3 Types of Government Loans Explained

There are three Types of Government Loans for mortgage programs in the United States: FHA, VA, and USDA. Depending on which county you live in, the maximum loan amount for these types of loans is determined. 

In most cases, a government agency such as the Federal Housing Authority will not issue the loan. Instead, they guarantee private lending institutions either the full amount or a percentage of the loan given. 

This is what makes it easier for borrowers. It is easier for private lending institutions to lend money to someone just because the funds are guaranteed and supported by the government.

The government relies on underwriters at a particular government agency to establish the rules and regulations as well as the requirements that applicants must meet when applying for this type of mortgage loan. 

There are usually national and local policies that determine whether an applicant meets the criteria and / or eligibility criteria for a particular type of loan. 

For example, someone who has never served in the military is not eligible for a VA loan. There are no people who were fired without honors.

Types of Government Loans Mortgage 

Free Government Loans

There are three types of government mortgage loan programs in the United States. They include:

  • FHA– The Federal Housing Authority    
  • USDA– United States Department of Agriculture
  • VA– The Department of Veteran Affairs

As mentioned before, there are three types of government loan programs available; FHA, VA and USDA. All other types of loans are considered conventional loans. 

Depending on many simple factors such as your home’s location, may or may not determine your eligibility for a government mortgage loan program. If you’d like to learn more about each individual type of government mortgage loan program, please click on its title below:

FHA Loans– The Federal Housing Authority, or FHA is part of HUD and plays a major role in supporting homeowners in lower- and moderate-income families. The FHA also assists first-time home buyers and others who may not be able to meet down payment requirements for conventional loans.

USDA Loans– The USDA offers home loans to borrowers in rural areas for purchasing homes. Plus, they guarantee home loans for those who are not eligible for a direct mortgage loan.

VA Loans– VA loans are backed and guaranteed by the United States Department of Veteran Affairs. Qualifying for a VA loan depends on current military status, as well as the county you live in to determine the loan amount.

FHA Loans

Since 1934, The Federal Housing Authority, or FHA has been running several programs to promote home ownership throughout the United States. HUD, or the Department of Housing and Urban Development is the federal agency that deals with America’s housing needs. 

HUD is responsible for the national policy and programs that address these needs. The Federal Housing Authority, or FHA is part of HUD and plays a major role in supporting homeowners, especially in lower- and moderate-income families. 

The FHA also assists senior citizens, first-time home buyers and others who may not be able to meet down payment requirements for conventional loans. They do this by providing mortgage insurance to private lenders.

The FHA promises to pay lenders if a borrower defaults on the loan. The FHA pays for this obligation by charging the borrowers a fee. Home buyers who use FHA loans pay an upfront mortgage insurance premium (MIP) of 1.5%, then continue to pay a small fee in each monthly payment. 

Now, the FHA does not make loans itself or guarantee them. The insurance they provide to lenders is just that. They insure loans and remove or minimize the default risk lenders face then buyers put down less than 20%.

FHA Loan Requirements

FHA loans are available to urban and rural areas for single family homes, condominiums, 2-unit, 3-unit, and 4-unit properties. The FHA loan program has specific requirements set aside to ensure they assist only those in need. The FHA loan requirements include:

  •     A satisfactory credit records
  •     The amount of cash needed to close the loan
  •     Steady, monthly income

Benefits of FHA Loans

FHA loans are very popular among first-time home buyers and low- to moderate-income families, however there are many different benefits all borrowers can have after getting an FHA loan. Benefits include: –

  •     Borrowers may make extra payments toward the principal while making the regular monthly payments
  •     Borrower may repay the loan faster, which saves on interest
  •     Borrower can pay off the FHA loan at any time and is not penalized by doing so
  •     FHA loan may be assumable
  •     Possible leniency during financial hardships
  •     Available funding for home improvements (through FHA 203k programs)
  •     Borrowers who filed bankruptcy may apply for an FHA loan 2-3 years after date of bankruptcy discharge, as long as credit score is still good
  •     Borrowers who have less than perfect credit can truly benefit from this loan
  •     Low closing costs
  •     Low down payment

There are limits on the amount of money one person can receive, however, that too depends on eligibility requirements. Your credit history and credit score play a major role in the amount you may borrow.

FHA Loan Limits

Like with all other types of loans granted, the FHA puts limits on the amount they are willing to distribute to each family. The 2010 basic standard mortgage single-family home limits for FHA insured loans are as follows: –

  •     1-Family – $271,050
  •     2-Family – $347,000
  •     3-Family – $419,425
  •     4-Family – $521,250

How do I Get an FHA Loan?

The important thing to remember is that just about anyone can get an FHA loan. There aren’t any income limits like you see with many different first-time home buyer programs. Instead there are limits on how much you borrow.  

Getting the loan is simple. All you have to do is contact and apply for an FHA loan through a HUD-approved lender. Similar to finding a doctor who takes your insurance company. To find a HUD-approved lender near you, click here: http://www.hud.gov/

USDA Loans

Through a borrower’s local USDA Rural Development Office, the United States Department of Agriculture provides a home loan program that is designed to benefit people living in rural areas and smaller communities. 

This home loan program offers a government-backed loan that doesn’t require a down payment. The key is that borrowers must buy a home within a qualified rural area. 

More specifically, a rural area is considered an open country place, or in a city with 10,000 residents or fewer. In some situations, a borrower may qualify if the city is between 10,000 and 25,000 residents.

