One of the first steps to buy a house is understanding the mortgage and lender game. There are many types of mortgages, but one type you might explore are government-backed mortgages.
Government-backed mortgages are a thing. The government will back the debt of the lending institution with guarantees if necessary. A government-backed mortgage is insured by either the Federal Housing Administration (FHA), Department of Veterans Affairs (VA), or Department of Agriculture Rural Housing Service (RD).
The FHA has insurance for mortgages with down payments as low as 3.5% and offers low-interest loans with easier eligibility requirements than private lenders.
The VA guarantees loans for veterans with no down payment, subject to creditworthiness, which can be higher than that of conventional mortgages. The VA also provides income limits that are higher than most other lending programs, including FHA and RD Rural Housing Service loans.
RD Rural Housing Service provides affordable housing to rural families through direct loan or loan guarantees.
Here is everything you need to know about government-backed mortgage loans.
Government-Backed Mortgages are Less Risky
The government-backed mortgages are often less risky because they have a lower risk of defaulting. For example, a government-backed mortgage might have a credit score requirement that is lower than the private investors.
Government-backed mortgages can be less risky because they are backed by the government, which makes them more secure for investors. This is not to say that all investments with the government are guaranteed to be safe, but it does mean that there is a greater chance of being repaid on time and at all. In addition, these mortgages typically have lower credit requirements than those for private investment companies.
Government-Backed Loans Have Different Cost Structures
Government-backed mortgages have a cost structure that is different from a conventional mortgage. This is because they are insured by the federal government and do not have to worry about default or foreclosure.
In order to have a government-backed loan, you need to have an excellent credit score and enough income to qualify for the loan amount. This is because the government insures the loans and it wants to be sure that they will get their money back.
We outlined some of those differing cost structures by the type of loan in the opening section of this article.
You’ll Need to Meet Certain Requirements
There are many requirements to meet when applying for a government backed mortgage loan. The requirements depend on the type of home loan that you want and your credit history. You will need to provide all the information required by the lender and be prepared to show that you can pay back the loan.
Some of these requirements include:
Proof of income: If you are salaried, you will need three months worth of bank statements. If self-employed, you will need six months worth and if your income is purely commission based, it is best to speak with a broker beforehand about what documents they might require.
Proof of assets: You may also need proof of assets such as stocks, bonds or other investments in order to demonstrate stability and financial security.
Credit history: The government will want to ensure that you have a solid history of borrowing and paying it off.