There are many different types of mortgages to choose from when it comes to homeownership. Today, many homeowners will opt for a government-backed mortgage because of the many benefits they provide. In addition, these loans are secured by a federal agency, making them easier to be approved. First, however, homebuyers should learn more about government-backed loans and why they might be a good option before choosing a mortgage.
What Makes Them Different?
The main difference between government-backed mortgages and conventional mortgages is that a federal agency secures one backed by the government. Therefore, the agency can differ based on the exact mortgage obtained. Since a federal agency backs the mortgages, the lender is protected if anything happens and the borrower can’t repay the loan. Since there is less risk to the lender, they’re able to offer reduced down payments as well as lower interest rates.
Benefits of Government-Backed Mortgages
There are numerous benefits of obtaining a government-backed mortgage instead of a conventional one, including the following.
- Lower Interest Rates – As mentioned, there is a lower risk to the lenders to offer lower interest rates. Over the life of the loan, this is a significant amount of money saved compared to a conventional loan with a higher interest rate.
- Easier to Obtain – With the reduced risk, lenders can offer these mortgages to more people. They’re typically much easier to obtain for the average person, making it easier to buy a home.
- Lower Down Payments – Government-backed mortgages typically allow the buyer to put down a much lower down payment or even 0% instead of the traditional 20% down payment.
FHA loans are offered by the Department of Housing and Urban Development. Anyone can apply, and there are no restrictions for where the property is located. Anyone can get this type of mortgage, not just a first-time homebuyer, and the down payment is as low as 3.5% for buyers. There is an insurance premium for an FHA loan, but it can be paid upfront or rolled into the loan, depending on the buyer’s preferences. Since this mortgage has fewer restrictions compared to VA or USDA loans, it is the most popular option and will work for more people who want to buy a home.
VA loans are offered to veterans with active duty of at least 181 days in service and reserves who have at least six years in service. This type of loan is also available to surviving spouses of those who died or as a result of injuries sustained while serving, but the spouse does need to be unmarried to obtain the loan. The VA loan does not require a down payment, but a funding fee can be rolled into the loan amount instead of paid out of pocket.
The USDA loans are geared towards helping buyers purchase property in rural or semi-rural areas. There is an income limit for buyers, and the property does need to be in an approved area for this loan to be applicable. However, if it is, there is no down payment required. Loan officers can help buyers determine if a particular house is in an approved area to qualify for this type of loan.
Before Getting a Government-Backed Mortgage
Buyers need to be aware of the limitations before choosing a government-backed mortgage. The VA loan limits who can get the mortgage through them and the USDA loans are limited by income and location. On top of this, these loans must be used for a primary residence. There is usually a requirement for the buyer to use the home as their primary residence for a certain period after the purchase. Instead, those who want to purchase a second home or rental property will want to look into a conventional loan.
If you’re planning on purchasing a home, take a look to see if you qualify for any of the government-backed loans. This could help you save a significant amount of money, and it may mean you don’t have to put down a 20% or larger down payment for the purchase. On the other hand, you may not need a down payment at all. With the number of benefits, these mortgages make it easier for anyone to purchase a home, so you can be a homeowner even if you don’t have a lot of money saved up yet.