What is a government-backed mortgage?

Government-backed mortgages, which include FHA, VA, and USDA loans, promote homeownership for low-income households, first-time buyers, veterans, and more.

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• Unlike a conventional mortgage, a government-backed mortgage is guaranteed or insured by a government agency.
• There are three main types of government-backed loans: VA, USDA, and FHA.
• In many ways, it's easier to qualify for a government home loan than for a conventional mortgage.

When you apply for a mortgage, you'll have to decide between two basic types of loans: a government-backed mortgage and a conventional loan.

Government-backed mortgages were created to promote homeownership by making it more affordable. If you have a low income, poor credit, or are a first-time homebuyer or veteran, one of these mortgages could help make homeownership possible for you.

Government-backed mortgage definition

A government-backed mortgage is a home loan that is insured or guaranteed by a federal agency. You may qualify for a mortgage backed by the Federal Housing Administration (which is part of the US Department of Housing and Urban Development), US Department of Agriculture, or the US Department of Veterans Affairs.

These types of loans aren't direct loans, meaning you don't apply for a government-backed mortgage directly through the government agency — you apply through a private mortgage lender that offers FHA, VA, or USDA loans. If you default on a mortgage that's backed by the government, the agency pays the lender on your behalf.

When a lender gives you a government-guaranteed mortgage, it's like the lender is getting insurance on your loan. This is what allows the lender to offer you more favorable terms, such as a lower rate or more flexible credit requirements.

A conventional loan is not guaranteed by the government. A private lender, such as a bank or credit union, gives you the loan without insurance from the government. However, most conventional mortgages are backed by the government-sponsored enterprises Fannie Mae or Freddie Mac, provided they meet the criteria set forth by the enterprises.

Each type of government-backed loan is different, but it's generally easier to qualify for one than for a conventional mortgage.

Types of government-backed mortgages

There are three main types of government-backed loans for buying a home: VA, USDA, and FHA.

Each type of mortgage has its own requirements regarding what down payment, credit score, and debt-to-income ratio you'll need to qualify. 

Keep in mind that each lender can set its own standards surrounding credit scores and DTI ratio. For example, while the rule of thumb is that you can qualify for an FHA loan with a 580 credit score, a lender has the right to say it requires a 600 credit score.

1. VA loan

A VA mortgage is for active-service military members or veterans, or certain qualifying spouses of members who have died. VA loans usually charge lower interest rates than conventional mortgages.

Here are the requirements to get a VA loan:

• Down payment: None
• Credit score: Each lender sets its own standards, but many require at least a 660 score
• DTI: 41% is the VA guideline, but it can vary

See Insider's picks for the best VA mortgage lenders>>

2. USDA loan

USDA loans are for low-to-moderate income borrowers buying homes in rural or suburban areas. Like VA loans, USDA mortgages typically charge lower interest rates than conventional loans.

To be eligible for a USDA loan, you'll need the following:

• Down payment: None
• Credit score: No set minimum from the Department of Agriculture, but many lenders require 640
• DTI: 41%

See Insider's picks for the best USDA loan lenders>>

3. FHA loan

Unlike VA and USDA loans, FHA mortgages aren't for a specific group of people. You'll probably get a lower rate than you would with a conventional mortgage. The downside is that you do need money for a down payment.

You'll need the following to get an FHA loan:

• Down payment: 3.5%
• Credit score: 580. You can get a loan with a score between 500 and 579, but you'll need a 10% down payment.
• DTI: 43%, but you may be able to go higher with certain compensating factors (such as having a certain amount of cash saved up to cover your mortgage payments in case of emergency)

See Insider's picks for the best lenders for FHA loans>>

Pros and cons of government-backed home loans

Getting a government home loan comes with its trade-offs. Some of the pros and cons will depend on which type of government loan you choose.

Pros

• Easier to qualify. In many ways, it's easier to qualify for a government home loan than for a conventional mortgage. VA and USDA loans don't require a down payment, while conventional loans require at least 3% up front. Many lenders will give you an FHA loan with a lower credit score than if you applied for a conventional mortgage, and you can apply for all three types of government-backed mortgages with a higher DTI than for a conventional loan.
• Lower mortgage insurance costs. With a conventional mortgage, you'll pay for private mortgage insurance until you acquire at least 20% equity in your home. You don't have to pay for mortgage insurance with a VA loan. USDA mortgages require mortgage insurance, but you'll probably pay less than you would for a conventional mortgage. You'll also pay for mortgage insurance with an FHA loan, and depending on several factors, it could end up cheaper.
• Lower interest rates. FHA, VA, and USDA mortgages typically charge lower interest rates than conventional mortgages.

Cons

• Some stricter rules. Yes, it's easier to qualify for a government-backed loan than a conventional loan in general — but certain eligibility requirements can be stricter. For example, you'll need a higher credit score for a VA or USDA loan than for a conventional mortgage, and an FHA loan needs a slightly higher down payment.
• Higher mortgage insurance costs. If you choose an FHA loan, you could end up paying more for mortgage insurance than you would on a conventional loan, depending on your credit score.
• Eligibility. USDA and VA loans are meant for certain groups of people, so you may not qualify. You must be at a low-to-moderate income level to get a USDA mortgage, and you have to buy a home in a rural or suburban area. VA loans are specifically for military families. (FHA mortgages have more flexibility, though.)
• Minimum property standards. Each type of government home loan has rules surrounding what type of home you can buy. To get a VA or FHA loan, your home must meet certain safety standards. USDA loans come with location restrictions.