Source: Forbes —
Government-backed mortgages can be easier to qualify for compared to conventional loans. This can make them a good choice if you have a lower income, don’t have perfect credit or can’t afford a large down payment. Some borrowers might also qualify for a lower interest rate on a government-backed loan than what they’d get with a conventional mortgage.
There are several government programs to consider if you’re looking for a mortgage, so it’s important to understand how each one works as you compare your options. Here’s what you should know about government-backed mortgages and loans.
What Are Government Loans?
Government home loans are mortgages issued by private mortgage lenders and insured by the federal government. There are several government agencies that offer mortgage programs, including the Federal Housing Administration (FHA), U.S. Department of Agriculture (USDA) and Department of Veterans Affairs (VA).
Because the federal government guarantees these loans, there’s less risk to the lender if a borrower defaults. This is why government-backed loans come with more lenient requirements compared to conventional mortgages. For example, you might qualify with a:
- Smaller down payment: Depending on the type of loan you apply for, down payment requirements can be as low as 0% to 10% of your loan amount. This is much less than the traditional 20% needed for a conventional loan to avoid private mortgage insurance (PMI).
- Lower credit score: You’ll typically need a credit score of at least 620 to get approved for a conventional mortgage. Government-backed loans, on the other hand, usually have lower credit score requirements. For example, you could qualify for an FHA loan with a credit score as low as 500—though having a score as low as this could require a higher down payment. USDA and VA loans have no specific minimum, though lenders often set their own minimums.
- Higher debt-to-income (DTI) ratio: Your DTI ratio is the amount you owe in monthly debt payments compared to your income. Many mortgage lenders require your DTI ratio to be no higher than 43%, but others allow for more wiggle room. For example, government-backed loans generally allow for a maximum DTI of 41% for VA loans and 43% for FHA and USDA loans. But you might still qualify for an FHA loan with a DTI ratio as high as 57%—though this is decided on a case-by-case basis.
Keep in mind, too, that government-backed loans are considered non-conforming loans—meaning they operate outside of the standards set by Fannie Mae and Freddie Mac for conventional mortgages. Additionally, while Fannie Mae and Freddie Mac are both government-sponsored enterprises, they aren’t a source of government-backed loans. Instead, these entities are owned by private shareholders and buy mortgages from lenders so those lenders have more funds to continue issuing mortgages—which ultimately supports the nation’s home mortgage system.
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