Government Home Loans And More: A Guide For First-Time Borrowers

Certain circumstances can make it difficult for some people to qualify for conventional mortgages. Government-insured home loans exist for this reason – so borrowers who need funding can achieve their homeownership goals.

Government home loans are often more affordable, have lower interest rates, and are usually easier to qualify for than personal or conventional loans. We’ve created a short guide to everything you need to know about the most popular government-backed mortgage loans available.

How Does A Government-Backed Mortgage Loan Work?

All government home loans are secured, or insured, by the federal government. In some cases, applying for a government-backed mortgage is as easy as filling out an application online and submitting it to the government. In other cases, the government works with approved lenders and only insures the loan, rather than funding it. For instance, the government doesn’t issue Department of Veterans Affairs (VA) loans – you must work with a mortgage lender to get this type of loan.

If a borrower defaults on a mortgage issued by a lender, like a private bank, but the loan is secured by the government, the government ends up repaying the lender. Every lender has its own application process for taking out a government loan.

The Different Types Of Government-Backed Mortgage Loans

Government home loan programs are available for first- or even second-time home buyers. Your state might also have some unique loan options, but we’ll cover the major federal mortgage loan programs below.

1. Government Housing Loans

A government-backed home loan is considered a non-conforming loan, so it operates outside of the standards of government-sponsored enterprises Fannie Mae and Freddie Mac. Additionally, each type of government loan has a unique set of requirements.

The federal government generally doesn’t directly fund housing loans. To get a government mortgage loan, you’ll need to work with an approved bank or an online lending service. Some of the most common government housing loans are Federal Housing Administration (FHA) loans, VA loans and U.S. Department of Agriculture (USDA) loans.

There are several different types of home loans backed by the government.

FHA Loans

Backed by the Federal Housing Administration, FHA loans are mortgage loans with lower down payment and credit requirements, making them accessible to more people. To qualify for an FHA loan with Rocket Mortgage^®, you must have a credit score of at least 580 and a 3.5% down payment.

The downside of an FHA loan is that you’re required to pay an upfront mortgage insurance premium. This is usually equal to 1.75% of your total loan value, followed by monthly mortgage insurance payments. Depending on the size of your down payment for an FHA loan, you may have to pay monthly mortgage insurance for the life of your loan.

VA Loans

The U.S. Department of Veterans Affairs backs VA loans, which are only for eligible veterans, active-duty military, National Guard personnel, reservists and qualifying surviving spouses. While the VA has no minimum credit score to qualify, most lenders have certain requirements. Rocket Mortgage will accept scores as low as 580. The approval process will require you to have a valid certificate of eligibility (COE) as proof that you qualify for the loan.

VA loans typically don’t require any down payment when buying a home. However, both types of loans still require the home buyer to pay closing costs.

USDA Loans

USDA loans are government-backed loans that can help you buy a home in a suburban or rural area. USDA loans don’t require a down payment, but you usually must have a credit score of at least 640 to qualify. The home you want to buy must also be in an eligible rural area; you can check your potential home’s eligibility on the USDA’s Eligibility Map.

Rocket Mortgage doesn’t offer USDA loans at this time.

2. Government Loans For Veterans

In addition to home loans, a few other types of VA loans are available for veterans through the Department of Veterans Affairs.

Interest Rate Reduction Refinance Loan (IRRRL)

If you have a VA home loan and would like to lower your monthly payments, an IRRRL, also called a VA Streamline Refinance, can help you refinance with a lower rate. Depending on your loan’s terms, an IRRRL can give you a lower interest rate or a lower monthly payment.

If you’re switching from a different lender to refinance with Rocket Mortgage, you’ll need a minimum credit score of 600 for an IRRRL.

VA Cash-Out Refinance

Cash-out refinance programs allow you to utilize the equity you’ve built in your home. With the VA cash-out refinance program, you can refinance your VA home loan and extract cash from your home’s equity. There are no restrictions on how you can use your cash, but common uses include removing liens, paying off higher-interest debt or making home improvements.

One of the major benefits of a VA loan is that it’s the only one that allows you to take out up to the full amount of your home value. Rocket Mortgage requires a 620 qualifying FICO^® Score when you do this. Otherwise, you have to leave at least 10% equity in the home after taking cash out.

3. Government Disaster-Relief Loans

If you live in an area declared a disaster zone, you have access to low-interest natural disaster relief loans from the Federal Emergency Management Agency (FEMA). Disaster relief loans have long loan terms – up to 30 years – and low interest rates.

Home And Property Disaster Loans

Home and property disaster loans can help pay for home damage that insurance doesn’t cover after a declared disaster. Homeowners can apply for up to $500,000 to rebuild their homes after a natural disaster, plus an extra $100,000 to replace lost possessions. However, you can’t use these loans to upgrade your home or build more structures that weren’t there before the disaster.

4. Government Agriculture Loans

Farmers, ranchers and other agricultural experts can get low-interest loans from the federal government, funded by the USDA and the Farm Safety Agency (FSA). You can apply for most agriculture loans at your local USDA service center.

Farm-Operating Loans

Farm-operating loans are for family farmers or ranchers to build or sustain their farms. The FSA guarantees farm-operating loans from commercial lenders and services its own loans. You can get up to $2,236,000 with a guaranteed farm-operating loan. Most loans have a repayment term of up to 7 years.

Farm-Ownership Loans

If you want to buy a new farm or ranch, a Farm-Ownership Loan may be the loan for you. You can qualify for up to $2,236,000 with an FSA guaranteed ownership loan, or you can get $600,000 in many cases with an FSA direct loan. Farm-Ownership Loans are long-term loans with a maximum repayment term of 40 years.