Government home loans and more: A guide for first-time borrowers

If your credit, income, or savings aren’t where you hoped they’d be, the idea of buying your first home can feel overwhelming. Government-backed loans are designed to help make homeownership more accessible.

Government home loans typically offer more lenient credit requirements, as well as a below-market interest rate and smaller down payment. This can make it possible to buy a home even if a regular loan isn’t an option.

In this guide, we’re focusing on government loans for housing, specifically mortgage programs, how they work, and what to expect if you apply.

How does a government-backed mortgage loan work?

Government-backed loans began after the Great Depression to help more people become homeowners. Today, they continue to support first-time buyers, veterans, rural families, and others who may struggle to qualify for conventional financing.

Unlike conventional, privately funded mortgages, these loans are insured by the government. That insurance reduces risk for lenders, making approval more likely, but it also comes with restrictions — including strict limits on how much you can borrow.

Here’s how they generally work:

• The government provides insurance, lowering the risk for lenders.
• You apply through an approved lender, such as Rocket Mortgage, for programs like FHA or VA loans.
• Loan limits apply, meaning you cannot borrow more than the cap set by each program.

Borrowers with credit scores as low as 600 and as little as $5,000 saved may struggle to qualify for a conventional mortgage. FHA loans, on the other hand, allow approval with a minimum credit score of 580 and a down payment of just 3.5%, making homeownership more accessible.

Types of government housing loans

FHA

FHA loans are backed by the Federal Housing Administration. They’re often a good fit for buyers who don’t have a perfect credit history or require down payment assistance. FHA loans also include access to loss mitigation options, which can help borrowers avoid foreclosure during financial hardship.

To qualify, you’ll generally need:

• A credit score of at least 580 to put just 3.5% down (Rocket Mortgage standard).
• A 10% down payment is if your score falls between 500 – 579.
• Proof that you have a steady income and employment.
• An up-front mortgage insurance premium of 1.75% of the loan, plus ongoing monthly insurance payments.
• A property that meets the FHA’s appraisal standards.

VA loans

VA loans are guaranteed by the Department of Veterans Affairs. These loans are for eligible service members, veterans, and surviving spouses. Proof of service or qualifying status is required as a Certificate of Eligibility (COE). This document confirms your eligibility and informs lenders of the amount of entitlement you are eligible for with a VA-backed mortgage. Most VA borrowers will pay a one-time funding fee.

Key benefits of VA loans:

• No down payment required.
• No private mortgage insurance (PMI).
• Minimum credit score of 580 (Rocket Mortgage standard).
• Closing costs apply, though sellers can help cover them.

USDA loans

USDA loans, which are backed by the U.S. Department of Agriculture, help people buy homes in rural and some suburban areas. These loans encourage growth in smaller communities by offering affordable financing.

Key requirements for USDA loans:

• No down payment required
• Minimum credit score: typically 640
• Property must be in a USDA-eligible area (check the eligibility map)
• Income limits may apply, depending on location and household size

Borrowers should also budget for USDA loan closing costs, which typically range from 2% to 6% of the loan amount. These costs can often be rolled into the loan or covered by seller concessions.

For borrowers interested in building rather than buying, a USDA construction loan can finance the land purchase and the cost of building a home in an eligible area.

(Note: Rocket Mortgage doesn’t currently offer USDA loans.)

Refinancing government-backed loans

If you already have a government loan, refinancing might help you lower your monthly payment, get a better rate, or access cash from your home’s equity.

Refinancing is the process of replacing your current mortgage with a new one. Homeowners often do this to lower their interest rate, reduce monthly payments, shorten or extend the loan term, or access equity for home repairs or debt repayment. In other words, refinancing provides an opportunity to adjust your loan to better align with your current needs and goals. When you refinance, you’ll receive a new amortization schedule, which lays out how much of each payment goes toward principal versus interest.

Interest rate reduction refinance loan (IRRRL)

An Interest Rate Reduction Refinance Loan (IRRRL)¹ is a special refinancing option available only to veterans, active-duty service members, and qualifying surviving spouses with a VA Loan.

What makes the IRRRL unique is its simplicity. It typically requires less paperwork, no appraisal, and no income verification, which makes the process faster and easier than most other refinance options. The primary goal is to assist VA borrowers in securing a lower interest rate or reducing their monthly payment without undergoing a lengthy approval process.

Key qualifications for an IRRRL:

• You must already have an existing VA loan
• You need to meet VA service requirements
• At least 210 days must have passed since your first payment on the current loan
• You must have made six consecutive on-time monthly payments
• The refinance must result in a tangible benefit, such as a lower interest rate or reduced monthly payment

FHA and USDA streamline refinance

A streamlined refinance is a simplified option designed to make the process faster and easier than a traditional refinance. The reduced documentation makes it unique: borrowers often don’t need a full credit check, income verification, or home appraisal. The focus is on your history of making on-time mortgage payments, demonstrating your ability to handle the loan.

How each program works:

• FHA streamline refinance: Does not require income verification, but you must show a consistent record of on-time payments.
• USDA streamline refinance: Works similarly, but is only available to borrowers with existing USDA loans. Lenders typically require proof of timely payments.

Cash-out refinance

A cash-out refinance allows you to take out a new loan for more than you currently owe and keep the difference. This option can be used to fund major expenses, like repairs or debt repayment.

With an FHA cash-out refinance, borrowers may qualify with a credit score as low as 580, as long as they maintain at least 20% equity in the home. A VA cash-out refinance, available to eligible veterans and service members, can be even more flexible, allowing borrowers to access up to 90% of their home’s value.

Typical requirements: