All About Government-Backed Mortgages and Loans
When you’re looking for a mortgage, one of the most crucial deciding factors should be whether or not the loan is government-backed or government-insured. Although conventional mortgages are more popular than any kind of government-backed mortgage, this can be the right choice for many borrowers. Here’s what you need to know about these terms and how they might affect your buying process.
Types of Government-Backed Loans
The three primary programs for government-backed loans are the Federal Housing Administration (FHA), the United States Department of Agriculture (USDA), and the Department of Veteran Affairs (VA). Each type of loan is backed by a different government agency (the FHA, USDA, and VA respectively), protecting the lender from loss. Of the three types of government-backed loans, FHA loans are the most common.
If a borrower is unable to repay the lender, the agency that has insured the loan will cover the cost. It’s important to note that government-insured mortgages will function slightly differently with different requirements depending on what agency is insuring them.
How Government-Backed Loans Differ from Conventional Loans
Government-backed loans definitely have their benefits! Overall, they offer more flexibility to borrowers compared to conventional loans. Since the loans are insured and the lender is protected from loss, they are less risky for the lender. Because of this, it isn’t as difficult for borrowers to qualify for them. In addition, the interest rates are usually lower. You will usually only be required to provide a small down payment, and sometimes you may even be able to obtain 100% financing on a government-insured mortgage.
All of this is different than a conventional loan that isn’t insured by any government agency. This is why the requirements of conventional loans—such as credit history and debt to income ratio—are so much stricter.
All of this does not mean that government-backed loans are without requirements. For example, VA loans are only available to veterans, active service members, and widowed spouses of service members who were killed in the line of duty. USDA loans are only available for low- to moderate-income individuals in rural or suburban areas. These loans are given out to stimulate economic growth.
As for the disadvantages of these loans, you should know that they come with additional fees including mortgage insurance that you may not need to pay for with a conventional loan. However, if you’re able to make a sizable down payment, you may be able to avoid paying mortgage insurance. There are also more limitations on how much you can borrow using one of these loans. The county where you live will help determine your borrowing limits for an FHA or USDA loan.
Discover What Government-Backed Mortgage is Right for You
Are you still looking for more information about government-backed loans? The Carolina Mortgage Team at Revolution Mortgage can help. We can look at your unique situations and find out what mortgages you qualify for and what will be best for you. To learn more, contact us today!