Government Home Loans: A Complete Guide

Mortgages make it possible for borrowers to become homeowners, but for various reasons, some people have trouble qualifying for a conventional loan. Fortunately, government home loans exist to provide affordable mortgages to all types of home buyers.

Let’s review the various types of government home loans available, highlighting the requirements for each.

What Is A Government Home Loan?

Sometimes known as “government-backed loans,” government home loans are mortgages insured by the federal government. The government doesn’t fund the mortgage but backs the loan and repays the lender in full if the borrower stops making payments or defaults.

A government home loan is also a non-conforming loan, meaning it works outside of standards set by Fannie Mae and Freddie Mac. Every government home loan comes with a unique set of requirements borrowers must meet, but government loans are generally easier to qualify for than conventional home loans and often come with lower interest rates.

Government Mortgage Loans For Purchasing

There are three main types of government loans for buying a home. Take a look at them below and see if there’s a home loan that fits your situation.

FHA Loans

One of the most common types of government home loans is an FHA loan, made possible by the Federal Housing Administration. Known for their lower down payment and credit score requirements, FHA loans tend to be popular with first-time home buyers. For example, to qualify for an FHA loan through Rocket Mortgage®, a borrower can have a credit score as low as 580 and make a down payment as low as 3.5%. One drawback is that new borrowers must pay a mortgage insurance premium (MIP), but this can be removed eventually under certain conditions.

VA Loans

VA loans are government home loans made specifically for active-duty, guard and reserve components,  as well as former service members and surviving spouses of those who’ve died in the line of duty or from a condition resulting from their military service. These mortgages are backed by the U.S. Department of Veterans Affairs (VA) and typically require no down payment on the home. The VA has certain requirements a borrower must meet to qualify, which include obtaining a Certificate of Eligibility (COE), and a VA funding fee owed at closing. However, you aren’t required to purchase mortgage insurance, even without a down payment. VA loans have similar credit requirements as FHA loans.

USDA Loans

USDA loans are government-backed loans that can help when buying a home in a relatively rural or remote area. These loans often require no down payment, but the credit requirements are higher than with an FHA or VA loan, with a minimum accepted credit score of 640. Additionally, the home you want to buy must be USDA-eligible and meet other requirements set by the U.S. Department of Agriculture (USDA).

Government Home Loans For Refinancing

Most government home loans offer refinancing options, but FHA and VA loans can offer a faster and simplified refinancing process, plus opportunities to take cash out.

FHA And VA Streamline Refinancing

The FHA Streamline Refinance often bypasses the need for an appraisal, requires less paperwork and may not require credit score or income verification. The VA Streamline Refinance, or VA Interest Rate Reduction Refinance Loan (IRRRL), operates similarly, but you must already have a VA loan and be able to justify to your lender the potential benefits of refinancing.

FHA And VA Cash-Out Refinancing

A cash-out refinance allows a homeowner to refinance their mortgage and take cash out of their home’s equity at the same time. FHA and VA loans come with their own cash-out refinancing option that borrowers can take advantage of.

An FHA cash-out refinance isn’t too different from a traditional cash-out, other than the loan being backed by the FHA. Homeowners can take out cash worth up to 80% of their home’s value. One downside is that borrowers who choose this kind of cash-out refinance must pay mortgage insurance for at least 11 years.

A VA cash-out refinance has the benefit of allowing homeowners to take out up to 100% of their home’s value in cash, with no mortgage insurance required.

Government Home Improvement Loans

Some government-backed mortgages are designed to fund certain home improvements or renovations. These home improvement loans roll the costs of renovations into the mortgage, and you can use the extra cash to cover your desired improvements.

The FHA 203(k) loan works like a regular FHA loan (including MIP requirements) and can help lower- and moderate-income borrowers buy a house as-is, plus pay for the necessary repairs. For VA loan qualifiers, VA renovation loans are available as well.

Government Home Loans For Senior Citizens

The U.S. Department of Housing and Urban Development (HUD) backs a type of reverse mortgage called the home equity conversion mortgage (HECM) specifically for senior citizens. Through this loan program, homeowners age 62 or older can turn their home equity into cash and pay off their mortgage. Applicants must first complete a reverse mortgage counseling session and financial assessment.

How To Get A Government Home Loan

Government home loans are issued through approved lenders but insured by the federal government, so acquiring one works similar to getting a mortgage the traditional way. The steps are more or less the same:

1. Review your credit score and other qualifications.

2. Shop around and get preapproved with multiple lenders.

3. Submit a full application and wait to hear back.

4. Receive your loan and begin making payments on it.

Each government home loan comes with certain rules and stipulations, so make sure you fully understand the type of loan you’re agreeing to.

The Bottom Line

Government home loans can be a helpful financing option for lower- and moderate-income buyers or homeowners looking to purchase or refinance. FHA loans can work for a fairly broad spectrum of home buyers, while VA loans target a more specific group. There are various government home loans for different people, so find the one that best suits your situation.

Curious about other home-buying grants and resources? Check out some first-time home buyer programs.