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

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

Government home loans and other federally backed loans are often more affordable, have lower interest rates, and are often 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 loans available.

Government loans are insured or backed by the U.S. federal government. There are many types of government home loans as well as government loans for college education, disaster relief, opening a business and supporting veterans. Government-backed mortgages help all types of home buyers purchase their dream home.

All government loans are secured, or insured, by the federal government. In some cases, applying for a government loan is as easy as filling out an application online and submitting it to the government. To apply for a student loan, you can simply fill out the Free Application for Federal Student Aid (FAFSA^Ⓡ) online.

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 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 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 that you’ll need to follow.

Government loan programs are available for everything from attending college to buying a home. Your state might also have some unique loan options, but we’ll cover the major federal loan programs below.

Government Housing Loans

A government-backed home loan is considered a non-conforming loan, so it operates outside of the standards of 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 FHA loans, VA loans and USDA loans.

Let’s take a look at the 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, usually equal to 1.75% of your total loan value, followed by monthly mortgage insurance  payments. Depending on the size of your down payment, you may be paying 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.

Like USDA loans, 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 website.

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

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 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.

Veterans’ Life Insurance Policy Loans

If you’re a veteran who served in the Vietnam War, Korean War or World War II, you may have a government-issued permanent life insurance plan. A veterans’ life insurance policy loan allows you to borrow up to 94% of your policy’s value in cash or surrender your policy for its cash value.

Government Education Loans

The federal government offers many loans and grants that can help you pursue a college degree or research in a needed area. For most types of education loans, you’ll start by filling out and submitting the FAFSA^Ⓡ online. You can also find a paper copy of the FAFSA^Ⓡ at your local library or postsecondary school.

Direct Subsidized And Unsubsidized Loans

Direct subsidized and unsubsidized loans are two types of low-interest student loans offered through the Department of Education to help cover the cost of college or career school.

Direct subsidized loans are available for undergraduate students to attend a 4-year or 2-year college, technical school or trade school. These loans are only for students who demonstrate financial need. The U.S. Department of Education pays the interest while you're in school at least half-time, the first 6 months after you leave school and during a period of deferment. Annual loan limits apply.

Unlike direct subsidized loans, direct unsubsidized loans aren’t awarded based on need. Instead, they’re awarded based on the cost of your tuition and other financial aid you need. Direct unsubsidized loans begin accruing interest as soon as you take out the loan. Annual loan limits apply.

Direct PLUS Loans

Direct PLUS loans are unsubsidized loans that the U.S. Department of Education funds. Interest begins accruing immediately on Direct PLUS loans. Graduate or professional students and parents of dependent children in college can take out these types of loans.

Your credit should be in good standing if you want to take out a Direct PLUS loan. If you have an unfavorable credit history, you may still be able to receive a PLUS loan if you meet additional loan requirements. The maximum PLUS loan amount you can receive is the cost of attendance minus any other financial aid received.

Direct Consolidation Loan

This allows you to take all of your existing loans through the Department of Education and consolidate them into a single loan with one payment. There is no application fee for this.

Government Business Loans

If you aspire to be a small business owner, a government loan from the Small Business Administration (SBA) can give you the funds you need to get off the ground. As with housing loans, the government doesn’t directly issue business loans. Instead, you apply through your bank or lending service, and the government guarantees the loan.

If you’re thinking of applying for both a mortgage and a business loan, be sure to make the proper preparations.

7(a) Small-Business Loan

A 7(a) loan is the most basic type of small-business loan, and it can be used for a wide range of purposes. 7(a) loans are designed for small, for-profit businesses that can’t get loans from other channels. You can receive up to $5 million with a 7(a) loan.

CDC/504 Loan Program

CDC/504 loans are for specialized small-business owners who want to purchase or upgrade their commercial facility. Corporate development companies are nonprofits that issue and guarantee 40% of your CDC/504 loans. Your bank lends 50%, and you must put 10% down. You can get up to $5 million (up to $5.5 million for certain energy projects) with a CDC/504 loan.

SBA Microloans

SBA Microloans are small-business loans with shorter terms and smaller maximums than 7(a) loans. Microloans are only for new startups and small businesses, and you must pay them back in no more than 6 years. You can get up to $50,000 with an SBA Microloan, and the average loan size is $13,000.

Government Disaster-Relief Loans

If you live in an area declared a disaster zone, you have access to low-interest disaster-relief loans from the SBA and the Federal Emergency Management Agency (FEMA). Disaster-relief loans have long loan terms – up to 30 years – and low interest rates. Let’s take a look at your options for natural disaster relief below:

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 $200,000 to rebuild their homes after a natural disaster, plus an extra $40,000 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.

Economic Injury Disaster Loans

If you own a small business or non-profit that’s in a declared disaster zone, the Economic Injury Disaster Loan program (EIDL) can help you rebuild. An Economic Injury Disaster Loan can give you up to $2 million to repair your business. Similar to a home and property disaster loan, Economic Injury Disaster Loans can’t go toward renovations or upgrades.

It’s important to note that the $2 million Includes both these loans and the physical disaster loans mentioned above. If you’ve used a physical disaster loan, the amount you can get through an EIDL will be lowered by the amount of that loan.

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 $1,825,000 with a guaranteed farm-operating loan Direct loans have a limit of $400,000. 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 is the loan for you. You can qualify for up to $1,825,000 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.

If you still have questions about government home loans, here’s a list of frequently asked questions:

Are government home loans available for first-time home buyers?

FHA, USDA and VA loans are all available for first-time home buyers who qualify.

What government home loans are available for people with poor credit?

Many government-backed loans accept lower credit scores than conventional loans. The lowest score that Rocket Mortgage generally accepts is 580 for FHA and VA loans. Lenders offering USDA loans may require a score of at least 640.

Does the government back home improvement loans?

The federally backed FHA 203(k) loan allows home buyers to purchase a fixer-upper home and fund the necessary renovations in a single mortgage. The loan can also be used to refinance and repair a property you own. These loans are not currently offered by Rocket Mortgage.

Does the government offer home loans for senior citizens?

The government-insured Home Equity Conversion Mortgage (HECM) is a common reverse mortgage option for senior citizens 62 and older. The HECM allows homeowners to convert their home’s equity into cash to pay off their mortgage.

In addition to other eligibility factors, the Department of Housing and Urban Development (HUD) requires borrowers to complete a HUD-approved reverse mortgage counseling session and go through financial assessment.

Rocket Mortgage doesn’t currently offer HECMs.

What is the home stimulus program?

Better known as the Homeowners Assistance Fund (HAF), this program is part of the American Rescue Plan for providing relief to Americans amid the COVID-19 pandemic. The purpose of the HAF is to prevent Americans from losing their homes, utilities or insurance during a time of economic hardship. You can find more information about the HAF on the U.S. Treasury website.

Government-backed loans often allow borrowers with lower credit to get the financing they need. Especially if you’re a first-time home buyer, a government home loan can give you the chance to become a homeowner.

Get started today with Rocket Mortgage and see what government home loans you may qualify for. You can also give one of our Home Loan Experts a call at (833) 326-6018.