Government-backed loans can help borrowers become homeowners with less than perfect credit and lower down payments. Take a look at the loans described below to see if any of these mortgage programs may help you buy the home of your dreams.
VA LOANS
The 1944 GI Bill implemented VA loans to thank those who have served our country by making it easier for veterans, active military servicepeople, and military spouses to buy a home. These loans are issued by private lenders and backed by the U.S. Department of Veterans Affairs.
VA Loan Requirements
To qualify for a VA loan, you must meet at least one of these criteria:
- You currently serve in the U.S. military and have served for at least 90 consecutive days.
- You are an honorably discharged veteran and meet the standards listed on this chart according to the time of your service.
- You are the spouse of a veteran who died in the line of duty.
You will also need to provide a Certificate of Eligibility (COE) when applying for your loan. The VA explains the process of applying for a COE here.
Benefits of VA Loans
The pros of buying a home with a VA loan are:
- You do not need to make a down payment.
- Because VA loans are backed by the government, you do not need to pay for private mortgage insurance (PMI).
- While the VA can’t guarantee unlimited money, there is no cap on the amount you can borrow.
- There is no penalty for prepayment.
- Requirements are less strict than those of other loans, so you may qualify even if you have a lower credit score, higher debt-to-income ratio, or have a bankruptcy or foreclosure that took place over two years ago.
FHA LOANS
FHA loans are backed by a government agency under the Department of Housing and Urban Development called the Federal Housing Administration (FHA). With an FHA loan, the borrower is required to pay a mortgage insurance premium (MIP) to ensure that if they default on their loan, the lender is protected against losses.
FHA Loan Requirements
To qualify for an FHA loan, you must meet all of the following criteria:
- The property you intend to buy has been appraised by an FHA-approved appraiser.
- You are buying a home to be your primary residence, not an investment property, place of business, or seasonal home.
- You will move onto the property no more than 60 days after closing.
- The home meets minimum property standards according to inspection.
Benefits of FHA Loans
The pros of buying a home with an FHA loan are:
- Down payments are comparatively low, averaging between 3.5% and 10%.
- While a credit score of 580 or higher will result in a lower down payment requirement, applicants with credit scores as low as 500 may still qualify for an FHA loan. You may be able to qualify even if you have no credit history at all.
- FHA loans tend to offer lower interest rates, closing costs, and mortgage insurance fees.
- Applicants with a history of bankruptcy or foreclosure may still be able to qualify.
- You are permitted to use gift money for 100% of your down payment.
- There is no maximum debt-to-income (DTI) ratio for FHA loans. The general rule is a maximum DTI of 43%, but many borrowers can be approved with higher ratios.
USDA LOANS
USDA loans are government-backed loans first established by the U.S. Department of Agriculture (USDA) in 1991 to encourage Americans to settle down in rural areas. These loans are available for moderate- to low-income homebuyers purchasing a rural property.
USDA Loan Requirements
To qualify for a USDA loan, you must meet all of the following criteria:
You meet the income requirement for your area, which you can find here.
- The property you intend to buy must be located in a rural area with fewer than 35,000 residents.
- You must use the property as your primary place of residence.
Benefits of USDA Loans
Some pros of buying a house with a USDA loan include:
- You don’t need to make a down payment.
- There is no minimum credit score requirement, so you may qualify even with a lower credit score, as long as you provide evidence that you are willing and able to pay it back. However, some lenders do have their own minimum credit score requirements.
- USDA loan interest rates tend to be lower than FHA loans.
Speak to a Cross Timbers Mortgage expert today to see if a government mortgage program would be the perfect fit for you, and can help you achieve your dream of homeownership.