Whether purchasing or renovating a new home, or making improvements to your current property, government-backed loans can assist borrowers who might not otherwise be able to obtain a mortgage.
Sponsored and insured through various U.S. federal agencies and underwritten by approved lenders such as Contour Mortgage, some of the most common government-backed loans are provided through the Federal Housing Administration (FHA), U.S. Department of Agriculture, (USDA), and Veterans Affairs (VA) for active and retired U.S. military personnel.
While each home loan type boasts its own requirements and qualifications, choosing the best is determined by factors including personal budget, debt-to-income (DTI) ratios, credit rating, and more.
Learn more about the various types of government-backed loans available through Contour Mortgage.
What Are Government-Backed Home Loans?
As non-conforming financing for those not meeting conventional requirements, government-backed home loans are supported and insured through federal agencies, such as the FHA, USDA, and VA. It’s important to note these can only be obtained through an approved banker or lender.
Unlike traditional loans, should the borrower default, the U.S. government—as the sponsoring agency—is responsible for repaying the underwriting lender.
The Most Common Government-Backed Loans
Below we’ll discuss the requirements and qualifications of government-backed loans offered through the FHA, USDA, and VA, as well as their pros and cons. It’s recommended to speak with a reputable lender, such as Contour Mortgage, for additional information and to answer specific questions.
FHA Home Loans
Originally established during the Great Depression to assist young families seeking affordable housing, most of these loans are offered at 30-year, fixed rates.
Perhaps one of the most attractive elements is its 3.5 percent down payment requirement. Regardless of borrower credit scores and income, this can be the difference between attaining your dream home or walking away empty handed. In certain situations, closing fees and costs will be absorbed by sellers, builders, or mortgage lenders. Additional benefits include the buyer assuming the seller’s current outstanding mortgage.
Depending on location and cost-of-living requirements, FHA loan limits can vary, so it’s recommended to review the FHA Mortgage Limits Tool for exact amounts.
Because of this loan’s low down payment requirements, borrowers will also be required to purchase mortgage insurance premiums with upfront guarantees and annual fees. The former totals 1 percent of the loan, the latter 0.35 percent of remaining principal.
Gifting is another option, whereby family members, friends, employer, or other approved source can transfer up to 100 percent of the down payment. Applicable for home purchase or rehab projects, as well as closing costs and other fees, these funds must be claimed on yearly tax returns if exceeding $15,000 per Internal Revenue Service (IRS) limitations.
Learn more about gifting on the HUD website, or contact a Contour Mortgage loan officer for assistance.
Reverse Mortgages
Geared mainly for those aged 62 and over, or if the majority of the loan has been paid down, FHA-sponsored reverse mortgages tap into current home equity as cash for remaining payments and home improvement projects. Known as a Home Equity Conversion Mortgage (HECM), this loan pays the borrower back, provided they remain in the home in solid financial standing.
This loan can also be claimed as tax-free monthly income. It’s best to consult a reputable tax adviser or CPA for more information.
203(k) Renovation Financing
FHA-sponsored 203(k) rehab loans are a solid option to finance the renovation of your current home, or when purchasing a fixer-upper. Based on the anticipated increase in value, post-improvements, these loans can be used to facilitate increased living spaces, such as additions, cosmetic updates, foundation and structural upgrades, and more.
With two available options—Standard 203(k) and Limited 203(k)—the former is best for major repairs and upgrades, while the latter is appropriate for projects totaling less than $35,000.
USDA Loans
Backed by the Rural Development Guaranteed Housing Loan Program, USDA loans feature no down payment requirement, and relaxed PMI terms. These 30-year, fixed-rate loans are applicable for first-time and repeat home buyers seeking properties within designated location criteria per the USDA website. Eligibility requirements include paved road access, appropriate zoning, and operating utilities.
Similar to FHA loans, USDA loans require both upfront guarantees, and annual fees. Other stipulations include two years of consistent income, average credit scores, and an equal DTI offsetting living expenses and mortgage payments.
VA Loans
As a VA-approved and military-friendly community lender, Contour Mortgage is proud to assist active service members, veterans, and eligible surviving spouses with attaining a home.
VA loans help borrowers finance a new home or rehab project if utilized as a primary residence. To qualify, applicants must have served at least six months active duty in any U.S. military branch, six years as a reservist or National Guard member, or been on active duty for at least 181 days. Those who participated in combat military service for at least 90 days also qualify.
These loans feature zero down payment or DTI requirements, nor a minimum credit score. Lower closing costs and credit counseling are also additional benefits, and any VA loan closed after March 1, 1988 can be assumed by qualified borrowers.
The Takeaway
If you’re still unsure which government-backed home loan is best for you, speak with a reputable mortgage lender to help navigate specific requirements and qualifications.
Contact Contour Mortgage for a free consultation and to learn more about government-backed home loan requirements.
