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The Three Main Lenders of Government-Backed Mortgage Loans

Three doors opening
As the slow economy continues to cling onto America’s once strong back, something else continues to cling to the minds of many Americans—the American dream of owning a home.

While many Americans lost their homes to mass foreclosures and repossessions at the height of the recession, there are still many Americans (including some of those former homeowners) that dream of one day living in their own home.

Despite the fact that many Americans are jobless, homeownership in many ways has never been more within reach. The housing bubble’s popping has left many properties priced far below their previous highs. Further assisting prospective homebuyers are government-backed mortgage loans—also called federal home loans.

Through federal home loans, lenders are able to offer borrowers funds that are backed by the federal government. This lessens the risk that lenders are vulnerable to in the lending process should borrowers end up defaulting. Naturally, once facing less risk, lenders tend to be more inclined to offer financing to prospective borrowers—taking them one step closer to attaining that American dream.

Those looking to buy should be pleased to know that three different federal organizations offer government-backed mortgage loans. The three main lenders are the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), and, surprisingly, the Department of Agriculture (USDA).

The FHA

The FHA caters to first-time homebuyers. The government-backed mortgage loans offered by the FHA usually require a low down payment as well as relatively low credit requirements. The government-backed mortgage loans offered by the FHA are excellent for borrowers who have less-than-amazing credit scores since they’re easy to qualify for and carry low interest rates, which directly translate to lower monthly payments.

FHA home financing is very flexible and can be taken out with either adjustable or fixed interest rates. Hopeful borrowers need only a three percent down payment since the FHA allows closing costs to be factored into the total amount borrowed.

The VA

The VA offers financing for both veterans and active duty service members who are looking to purchase a home. Government-backed mortgage loans offered by the VA require no money down. These are especially useful for members of the military since not all members of the military have had time to save enough money for a substantial down payment.

Likewise, some financing offered by the VA also caters to veterans and active duty personnel that have savings but not the best credit scores. As part of the VA’s focus on both past and present service members, veterans and active duty personnel can use the VA’s government-backed mortgage loan program more than once. In fact, current and former service members can apply for a VA loan at any point in their lives. Some spouses may even qualify for financing through the VA.

The USDA

Shockingly, the United States Department of Agriculture offers financing for homes as well. While originally meant for farmers, the government-backed mortgage loans offered by the USDA today are typically only available to low-income borrowers. Eligible USDA loan borrowers cannot make more than 80 percent of the median income in their particular area of interest, according to USDA financing requirements.

Borrowers can even borrow slightly over 100 percent of a property’s sale price should the home require necessary repairs. The USDA permits these repairs to be made before or after the completion of a sale.

Financing offered by the USDA provides a zero down payment option. Private mortgage insurance (PMI) is typically required of borrowers who don’t put at least 20 percent down, since, on most home loans, PMI is used to protect lenders against borrowers who have little “skin in the game.” However, these government-backed mortgage loans do not require PMI. And since PMI can cost up to several hundred dollars each month (typically 1 percent of a home’s total value each year), borrowers save a significant amount of money by taking out USDA federal home loans.

While the FHA, VA, and USDA all offer specific types of financing with various differences and similarities, all three are under government requirements that place restrictions on the maximum amount that can be borrowed. The restrictions are based on the cost of living in the area a borrower lives in. Limits also require interest rates be reasonably set so that a buyer can afford a home. Prospective borrowers who are not interested in financing from the FHA, VA or USDA can always seek a mortgage from a traditional lender—such as a bank.