7 Important Things to Know About Government Home Loans

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According to the National Association of Realtors, 87% of recent home buyers financed their home purchase rather than buying the property outright. This makes sense considering that buying a piece of real estate is one of the biggest financial transactions many Americans will make in their lives.

When it comes to finding the right home loan, first-time buyers often look to some of the government-backed home loan options. This is because they can offer low-interest rates, require little to no down payment, and not have credit requirements that are as strict as private lenders.

On the other hand, they can have some drawbacks including potentially requiring mortgage insurance and owner-occupancy rules.

Are you wondering what you should know about government home loans? Let’s take a look at seven important aspects of these government-backed loans.

1. Government Home Loans Can Require Little to No Down Payment

If you have at least a 580 credit score, FHA loans can require as little as 3.5% down when you’re purchasing a home. If you are a veteran, qualifying surviving spouse, or current military personnel, you might consider taking out a VA loan where there is no downpayment requirement at all.

The credit score requirement for VA loans are typically at least 620. However, some lenders will accept scores as low as 580.

USDA loans are zero-down-payment mortgages. This type of loan is for rural or suburban properties that are issued directly by the USDA. The threshold for income vary depending on the region of the country.

2. To Get a Government-Backed Home Loan, You Need to Work With a Lender

It’s important to understand that government home loans aren’t actually directly funded by the government. Instead, you need to work with an approved online lending service or bank in order to get a government-backed home loan.

There are a number of different government housing loans available to Americans. Some of the most common ones include FHA loans, VA loans, USDA loans, and Native American Direct Loans.

If you’re considering taking out a government-backed home loan, it’s worth finding the right lender to work with. Check out this website to learn more about loan options and loan rates.

3. Government-Backed Home Loans Don’t Have Strict Credit Requirements

You can still qualify for an FHA loan even if your credit score is as low as 500. The credit score requirements are slightly higher for VA loans (usually around 600 but it depends on the lender) they are still typically lower than if you were seeking a conventional loan.

4. USDA Loans Can Help You Buy a Property in a Rural or Suburban Area

You’ve maybe heard of USDA loans referred to as rural development loans. These can be used to purchase, update, or build a primary residence that is located in a suburban or rural area. These often don’t require any down payment and can even be used to purchase manufactured homes.

The credit requirements for a USDA loan are higher than some of the other government loan options. In order to qualify, you need a credit score of at least 640.

The property you are interested in purchasing also needs to be in an eligible rural area. More information about whether a home is eligible can be found on the USDA website.

The qualifications for USDA rural development loans are that you have to:

  • Be a US citizen or a permanent resident
  • You have to have dependable income for at least 24 months typically
  • Have a monthly payment that is 29% or less of your monthly income
  • Have an acceptable credit history

If your credit score is above 640, you will be rewarded with streamlined processing. If your credit is lower than this, you will have to meet underwriting standards that are more stringent.

5. Be Aware of the “Owner-Occupancy” Rule

If you are considering using either an FHA or a VA loan to buy an investment property, you’ll want to know about the owner-occupancy rule. This means that you have to maintain a home as your primary residence and live there for at least one full year. You also are required to move in within sixty days of closing on the home loan.

6. The Interest Rates Are Low

The interest rates offered on FHA and VA loans are often lower than for other loan products. This is because lenders have a significant safety net since the loan is backed by the federal government. Having a lower interest rate means that you can end up saving a lot of money on interest over time.

For USDA loans, the interest rates can be as low as 1%. It’s hard to get better than that!

7. You Might Have to Pay Mortgage Insurance

Unless you are able to make a 20% down payment when you take out an FHA loan, you’ll have to pay an annual mortgage insurance upfront. This consists of a payment of 1.75% of the loan amount at closing and an annual premium as well.

For VA loans, mortgage insurance isn’t required. However, you will end up paying a funding fee that is based on the total amount of the loan.

Government Mortgages: Is It the Right Choice For You?

Taking out a government-backed loan can be a reasonable way to get the financing you need, particularly if your credit isn’t perfect or if you don’t have enough money for a typical down payment. These types of loans make it possible for more Americans to become home owners.

Did you find this article about government home loans helpful? If so, be sure to check out the rest of our blog!

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