, you must be an active military member, a veteran, or the spouse of one. Children of service members and veterans do not qualify, nor do boyfriends, girlfriends, or fiances of members and veterans.
If you qualify for a VA loan, you can take advantage of benefits like:
$0 down payment,
Low interest rates,
No private mortgage insurance requirement,
Relaxed credit requirements,
And the possibility of buying a property with up to four units (as long as one of them is your primary residence).
USDA Loans
USDA loans are backed by the Department of Agriculture. The goal is to promote rural areas by making it possible for low-to-moderate-income buyers to purchase homes in those areas on favorable terms.
Only homes located in a qualifying rural area can be approved for a USDA loan. But you might be surprised at how many towns, and even suburbs, are included in the USDA’s “rural areas.” There are income caps that change annually, so only buyers who make less than the caps can qualify. USDA loans also only cover single-family homes that you occupy as your primary residence. So you can’t buy a multi-unit property or income property with a USDA loan.
If you and your chosen home qualify for a USDA loan, you benefit from:
A $0 down payment,
Low interest rates,
And no specific loan limit (though the amount a lender will loan you will be limited based on your income and ability to repay the loan).
FHA Loans
FHA loans are backed by the Department of Housing and Urban Development (HUD). FHA loans were originally designed to be the “first-time buyer” loan, making it possible for buyers with comparatively little savings or perfect credit to qualify for a home loan. But today, anyone looking to buy a single-family primary residence can apply for an FHA loan. Just know that the amount you can borrow with an FHA loan is capped at specific amounts, depending on your location.
FHA loans offer:
Relaxed income and credit requirements,
Low closing costs,
Down payments as low as 3.5% (or 10% if you have credit issues), and
Down payment assistance for qualified borrowers.
How to Get Pre-Approved for a Home Loan
Whether you decide to get a government-backed home loan or a conventional loan, getting pre-approved for your loan is the first step in the house-hunting process. When you’re ready to start your home search, contact the experienced agents at Sequoia Real Estate. We can put you in touch with a mortgage broker who can help you decide which loan type would work best for you. Your mortgage broker can also help you find a lender who can work with you to get your pre-approval.
We’re excited to help you on your path to homeownership! Contact us today.