Buying your first home is an exciting milestone, but it can also be a bit overwhelming, especially when it comes to understanding the different types of loans available. For some, a government-backed home loan may be the key to overcoming certain barriers to homeownership.
Government-backed home loans are mortgages insured by a federal agency, and they are designed to help some borrowers achieve the dream of purchasing their own home. These loans each come with unique benefits and eligibility requirements, making them accessible to a wider range of buyers.
The three main types of government-backed home loans are Federal Housing Administration (FHA) loans, Veterans Affairs (VA) loans, and U.S. Department of Agriculture (USDA) loans. Below, we will cover the types of government-backed home loans, including the requirements to qualify and the benefits each of these loans can provide to buyers.
FHA
An FHA loan is a mortgage insured by the Federal Housing Administration, a part of the U.S. Department of Housing and Urban Development (HUD). Securing a mortgage with a FHA loan is a great option for first-time homebuyers, particularly for those who may not have a large down payment saved or who have less-than-perfect credit. These lending solutions make homeownership more accessible by lowering the barriers to getting a loan.
Benefits of FHA Loans
Lower Down Payment
One of the biggest advantages of FHA loans is that you can purchase a home with a down payment as low as 3.5% of the home’s purchase price. FHA loans also allow flexibility on where your down payment can come from. You can use gift funds from a family member, grants, and even down payment assistance programs to help cover your down payment.
Easier to Qualify
The FHA insures these loans with the lender, removing the risk to them and increasing the odds of approval for the buyer.
Lower Credit Requirements
FHA loans typically require a lower credit score than other loan options. This can be helpful for first-time buyers who are still building their credit history.
While FHA loans offer many benefits, there are also some things to keep in mind.
Mortgage insurance: The FHA requires you to pay mortgage insurance premiums. In most cases, you will have to pay those premiums for the life of the loan. If your down payment is more than 10% of the purchase price, you can drop the insurance after 11 years.
This insurance is the vehicle that protects the lender in case the buyer defaults on the loan. You’ll pay part of this insurance upfront and another part as a monthly fee added to your monthly mortgage payments.
Property Standards: The home you want to buy must meet certain standards set by the FHA. This is to ensure the property is safe and livable and will remain so for the foreseeable future.
Loan Limits: There are limits to how much you can borrow with an FHA loan, these limits vary by location and are based on the cost of living in that area.
VA
A VA loan is a mortgage loan guaranteed by the U.S. Department of Veterans Affairs. These loans are designed to help veterans, active-duty service members, and eligible surviving spouses to secure financing in their journey to homeownership. Much like FHA loans, the VA insures part of the loan and lenders are more willing to offer eligible buyers more favorable financing terms. You will need a Certificate of Eligibility (COE) to prove your eligibility to lenders. This can be obtained online, through your lender, or by mail.
VA loans offer numerous benefits that can make buying a home more affordable and accessible for veterans and their families. If you meet the eligibility requirements, a VA loan could be an excellent option, providing significant financial advantages.
Benefits of VA Loans
No Down Payment
One of the most significant advantages of a VA loan is that you can buy a home without providing a down payment. This is a huge benefit, as saving for a down payment can be a major hurdle for many homebuyers.
No Private Mortgage Insurance (PMI)
Unlike many other loans, VA loans do not require private mortgage insurance (PMI). PMI is usually required if you make a down payment of less than 20% with other financing options. By not having to pay PMI, your monthly mortgage payment will be considerably lower.
Flexible Credit Requirements
VA loans typically have more flexible credit requirements, increasing the buyer’s ability to be approved for their home loan. This can be particularly helpful if your credit score isn’t perfect.
Limited Closing Costs
The VA limits the amount of closing costs that can be charged, helping to reduce the amount of money you need to bring to the table when you close on your new home.
USDA
If you’re looking to buy a home in a rural area, a USDA loan might be a great option for you. A USDA loan is a mortgage offered through the United States Department of Agriculture aimed at helping low- to moderate-income families buy homes in eligible rural areas. The goal of USDA loans is to promote homeownership and improve the economy and quality of life in rural communities. They offer significant benefits to help make homeownership more accessible.
Benefits of USDA Loans
No Down Payment
Much like a VA loan, one of the biggest advantages of a USDA loan is that it allows you to buy a home with no down payment. This can be a significant benefit if you don’t have money saved for a down payment.
Lower Mortgage Insurance Costs
While USDA loans do require mortgage insurance throughout the life of the loan, the cost can be lower than the private mortgage insurance (PMI) required for a standard loans, helping to save you money over the life of the loan.
Flexible Credit Requirements
USDA loans are designed to help more people qualify for homeownership, so they typically have more flexible credit requirements. Even if your credit score isn’t perfect, you might still be eligible for a USDA loan.
When deciding which government-backed loan is right for you, consider the following:
Your Eligibility: Are you a veteran, do you qualify based on income, or do you need more flexible credit terms?
Down Payment: Do you have savings for a down payment, or do you need a no-down-payment option?
Location: Are you buying in a rural area or within a city?
Monthly Payments: Consider the long-term costs, including mortgage insurance and interest rates.
Government-back home loans can offer greater access to financing for homebuyers. The benefits of these lending options often include reduced down-payment requirements, more flexible credit requirements, and in some cases, lower mortgage insurance costs.
The Community First Bank Home Loans team is ready to help you find out if one of these government-backed home loans is right for you. To find out more, including the lending options available to you, get in touch with our team of experts today.
Dora Castaneda, NMLS # 420534, Mortgage Consultant
Monique Rojo, NMLS # 1267820, Mortgage Consultant
