There’s no denying that it’s harder than ever to become a homeowner in the United States. This is mostly due to the limited housing supply and prices that have rapidly increased faster than wages. Still, the white picket fence is the definition of the American dream for many young Americans. Luckily, there are several government-backed home loans specifically designed to help certain qualifying individuals achieve home ownership.
Types of Government-Backed Home Loans
Here are the three types of government-backed home loans:
Federal Housing Administration (FHA) Loans
The Federal Housing Administration offers FHA loans to make homebuying more accessible. These loans are particularly meant to help first-time homebuyers, with low credit scores, and small down payments.
Specifically, FHA loans are for low-to-moderate-income households that fall into the following categories:
- First-time homebuyers
- Seniors who partially or fully own their house
- Individuals buying a mobile or manufactured home.
Some of the advantages of FHA loans are:
Compared to the traditional mortgage lender route, FHA loans have easier qualifications. FHA loans only have a minimum 3.5% down payment requirement and a minimum credit score of 580. You can also get approved with a 500 credit score, but you’ll need a 10% down payment.
FHA Loan Eligibility
You must meet the following criteria to qualify for a FHA loan:
- You must have a credit score.
- Your property needs to be within FHA loan limits.
- You’ll need to apply with a FHA-approved lender.
FHA loans are issued through private lenders, such as banks and credit unions. However, the loan is insured by the Federal Housing Administration. This insurance helps offset the risk for the private lender, allowing them to offer more favorable terms to borrowers.
How to Apply for a FHA Loan
You can find a FHA-approved lender here. Once you find the right lender, you’ll follow the same process as applying for a traditional mortgage. You’ll gather the necessary documentation, apply, and review your options.
Veteran Affairs (VA) Loan
The Department of Veterans Affairs offers VA loans to qualifying veterans, service members, and spouses. These loans help those who have served the country and their families purchase or refinance a home with favorable terms.
Similar to FHA loans, VA loans are issued by private lenders. The Department of Veteran Affairs guarantees a portion of the loan, which helps the private lenders offer better terms for borrowers.
Some of the advantages of VA loans are:
- You can get a loan with no downpayment. Note that some private lenders offering VA loans may have downpayment requirements, but the Department of Veterans Affairs does not.
- Competitively low interest rates
- Limited closing costs
- No Private Mortgage Insurance (PMI)
- You can have a VA loan multiple times throughout your life
You must meet one or more of the following to qualify for a VA loan:
- Serve 90 consecutive days of active service during wartime.
- Serve 181 days of active service during peacetime.
- Have six years of service in the National Guard or Reserves,
- Serve 90 days total (with at least 30 of them consecutively) under Title 32 orders.
- You’re the spouse of a service member who died while serving or died from a service-related injury.
VA Loan Eligibility
Once you’ve confirmed that your service record qualifies you for a VA loan, there are a few more requirements you’ll need to pass:
- You can’t have any existing defaults on any federal debt
- A minimum of two years of employment history
- A debt-to-income ratio below 42%
- Minimum residual income requirements (varies depending on your loan size)
- VA home appraisal
- Ability to pay the VA funding fee, which can range between 0.5% to 3.6% of the loan amount
- You must be using the loan for a primary residence purchase
How to Apply for a VA Loan
You can find a VA loan-approved lender here. After finding a lender, you’ll collect your supporting documents, apply, and review your options.
USDA Loans
The U.S. Department of Agriculture (USDA) offers home loans to help low-to-moderate-income families in rural areas afford to buy a home. These loans are specifically for people who can’t qualify for a mortgage through a conventional lender.
There are two types of USDA loans:
- Loans that are given out through a private lender and guaranteed by the government
- Loans that are 100% given out by the government agency itself
Many people dismiss USDA loans because they think “rural area” doesn’t apply to them. However, the official definition of rural, for the purpose of the loan, is quite broad. An area can qualify as rural if it has less than 35,000 residents.
Some of the advantages of USDA loans are:
- You can get a loan with no downpayment.
- Competitively low interest rates
- No prepayment penalty
- Limited closing costs
- Low credit requirements; even individuals with a score below 620 can be approved
- Low Private Mortgage Insurance (PMI) rate
USDA loan eligibility
You must meet the following criteria to qualify for a USDA-guaranteed loan. These are the loans backed by the USDA but given out by a private lender:
- Be a U.S. citizen or permanent resident.
- Have consistent, dependable income.
- Have a credit score of at least 640 (although approval with a lower credit score is possible)
The USDA also gives out home loans, the funds of which come entirely from government agencies. You must meet the following criteria to qualify for a single-family housing direct USDA loan:
- Be a U.S. citizen, permanent resident, or eligible noncitizen.
- Meet income limits, which are determined by area. Limits can be found here.
- Currently without “decent, safe, and sanitary” housing.
- Demonstrate that a loan approval through a traditional lender isn’t possible
How to Apply for a USDA-Guaranteed Loan
First, find a USDA loan-approved lender here. Next, apply, submit supporting documents, and wait to receive an answer.
How to Apply for a USDA Single Family Housing Direct Loan
You can apply for direct USDA loans at your local RD office year-round.
If you meet the qualifications for any of the above loans, you may have the boost you need to get your first home loan. Knowing about these programs—and taking advantage of them—can be the difference between renting and being a homeowner.
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