Government

A government-backed mortgage is a type of mortgage loan that's insured or guaranteed by an agency of the federal government. There are three types of government-backed mortgages that homebuyers can take advantage of—and, in some cases, these programs can make it easier to qualify for a mortgage.

For each loan type, the backing agency insures the loan amount, protecting the lender in the event a borrower can't repay the debt. The arrangement significantly reduces the risk to lenders and may make it easier for them to offer lower interest rates or low or even no down payment requirements.

Conventional vs. Government Loans

○ Conventional loans are not insured by a government agency, so they're riskier for lenders and tend to have stricter eligibility requirements.

○ Government-backed loans have different cost structures, including upfront fees and mortgage insurance requirements.

○ Conventional loans are more popular and accessible than government-backed mortgage loans.

○ Government-backed loans have certain requirements that you won't see with conventional loans. For example, USDA loans are designed for folks buying a home in an eligible rural or suburban area, and VA loans are reserved for members of the military community and their families.

○ Fannie Mae and Freddie Mac, which are government-sponsored enterprises but not government agencies, set conforming rules for conventional loans. The two may also purchase and guarantee loans that meet their standards through a secondary market.

Depending on your situation, it may be a good idea to consider multiple types of mortgage loans to ensure you find the best fit for your needs.

Loans insured by the Federal Housing Administration are more accessible than USDA and VA loans because they don't require you to be a member of the military or purchase your home in a certain area.

If you have a credit score of 580 or higher, the minimum down payment for an FHA loan is 3.5% of the purchase price of the home. If your credit score doesn't meet that minimum, you may still be able to get a loan with a 500 credit score or higher, but you'll need to put down 10% instead. This is a huge win for first-time homebuyers with little savings and people who have experienced some credit issues in the past.

The primary drawback of an FHA loan is its mortgage insurance requirement. You'll need to pay an upfront premium of 1.75% of the loan amount, plus an annual premium of 0.45% to 1.05% of the loan amount. Unless you put down 10%, there's no way to get rid of mortgage insurance on an FHA loan without refinancing. This is in stark contrast to conventional loans, which allow you to remove private mortgage insurance as soon as your loan-to-value ratio hits 80%.

If you do put down 10% or more on an FHA loan, your lender can remove the mortgage insurance requirement after 11 years.

USDA loans are backed through the agency's Rural Development Guaranteed Housing Loan Program. It's limited to low- and moderate-income borrowers who are buying a home in a rural or eligible suburban area—dense urban areas are excluded.

There are a few different types of USDA loans you can apply for, and the credit and income requirements can vary with each program.

With a standard USDA-guaranteed loan from a private lender, though, there is no down payment requirement, which is another major benefit for people with low to moderate income. Also, the upfront mortgage insurance premium is 1%, and the annual premium is 0.35%, both of which are lower than FHA loans.

Beyond the area restrictions, the biggest drawback of a USDA loan is that there is no way to remove mortgage insurance while you have the loan.

VA loans are the most restrictive government-backed loans in terms of accessibility. To qualify for one, you must be an active-duty service member, a veteran, an eligible spouse of a veteran, or a U.S. citizen who served in the armed forces of a government allied with the U.S. during World War II.

VA loans don't have a minimum credit score requirement set by the agency, and you can finance up to 100% of the purchase price of your new home. However, the lenders that offer VA loans typically set a minimum credit score, so you'll want to shop around.

VA loans don't charge ongoing mortgage insurance premiums. However, there is an upfront funding fee you'll pay at closing that equals 1.4% to 3.6% of the loan amount, depending on the size of your down payment and whether you've gotten a VA loan previously.

For those who qualify, VA loans can be an excellent way to get into a home with a low down payment or none at all. And while the upfront fee can be high, there's no ongoing mortgage insurance. But unless you're an eligible member of the military community, it's not an option.