If you are in the market for a new home or simply want to refinance your current mortgage loan, consider applying for a government mortgage. Government mortgage loans are secured by the federal government and often have more lenient eligibility requirements. These mortgage loans are a viable option for individuals who do not qualify for conventional financing.
Facts
If you apply for a government-backed mortgage, you aren't financing your home directly through the federal government. The federal government merely provides insurance to your lender. Thus, your lender can approve your home mortgage securely knowing that, should you default, the U.S. government will ensure that the lender doesn't suffer a financial loss. Because of the lower risk involved for the lender, individuals who don't qualify for a standard mortgage loan can often become homeowners with a government-backed mortgage.
Types
A government mortgage can either be insured through the Federal Housing Administration as an "FHA" loan or through the Department of Veterans Affairs as a "VA" loan. The DVA only offers VA loans to individuals who either currently serve in the U.S. military or served in the past. FHA loans, however, are available to all borrowers who meet the qualifications. In order to qualify for an FHA loan, you must demonstrate steady employment over the previous two years, a lack of recent bankruptcies or foreclosures and provide proof of consistent income.
Significance
By making mortgage loans easier to obtain for borrowers, government-backed mortgage loans are beneficial to the economy. The U.S. population, in turn, has come to depend upon these loans for mortgage financing. As of 2010, the FHA holds more than six million mortgages in its portfolio. The DVA, by contrast, has serviced 18 million mortgage loans since the inception of the VA loan program in 1944.
Benefits
Conventional mortgage loans often require borrowers to provide the lender with a down payment of 10 to 20 percent of a home's total purchase price. If you opt to purchase your home using a government-backed mortgage, however, the down payment requirement is substantially lower. The U.S. Department of Housing and Urban Development, which regulates FHA loans, only requires a 3.5 percent down payment from approved borrowers. If you qualify for a VA mortgage loan, you don't need to supply a down payment at all.
Considerations
As advantageous as government mortgages are to many consumers, they may not be suitable for all borrowers. FHA loans have limitations that vary depending on your state and county of residence. If the purchase price of the home you wish to buy exceeds FHA's purchasing limits for your area, you must either seek alternate financing or pay down the difference yourself. Financing your home through a VA loan also may be problematic if a low interest rate is important to you. VA loans often carry higher interest rates than conventional loans due to the lack of a down payment. These mortgages also typically require the borrower to complete a greater amount of paperwork.
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