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Government-Backed Loans Help Homebuyers

April 27, 2015
Banking
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If you’re having trouble finding a home loan, there’s one resource you might not have considered: government agencies. Although not lenders themselves, a few agencies guarantee home loans for people who may not have the best credit scores or can’t afford high down payments. You may be eligible depending on income, military service or where you live, but these loans are not for everybody. Here’s an overview of three big government-backed home loan programs.

Federal Housing Administration loans

An FHA loan, as it’s called, can help homebuyers who don’t have enough money for a big down payment or other costs. Your income doesn’t have to be low to qualify, but you do need to meet certain requirements, including the ability to make monthly payments.

There is a catch, though: Most FHA loans require you to pay for mortgage insurance, which protects the lender in case you default. Typically you pay an upfront premium of 1.75% of the loan amount and an annual premium broken down into monthly installments. The annual premium varies, but for loans longer than 15 years, you can pay between 0.80% to 0.85% of your starting loan amount. Loans bigger than $625,500 can require premiums as high as 1.05%.

Despite the extra cost, prospective homeowners may find an FHA loan appealing if they can’t get a conventional loan. You can be approved for an FHA loan with a credit score of at least 500, and if yours is 580 or higher, your down payment may be as low as 3.5%. You can also roll some closing costs into the mortgage to lower your upfront expenses further.

Veterans Affairs loans

VA loans, insured by the Department of Veterans Affairs, provide military-affiliated families, including active service members, veterans and some widowed spouses, with favorable loan terms. They don’t require you to pay mortgage insurance, and in most cases, you can avoid a down payment as well. The VA also limits the closing costs that lenders can charge and lets you roll some of them into the mortgage itself. But these loans, except in certain cases, have a one-time fee at closing, which helps fund the program.

Because the VA backs the loan, lenders can justify approving mortgages to eligible homebuyers at competitive rates and lower costs than those buyers would otherwise get due to limited or below-average credit histories.

U.S. Department of Agriculture loans

These loans aim to help low- and middle-income families purchase homes in eligible rural communities, which the USDA defines on its website. Income eligibility also varies by location. Similar to VA loans, these mortgages generally don’t require down payments. Plus, borrowers can use the money to cover repairs, property taxes and other costs beyond the purchase price. These loans require an upfront mortgage insurance premium of 2% of the price, but the monthly premium is lower than that of FHA loans.

As you consider ways to finance your future home, a government-backed loan might be a good deal if you qualify for one. With their more buyer-friendly requirements and lower down payments, these loans might be easier to get than a conventional mortgage, so be sure to ask your lender if an FHA, VA or USDA loan can work for you.