Types of Mortgage Loans - Government-Backed Mortgages

If you’re new to the homebuying market, beginning the process can feel quiteoverwhelming. Not only is there the matter of finding the right house, but you also have to research mortgage lenders and determine which type of mortgage is best for funding your new home. While there are a lot of steps involved to being approved for a mortgage and having the keys to your new house in hand, we’re here to help.

In this article, you’ll get the breakdown on the different types of government-backed mortgages available, and which one may be the right choice for you.

What are the different types of mortgage loans?

Home loans can be separated into two different categories:

Conventional

A conventional loan is any mortgage that is not insured/guaranteed by the government. If you opt for a conventional mortgage, you’ll have to determine whether you need a conforming or non-conforming loan. Conforming loans have a maximum loan limit between $726,200 and $1,089,300 depending on your approval and the cost of the area in which you’re buying. Any amount over that limit is considered a non-conforming loan — more commonly referred to as a jumbo loan.

Government

Unlike conventional mortgages, government-guaranteed loans are backed by administrations that work hard to provide borrowers with low down payment options. This way more individuals and families can make their homeownership dreams a reality. These government-insured mortgages have their own rules and options for you to choose from.

How do government-backed loans work?

Every government loan is secured/insured by the federal government. In the case of federally backed mortgages, the government works with approved lenders. While the lender provides the funding, the government insures the loan. Because the government guarantees these loans, lenders are incentivized to offer benefits to qualified borrowers including lower interest rates, fees, and low (or no) down payments to borrowers who meet special requirements. This makes homeownership more affordable and attainable to a wider range of buyers, including those who may not qualify for conventional mortgages.

These programs minimize risks to the lenders, so if the borrower defaults on the mortgage, the government will end up repaying the private lender. Each approved lender has their own application process that you’ll need to follow. Often times a mortgage insurance premium is required to help offset the added risk the government entity backing the loan is assuming.

The different types of government-backed mortgages

VA Loans

This type of mortgage loan is guaranteed by its namesake, the United States Department of Veterans Affairs. On top of offering highly competitive interest rates, there is little to no down payment required. Primary residences, second homes, and investment properties are even eligible for an Interest Rate Reduction Refinance Loan (IRRRL) later on if you decide to refinance. Check the list of requirements below to see if you may qualify:

• Eligible borrowers: Veterans, servicemembers, and surviving spouses
• One-unit loan limit: No limits (may vary based on available entitlement and lender guidelines, must qualify for VA loans)
• Number of units: 1-4 (must live in one unit as the primary residence)
• Minimum down payment: 0%
• Minimum credit score: 580-620 (may vary by lender)
• Best for: Veterans and servicemembers for their primary residence
• Occupancy: Primary, possible refinance on a second home, rental
• Pros: Zero to low down and typically lower rates. MIP not required
• Cons: Only available to veterans, servicemembers, or their surviving spouses. Rigid property requirements, upfront funding fee

FHA Loans

An FHA loan can only be issued by an approved lender. They are backed by the Federal Housing Administration (FHA). Similar to a VA loan, FHA mortgages are a great option for first-time buyers as they typically require a smaller down payment at closing.

There are also lending limits to be aware of. For instance, in 2023 it was a limit of $726,200. However, that limit may increase in counties and states with higher costs of living. The FHA map shows each county’s spending limits. Use the list below to determine if you meet the criteria for an FHA mortgage:

• Eligible borrowers: U.S. citizens and permanent resident aliens
• One-unit loan limit: 2023 FHA loan limits are $472,030 or $1,089,300 (in high-cost areas)
• Number of units: 1-4 (must live in one unit as the primary residence)
• Minimum down payment: 3-5%
• Minimum credit score: 580 (requires higher down payment)
• Best for: First-time buyers, those with low savings on hand for down payment, and those with low credit scores
• Occupancy: Primary
• Pros: Low down, lower credit scores
• Cons: Mortgage insurance premium (MIP) for the life of the loan if less than 10% down and MIP for 11 years if 10% or more down

Government-backed mortgages are a fantastic resource for borrowers: they offer more security, low to no down payment options, and less restrictive requirements for approval. Take time to compare rates and overall costs before you decide which type of mortgage is right for you. The best choice is different for every individual.

For more a more in-depth look, be sure to download our eBooks:

FHA Lending

VA Lending