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The U.S. government isn’t a mortgage lender, but it does play a role in helping more Americans become homeowners. Three government agencies back loans: the Federal Housing Administration (FHA loans), the U.S. Department of Agriculture (USDA loans) and the U.S. Department of Veterans Affairs (VA loans).
FHA loans: Backed by the FHA, these loans help make homeownership possible for borrowers who don’t have a large down payment saved up and don’t have pristine credit. Borrowers need a minimum FICO score of 580 to get FHA’s maximum 3.5 percent financing. However, a credit score of 500 is accepted with at least 10 percent down. FHA loans require two mortgage insurance premiums: one is paid upfront, and the other is paid annually for the life of the loan if you put less than 10 percent down. This can increase the overall cost of your mortgage.
VA loans: VA loans provide flexible, low-interest mortgages for members of the U.S. military (active duty and veterans) and their families. VA loans do not require a down payment or PMI, and closing costs are generally capped and may be paid by the seller. A funding fee is charged on VA loans as a percentage of the loan amount to help offset the program’s cost to taxpayers. This fee, as well as other closing costs, can be rolled into most VA loans or paid upfront at closing.
USDA loans: USDA loans help moderate- to low-income borrowers buy homes in rural areas. You must purchase a home in a USDA-eligible area and meet certain income limits to qualify. Some USDA loans do not require a down payment for eligible borrowers with low incomes.
Pros of government-insured loans
- They help you finance a home when you don’t qualify for a conventional loan.
- Credit requirements are more relaxed.
- You don’t need a large down payment.
- They’re open to repeat and first-time buyers.
Cons of government-insured loans
- Expect to pay mandatory mortgage insurance premiums that cannot be canceled on some loans.
- You’ll have higher overall borrowing costs.
- Expect to provide more documentation, depending on the loan type, to prove eligibility.
Who should get one?
Government-insured loans are ideal if you have low cash savings, less-than-stellar credit and can’t qualify for a conventional loan. VA loans tend to offer the best terms and most flexibility compared to other loan types for military borrowers.