U.S. Government Home Loans - dummies

By Eric Tyson, Robert S. Griswold

When seeking a mortgage, you might consider a government home loan. Through either insuring or guaranteeing home loans by an agency of the federal government, Uncle Sam is a major player in the residential mortgage market. Such government mortgage loans are called, you guessed it, government loans. The remaining residential mortgages originated in the United States are referred to as conventional loans.

Here’s a quick recap of government home loans:

  • Federal Housing Administration (FHA): The FHA was established in 1934 during the depths of the Great Depression to stimulate the U.S. housing market. It primarily helps low-to-moderate income folks get mortgages by issuing federal insurance against losses to lenders who make FHA loans. The FHA is not a moneylender. Borrowers must find an FHA-approved lender such as a credit union, bank, or other conventional lending institution willing to grant a mortgage that the FHA then insures. Not all commercial lenders choose to participate in FHA loan programs due to their complexities.

Depending on which county within the United States the home you want to buy is located, you may be able to get an FHA-insured loan of up to $636,150. The minimum loan amount under this program is $275,665 with a $636,150 maximum as of 2017. The loan limit varies based on the cost of housing in each area. (For current, up-to-date lending limits by area, visit the FHA Mortgage Limits web page.)

  • Department of Veterans Affairs (VA): Congress passed the Serviceman’s Readjustment Act, commonly known as the GI Bill of Rights, in 1944. One of its provisions enables the VA to help eligible people on active duty and veterans buy primary residences. Like the FHA, the VA has no money of its own. It guarantees loans granted by conventional lending institutions that participate in VA mortgage programs. This can be an excellent program if you qualify.
  • U.S. Department of Agriculture (USDA): The USDA oversees the Rural Housing program. This is a popular program for owner-occupied homes outside metropolitan areas. The loans offer $0 down and affordable mortgage insurance. However, there are restrictions on location, income, and assets. If you qualify, this is usually your best $0 down option, besides a VA loan.
  • Farmers Home Administration (FmHA): Like the FHA, VA, and USDA, the FmHA isn’t a direct lender. Despite its name, you don’t have to be a farmer to get a Farmers Home Administration loan. You do, however, have to buy a home in the sticks. The FmHA insures mortgages granted by participating lenders to qualified buyers who live in rural areas.

FHA, VA, and FmHA mortgages have more attractive features — little or no cash-down payments, long loan terms, no penalties if you repay your loan early, and lower interest rates — than conventional mortgages. However, these loans aren’t for everyone. Government loans are targeted for specific types of homebuyers, have maximum mortgage amounts established by Congress, and may require an inordinately long time to obtain loan approval and funding. In a desirable urban or hot market where homes generate multiple offers, buyers using government loans often lose out to people using conventional mortgages that can be funded quicker.