Those seeking a USDA loan may purchase a new or existing home, however homes that are built within the last year must have a certified inspection, certificate of occupancy and a 12-month home warranty from the builder. Homes built later than the last year must be structurally sound, functional and owner-occupied. 

As long as the market value of the home does not exceed the local loan limit and it’s considered a modest sized home for the area, the loan is usually granted as long as the other requirements are met.

USDA Loan Requirement Guidelines

If you are interested in applying for a USDA loan, you must meet specific requirements, such as:

  •     Must have adequate and dependable income
  •     Be a U.S. citizen, qualified alien or legally admitted to the US for permanent residence
  •     Satisfactory credit history
  •     Must have an adjusted annual household income that doesn’t exceed the moderate-income limit established in you are
  •     Must have repayment ability based on the following ratios:

    – PITI divided by gross monthly income, must be equal to or less than 29%

    – Total debt divided by gross monthly income must be equal to or less than 41%

There are several strict requirements set by the USDA home loan program that deal with eligibility standards and include the residence, the borrower’s credit history and the borrower’s income. 

If qualified, a borrower does not need a down payment, nor do they need to worry about paying for closing costs or mortgage insurance. 

Plus, there is not a maximum limit like there is with other home loan programs such as FHA and VA. Borrowers may use the loan towards things like the purchase of a home, home improvement costs and other things that relate to the home. 

Even borrowers who have poor credit may still be eligible for this loan. Your local USDA Rural Development Office can help determine whether or not a specific home meets the eligibility requirements. If it does, the Office can then provide the borrower with a list of approved lenders.

USDA Income and Loan Limitations

The USDA places limitations on the amount you can borrow based on certain factors such as the area of the country in which you live, where you want to purchase, your credit history and your monthly income. 

In some cases, an individual or family may borrow up to 100% of the appraised value of their home, which eliminates the need for a down payment. 

Since the number one thing stopping most people from buying a home is the inability to come up with a down payment, the availability of the loan guarantees from the Housing and Community Facilities Programs (HCFP) makes the reality of owning a home available to many more Americans.

VA Loans

VA loans are backed and guaranteed by the United States Department of Veteran Affairs. Veterans, as well as those still serving, widows, widowers, and members of the Guard and Reserve may obtain home loans with beneficial loan terms, such as not needing a down payment. 

VA loans are much easier to qualify for than conventional loans, and depending on your county, a maximum limit could be up to $729,000. 

However, the Dept. of Veteran Affairs doesn’t guarantee a borrower’s loan amount, instead they guarantee 25% of it. Interest rates right now are locked in at 6%. It’s important to know that like FHA loans, the Department of Veteran Affairs do not make the loans, instead they guarantee a percentage of the loans made by private lenders.

Veterans who have a conventional loan can take advantage of the VA when refinancing. Eligible veterans can refinance their homes up to 90% of the appraised value. This money can be used for home improvements, paying off other debts, or buying new properties.

VA Loan Eligibility Requirements

Before a borrower goes to a private lender for a VA loan, the borrower must first obtain a certification from the Department of Veteran Affairs stating he or she is qualified and eligible to receive such a loan. 

This certification is proof to the private lender that the borrower has reached all requirements, and once the borrower has it in hand, he or she may then apply with a private lender.

Applicants must start with the VA Form 26-1880. This is the Department of Veteran Affairs Certificate of Eligibility. Everyone must fill out this form, even surviving spouses of veterans.

Filling out the form may seem like an easy task; however, it’s not completely standardized. Some applicants can apply online, at the bank or by mail. 

Some applicants can only apply by mail. The following list is of those who may apply either online, at the bank or by mail:

  •     Veterans
  •     Active Duty Service Members
  •     Reservists
  •     National Guard

Many times, the applicant can apply through the lender at the bank. However, as mentioned before, some applicants can only apply via mail. These people include:

  •     Surviving spouses of those who died while on duty
  •     Surviving spouses of those who died as a result of military service

If you are still on active duty, in order to get approved for a VA loan, you must obtain and provide a signed statement from the unit commander or designated representative listing your name, rank, social security number, nature of current active duty service commitment or the length of the current assignment. 

Retirees and honorably discharged former military men and women must show proof of service, which can be as easy as submitting a copy of your DD Form 214. 

Those who left the military under negative circumstances or under circumstances that were not fully honorable, may have a very hard time gaining a VA loan due to qualification requirements. Even if you have poor credit, as long as you qualify, you may receive a VA loan.

Another key factor that borrowers and their spouses must do is qualify according to set debt ratios (VA guidelines) which are used to determine whether the borrower and/or spouse can be held accountable and reasonably expected to meet the expenses involved with home ownership. 

The way the VA goes about figuring this out is by this; adding up the total mortgage payment and all recurring monthly revolving and installment debt. These items will include your principle, interest, insurance, tax funds, homeowner dues, personal loans, car loans, credit cards, etc. 

Once you’ve added up all of the monthly expenditures, you take that amount and divide it by the gross monthly income. The max ratio to qualify is 41%. If the number exceeds 41%, the VA has a residual income guideline which can allow approval.

Government Vs Conventional Mortgage Loans

Even though the structures of these two types of mortgage loans are similar, there are subtle differences between them, such as:

With government loans, funds for the down payment are either less than normal or they are not required.

Private lenders have an easier time lending money to borrower’s through government programs because of the guarantee backed by the government.

Borrowers have an easier time qualifying for the government loan program.

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