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When you apply for a mortgage, you'll have to decide between two basic types of loans: a government-backed mortgage and a conventional loan.
Government-backed mortgages were created to promote homeownership by making it more affordable. They come guaranteed by the U.S. federal government, meaning if a borrower doesn't make payments, the government will step in and cover some of the lender's losses. This allows lenders to approve borrowers who might not otherwise have been eligible.
If you have a low income, poor credit, or are a first-time homebuyer or veteran, one of these mortgages could help make homeownership possible for you. Here's what to know about these common types of mortgages.
A government-backed mortgage is a home loan that is insured or guaranteed by a federal agency. There are mortgages backed by the Federal Housing Administration (which is part of the US Department of Housing and Urban Development), US Department of Agriculture (USDA), or the US Department of Veterans Affairs.
These types of loans aren't direct loans, meaning you don't apply for a government-backed mortgage directly through the government agency — you apply through a private mortgage lender that offers FHA, VA, or USDA loans. If you default on a mortgage that's backed by the government, the agency pays the lender on your behalf.
When a lender gives you a government-guaranteed mortgage, it's like the lender is getting insurance on your loan. This is what allows the lender to offer you more favorable terms, such as a lower rate or more flexible credit requirements.
A conventional loan is not guaranteed by the government. A private lender, such as a bank or credit union, gives you the loan without insurance from the government. However, most conventional mortgages are backed by the government-sponsored enterprises Fannie Mae or Freddie Mac, provided they meet the criteria set forth by the enterprises.
Each type of government-backed loan is different, but it's generally easier to qualify for one than for a conventional mortgage.
There are three main types of government-backed mortgage programs: VA, USDA, and FHA.
Each type of mortgage has its own requirements regarding what down payment, credit score, and debt-to-income ratio (DTI) you'll need to qualify.
Keep in mind that each lender can set its own standards surrounding credit scores and DTI ratio. For example, while the rule of thumb is that you can qualify for an FHA loan with a 580 credit score, a lender has the right to say it requires a 600 credit score.
Unlike VA and USDA loans, FHA mortgages aren't for a specific group of people. You'll probably get a lower rate than you would with a conventional mortgage. The downside is that you do need money for a down payment.
You'll need the following to get an FHA loan:
A VA mortgage is for active-service military members or veterans, or certain qualifying spouses of members who have died. VA loans usually charge lower mortgage interest rates than conventional mortgages.
Here are the requirements to get a VA loan:
USDA loans are for low-to-moderate income borrowers buying homes in rural or suburban areas. Like VA loans, USDA mortgages typically charge lower interest rates than conventional loans.
To be eligible for a USDA loan, you'll need the following:
There are many pros and cons of government-backed mortgages, but one of the biggest is that they are generally easier to qualify for than other types of mortgages. Here are just a few of the benefits you'll typically enjoy with a government-backed mortgage loan.
Coming up with a big down payment is challenging for many homebuyers, but with government loans, this isn't so much of a problem.
VA and USDA loans don't require any down payment (though you can offer one if you have the cash), and FHA loans ask for just 3.5% down. (If your credit score is below 580, though, you'll need at least 10%).
Conventional loans require at least 3% up front or, in most cases, 20% if you want to avoid paying for mortgage insurance.
In many ways, it's easier to qualify for a government home loan than for a conventional mortgage. Many lenders will give you an FHA loan with a lower credit score than if you applied for a conventional mortgage, and you can apply for all three types of government-backed mortgages with a higher DTI than for a conventional loan.
VA and USDA loans don't have official credit score minimums set by the government (though individual lenders can set their own thresholds.)
FHA, VA, and USDA mortgages typically charge lower interest rates than conventional mortgages. According to ICE Mortgage Technology, the average rate on conventional loans in early May 2024 was 7.36%. VA loans had average rates of just 6.66%, while FHA loan rates averaged 6.77%.
Who qualifies for government-backed mortgages? Chevron icon It indicates an expandable section or menu, or sometimes previous / next navigation options.
Government-backed mortgage requirements are different for FHA vs. VA vs. USDA loans. FHA loans require at least a 500 credit score and a 3.5 to 10% down payment. VA loans are only for military members and veterans, but have no credit score or down payment requirements. USDA loans are for buying a home in approved rural areas. They also have no set-in-stone credit score or down payment requirements.
Do government-backed mortgages require mortgage insurance? Chevron icon It indicates an expandable section or menu, or sometimes previous / next navigation options.
FHA loans require mortgage insurance that you'll pay up front and monthly. USDA loans have a "guarantee fee," which is also paid up front and monthly, while VA loans require a one-time funding fee at closing. These act similarly to mortgage insurance policies, covering some of the government's costs for guaranteeing the loan.
Are closing costs higher for government-backed loans? Chevron icon It indicates an expandable section or menu, or sometimes previous / next navigation options.
Sometimes, the closing costs on government loans are higher than those on conventional loans due to extra fees and mortgage insurance costs. These may be offset by lower interest rates, though.
How do I find a lender for a government-backed mortgage? Chevron icon It indicates an expandable section or menu, or sometimes previous / next navigation options.
Many lenders offer government-backed mortgages, including major banks and online lenders. Ask around, and make sure to choose one with experience in the loan program you're interested in. You can also seek help from a mortgage broker, who will point you toward government-backed mortgage lenders and help you shop for the best loan terms possible.
Are government-backed mortgages better? Chevron icon It indicates an expandable section or menu, or sometimes previous / next navigation options.
Government mortgages can be smart options for first-time homebuyers, borrowers with less-than-perfect credit, and buyers with small down payments, as they tend to be easier to qualify for than conventional loans.
