When you buy a new home, you need to obtain financing, and there are a few ways you can do this. While a conventional home loan through a bank is the most traditional option, many borrowers seek out government-backed loan products instead.
What is a government-backed loan?
A government-backed loan is a method of financing a home that is subsidized by a department within the United States government. This is also sometimes called a government-insured loan.
Does the government loan me money?
Getting a government-backed loan does not mean that the funds come directly from the government, but rather that the government subsidizes the loan. In other words, they act as a guarantor and offer to reimburse the bank for a portion of the loan should you default for any reason.
What types of government-backed loans are there?
There are three types of government-insured loans, including:
- FHA Loan. An FHA loan is available through the Federal Housing Authority. This is the most popular and most frequently used government-backed loan product. It is available to anyone purchasing an owner-occupied home under a specific price point.
- VA Loan. A VA loan is available through the Department of Veterans Affairs. It is available to both currently serving and retired military members who have been honorably discharged. It is part of the benefits package offered to members of the military. You cannot access this loan product if you have been dishonorably discharged, however.
- USDA Loan. A USDA loan is offered through the United States Department of Agriculture. It is also sometimes called an RD loan or a Rural Development loan. This loan product is designed to help with homeownership in rural areas with a population of fewer than 10,000 people.
Each of these government-backed home loans is designed to help Americans with their dream of homeownership.
Are government-backed loans easier to get?
Government-backed home mortgage products do not have the strict credit guidelines that conventional loans have. FHA, VA, and RD loans all have lower down payment requirements and will accept a much lower credit score. In fact, FHA loans typically only require three percent down while RD loans have a zero down program.
Can I buy any house with a government-backed loan product?
Because government-backed loans are designed to help the consumer, they do have specific requirements regarding the condition of the home. Generally speaking, you need to buy a home that is in good repair. The FHA even requires that condominium complexes be on an approved list.
Using a government-backed home mortgage product can help you purchase the home of your dreams by being more lenient than traditional bank loans.