How Do Government-Backed Mortgages Work?
A government-backed mortgage is not a loan from the government— rather, the government acts as an insurer for a loan from a private bank through one of three federal agencies: the Federal Housing Administration (FHA), the U.S. Department of Agriculture (USDA) or the Department of Veterans Affairs (V.A.).
For each type of loan, the agency in question acts as a guarantor on the contract, protecting the bank that writes the mortgage if the homeowner can’t pay it in full. This partnership lowers the risk for banks, which often makes it possible for them to give lower interest rates or, in some cases, to offer a loan with low or no down payment.
Each agency’s type of loan is different. They have different cost structures, credit requirements, insurance requirements, and up-front fees associated with them. It’s important to do further research if you’re hoping for one type of mortgage over another.
Two of the types of government-backed mortgages are restricted to specific populations or geographic areas: the Department of Veterans Affairs loan is restricted to active-duty service members, veterans, and eligible spouses of veterans, and the Department of Agriculture loan is limited to low- and middle-income borrowers who are buying a home in a rural or eligible suburban area.
The primary restriction of an FHA loan is that it requires borrowers to pay an up-front premium to act as mortgage insurance— typically 1.75% of the loan amount— plus an additional premium each year. This requirement can be waived if you make a down payment of 10% or more on the mortgage; otherwise, you’ll be paying that insurance annually for the life of the loan.
Additional requirements must be met for an FHA loan to be offered— typically minimum credit scores and limits on the ratio of debt to income that a borrower can have. FHA loans also have caps on the maximum amount homeowners can borrow. These limits are determined by HUD and vary by the county due to being based on the average value of properties in an area.
Federal homeowner assistance programs are available to all U.S. citizens, but states and counties often have their own programs to replace or supplement the assistance offered at the federal level. The U.S. Department of Housing and Urban Development has a list of Colorado-specific homeownership assistance programs here: https://www.hud.gov/states/colorado/homeownership/buyingprgms
Colorado’s Department of the Treasury also sponsors the Colorado Housing and Finance Authority (CHFA), which runs several programs aimed at helping people become homeowners. Down payment assistance, loans to cover closing costs, and home-buyer education classes are available at CHFA’s website: https://www.chfainfo.com/homeownership.
Golden Lenders has more than 25 years of experience in the mortgage industry – just the expertise you need for a successful outcome. Our team of mortgage consultants works to simplify the process for you while educating you on this complex process. Our priority is customer service. It is our goal to make this process as easy and convenient as possible while getting you the best deal on your loan. We work with borrowers of every type, from those who want to buy their first home, refinance the house they are in now or have credit challenges. Whether it’s your first home or you’re an experienced home buyer, we’re here to ensure everything goes as smoothly as possible.