Choosing the type of mortgage loan for you

A government-issued loan is a loan that is backed by a federal agency. The lender is protected if the buyer is unable to repay the loan. Government-issued loans also make it easier for homebuyers to qualify for a mortgage because they have more lenient requirements, including a lower down payment.

Private lenders also offer these loans, so you can choose to get a government-issued loan from a bank, credit union, or mortgage lender. There are three types of federal loans: FHA, VA, and USDA.

What is an FHA loan?

The Federal Housing Administration supports FHA loans. These loans are designed for borrowers with limited credit or low savings. You can qualify with a credit score as low as 580 and pay as little as 3% on your home. You may still be able to get an FHA mortgage with a credit score of less than 580, but you may have to pay a larger down payment.

You can only use an FHA loan for your primary residence, so it wouldn’t be an option for vacation homes or investment properties. If you pay less than 20% for a house, you are responsible for it private mortgage insurance (PMI), which protects the lender if the home ever has to go into foreclosure.

PMI is split and added to your monthly mortgage payment. PMI costs range from 0.22% to 2.25% of your mortgage. With an FHA loan, you would have to pay PMI throughout your loan term. Other types of mortgages, like traditional loans, allow you to get rid of PMI once you reach a certain amount of home equity.

What is a VA loan?

The US Department of Veteran Affairs supports VA loans. You must be an active service member or veteran to be eligible. Surviving spouses may also qualify. VA Mortgage Loan have low interest rates, limited closing costs and no down payment requirements. There are no credit limits as long as the lender believes you can afford the amount you want to borrow.

Also, there is no PMI with a VA loan. You can get a VA loan as many times as you like as it is a lifetime benefit.

Sometimes there is a program funding fee that is a percentage of the total cost of the loan. However Congress introduced it a program that can help to do without it if you meet certain qualifications.

What is a USDA loan?

The US Department of Agriculture supports USDA loans. To qualify, you must purchase a home in a rural area. The USDA has a map of Eligible Regions and income guidelines that vary by state.

With a USDA loan, the home must be your primary residence and there are no minimum credit or down payment requirements. Interest rates vary depending on the private lender chosen. USDA loans are only offered with a 30-year term. A USDA loan is an ideal mortgage option for people who want to live in a rural area but may have trouble meeting the requirements for a traditional mortgage.

Who Should Get a Government-Backed Loan?

Government-insured loans are options for people who want to buy a home but may not be able to meet the requirements for other types of mortgages. These options allow for lighter credit requirements and no down payment.