Government loans usually have better interest rates and more flexible loan terms than conventional loans. In many cases, low-interest government loans are the only way for lower-income or poor-credit buyers to secure financing. Some government-backed loans may even offer free cash towards closing costs and other expenses.
A conventional loan can be difficult to get if you have poor credit, little-to-no down payment, or have nontraditional income. Government-backed loans can save borrowers hundreds to thousands in upfront costs and interest fees.
As of March 2023, the national average for a 30-year conventional loan is 6.89%, whereas the average for FHA loans is 5.97%. On a $240,000 loan, that’s over a $52,000 difference over the course of a 30-year loan.
You do not have to be a first-time homeowner to take advantage of government-backed loans. Refinancing with an FHA loan could save you more than with a conventional refinancing loan. For instance, current conventional loan refinancing rates are 7.02%, while FHA refinancing loans are 6.86%.
All government loans require you to prove you have a source of income and can pay the mortgage monthly. In most cases, the home’s purchase price must be listed at fair market value. If the home is listed above or below average for its size and location, the lender may not approve the application.
The federal government insures loans, but it does not provide funding directly. To get one, you’ll need to go to a lender, like a bank or credit union, that is approved to provide government-backed loans.
The following are the most common government loans:
- Federal Housing Administration (FHA) loans for home purchases, property improvement, and equity conversion
- U.S. Department of Agriculture (USDA) home loans for rural home purchases and property improvement
- U.S. Department of Veterans Affairs (VA) loans for veterans, service members, and family members to buy, build, or renovate a home and refinance existing mortgages
Continue reading the section below to learn more about each of these loans.
You might still qualify for FHA loans with a credit score between 500 and 579, but you may need to make a down payment of at least 10%. Credit scores of 580 or higher typically allow you to pay as little as 3.5% down.
The FHA sets loan limits, which vary depending on the area. It will not insure any loans for homes listed above the area’s maximum. As of 2023, the following maximum loan amounts apply for a one-family property:
- $472,030 for the 48 continental states
- $1,633,950 for Alaska, Hawaii, the Virgin Islands, and Guam
- $1,089,300 for all other high-cost areas
Homes financed by FHA-insured loans must also meet certain physical requirements. For example, it must be safe, secure, and sound.
Many areas have down payment assistance programs for buyers that cover closing costs. FHA borrowers could receive hundreds or thousands toward their home purchase.
USDA Home Loans
For USDA loans, the home must meet rural location requirements. You can check the USDA website for property eligibility.
In most cases, USDA home loans do not require a down payment. However, these loans require borrowers to have an income that falls below certain limits. As of 2022, borrowers must have a household income of no more than 115% of the median income for the given area.
Additionally, most USDA loan borrowers must have a debt-to-income (DTI) ratio of 41% or less. However, this limit may extend to 44% for applicants with credit scores of 680 or higher. DTI refers to the amount of money you spend each month in comparison to the amount of money you earn.
A VA-backed home loan has better terms than both FHA and USDA mortgages. However, they are exclusively for military members and their families. Military families can also take advantage of VA mortgage payment assistance, which includes financial counseling and foreclosure avoidance. VA loans do not require a down payment. Unlike FHA loans, VA-backed loans do not have monthly private mortgage insurance fees.