Government-backed Home Loans for First-Time Buyers

Government-backed Home Loans for First-Time Buyers
Government-backed Home Loans for First-Time Buyers

As it has been established, getting a house as a first-time buyer is a huge project that requires a serious financial commitment and sometimes people just don’t have the money to use for the purchase.

There is always the option of obtaining a loan from a private lender but requirements such as a down payment, a good credit score, and private mortgage insurance (PMI) can sometimes eliminate this option.

This is where government-backed loans come in. The essence of these loans is to help first-time buyers who either don’t have enough money to buy a house or have bad credit to get a home loan without the need for a huge down payment or private mortgage insurance (PMI).

The government is able to help by backing these loans with the banks. This means that the government doesn’t do the lending but it guaranteed the loan by promising to pay back a sizable percentage of the loan if the borrower defaults.

This initiative has continued to help a lot of low-income families in the US get their dream homes and has sheltered the homeless.

There are numerous government-backed loans in the US and we will be looking at some of them. 

USDA Home loan

The first government-backed home loan that we will be looking at is the U.S. Department of Agriculture (USDA) home loan. This is a loan program that makes life easy for first time buyers.

What Is a USDA Home Loan?

The U.S. Department of Agriculture (USDA) home loans program offers zero-down-payment home loans to low-income residents of rural areas who cannot get a conventional home loan for one reason or the other.

The program is designed mainly to help lower-income families living in dangerous or hazardous areas get better homes.

These loans are backed by the USDA Rural Development Guaranteed Housing Loan Program, a part of the U.S. Department of Agriculture.

Sometimes, the department grants these loans directly, while sometimes they are issued through partner lenders.

The USDA Home Loan doesn’t require a down payment or mortgage insurance, and it has a lower rate compared to conventional home loans.

This loan is a great option for first-time buyers, as long as they can meet the requirements.

Types of USDA loans

Now that we’re familiar with what a USDA loan is, let’s look at some of the types that we have.

1. Loan guarantees: This is when the USDA guarantees a mortgage issued by one of its local partner lenders, letting borrowers qualify for low home loan interests without the need for a down payment.

2. Direct loans: These are low-interest home loans granted by the USDA to applicants living in unsafe areas or are not qualified for a conventional home loan. Interest rates are usually as low as 1% and the loans also offer terms of up to 38 years.

3. Home improvement loans and grants: These loans/grants allow homeowners to repair or renovate their homes. Loan terms are for 20 years with a 1% interest rate.

Eligibility Requirements for a USDA Home Loan

1. The home that the applicant intends to purchase must be situated in an area with a population of 35,000 or less and he must plan to make it a primary residence.

2. The applicant must be a U.S. citizen or at least a legal nonresident alien.

3. The applicant must not have any outstanding federal debt.

4. Income limits are also a requirement but they vary depending on your location and the loan program that you’re applying for.

5. The applicant should have a good or at least a manageable credit score.

How to Qualify for a USDA-Guaranteed Home Loan

Although the main qualification for a USDA-guaranteed home loan is the intention to purchase an owner-occupied primary residence, aspiring homeowners must also:

  • Be a U.S. citizen or at least a permanent resident.
  • Have a substantiated history of reliable income.
  • Have a credit history that shows ability to settle debts and a credit score of at least 640.
  • The monthly payment on the loan must constitute just 29% or less of the borrower’s monthly income.

How to get the Best USDA Home Loan Rates

1. Ensure your finances are in good shape. Go through your credit report and address any issues that you may have.

2. Although a USDA home loan doesn’t require a down payment, being able to make one position you as a safe candidate and increases your chances of getting it.

3. Compare home loan rates between a minimum of three USDA-approved lenders.

Best USDA Home Loan Lenders

Here are some of the best USDA Home Loan Lenders:

1. Guaranteed Rate.

2. Flagstar Bank.

3. Guild Mortgage.

4. SunTrust Mortgage (Truist).

5. PNC.

6. Pennymac.

7. Carrington.

8. New American Funding.

9. Northpointe.

10. Wells Fargo.

VA Loan

Another great government home loan option for first-time buyers is the VA loan. It is highly recommended if you are a veteran or an active service member.

What is a VA Loan?

A VA home loan, also known as a Department of Veterans Affairs home loan is a special type of mortgage guaranteed by the U.S. Department of Veterans Affairs (VA).

It is designed for qualified veterans as part of their military benefits. These loans aren’t issued by the government but by private lenders but it is backed by the government so that private lenders can feel more comfortable granting them as it doesn’t require a down payment or private mortgage insurance.

This means that even if a military borrower defaults, the lender won’t lose all the money as the government has made arrangements to pay some part of the loan.

A VA home loan offers lower interest rates and lower closing costs, so it makes home buying very affordable for veterans and active military members.

It is a great option for first-time buyers, especially if you don’t have enough money to purchase a house.

How a VA Loan Works

As a first-time buyer, the process of getting a VA loan is similar to that of getting a conventional home loan. Just like a conventional home loan, you can only use a VA loan to purchase a home that you will use as your primary residence.

How it works is that you fill out a loan application with a lender, provide evidence of your income and credit history, and prove that you have the money to cover closing costs.

A VA loan doesn’t require private mortgage insurance but you will have to pay a VA funding fee when you close.

When you want to apply, you will be asked to provide a certificate of eligibility from the VA. This certificate can be gotten from the VA website.

Borrowers Who Qualify For a VA Loan

1. Borrowers who are currently on active military duty.

2. A veteran who was honourably discharged and met the minimum service requirements.

3. A borrower who served at least 90 consecutive active days during wartime.

4. A military person who served at least 181 consecutive days of active service during peacetime.

4. A borrower whose spouse died in the line of duty may qualify for a VA loan.

VA Loan Requirements

After confirming that you’re qualified for a VA loan, the following are some of the additional requirements that you’ll need to meet.

1. Stable employment history: You must have a stable employment history for lenders to find you safe to lend to.

2. VA loan limits: If you still have your full entitlement, there are no limits to how much you can borrow.

3. A credit score of above 500: While a regular VA loan doesn’t require a minimum score, most lenders tend to set 500 as the lowest credit score that they can accept.

4. Residual income: The VA sets a minimum requirement for your residual income based on your home, its location, and your family size.

5. Maximum DTI ratio of 41%: The VA expects a maximum 41% DTI ratio, but if you have enough residual income, a lender might consider you.

6. No outstanding federal debt: If you owe any outstanding federal loan, you may not be eligible for the loan.

Types of VA Loans

There are different types of VA Loans.

1. VA Purchase Loan: This type of VA loan allows veterans to buy new or existing homes without any down payment.

2. VA Interest Rate Reduction Refinance Loan (IRRRL): This is widely used by veterans as it is simple and low cost, and sometimes doesn’t need credit underwriting.

3. VA Cash-Out Refinance: This type of VA loan allow veterans to refinance up to 90% of their home’s value.

4. VA Energy Efficient Mortgage: Here, veterans are given the chance to borrow more money to pay for energy efficiency enhancements to a home.

Top VA Lenders

1. Penfed Credit Union.

2. PNC.

3. Loandepot.

4. Guild Mortgage.

5. Navy Federal Credit Union.

6. Flagstar Bank.

7. Guaranteed Rate.

8. Rocket Mortgage

FHA Loan

As a first-time buyer, the FHA loan is one type of loan you might want to check out, as it packs a whole lot of benefits compared to conventional home loans.

What is an FHA Loan?

A Federal Housing Administration (FHA) loan is a government-backed home loan that allows you to put less money down (3.5% down payment) even when you have bad credit. It is set up to help low-income families own a home and it is very popular among first-time buyers.

This type of loan doesn’t require a good credit score or a big down payment. However, a borrower is expected to pay two types of mortgage insurance to protect the FHA-approved lender against losses if the borrower decides to stop making payments.

How to get a Federal Housing Administration (FHA) Loan

1. Find out if you’re eligible for the loan.

2. Find out the least amount you are allowed to borrow.

3. Decide how much you can afford to spend on a house.

4. Shop for FHA- approved lenders and make comparisons so as to get the one that best suit your needs.

5. Compile your documents and apply for an FHA loan.

6. Compare offers to ensure you are getting the best deal.

FHA Loan Requirements

1. As a borrower, if your credit score is between 500 and 579, you will have to drop a down payment of 10% before you can get an FHA loan but if it is 580 or higher, you can get an FHA loan with a down payment of 3.5%.

2. Your financial history must not show any payment default.

3. You must have a current and steady employment.

4. Alsp, your other financial commitments and monthly or annual expenses must take less than 31% of your gross income.

Top FHA Loan Lenders

1. PNC Bank.

2. Loan Depot.

3. Bank of America.

4. Ally.

5. Quicken Loans.

6. Mr. Cooper.

7. Wells Fargo.


There you have it, three types of government-backed home loams for first time buyers. We believe with the information that we’ve now exposed you to, you should be able to make your pick and aim for your dream home.

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