The government backs nearly 70% of the housing loans and 30% of the student loans.
The U.S. government offers loans through its different departments and agencies to deserving citizens and businesses. Generally, these benefit people who may not be able to come up with the capital or qualify for a conventional loan. Moreover, these loans have low interest rates, minimal credit scores, etc.
This article walks you through the different government-backed loans and mortgages, qualifications, etc.
What Is a Government-Backed Loan?
A loan backed or subsidized by the U.S. government is called a government loan. They are easier to qualify for and have lower interest rates when compared to conventional options like personal loans.
When you do not qualify for a conventional loan, these loans come to your aid, particularly in the case of small businesses and individuals with no collateral.
How Do Government Loans Work?
Government loans make it easier on the lenders by protecting them in case the borrowers don’t pay back. They make capital available for people who may need it and guarantee the loans issued by banks, private lenders, credit unions, and finance companies.
In short, if the borrowers are unable to make the payments, the U.S. government promises to do so on their behalf, which reduces the risk for the lenders.
While the government may not lend money directly, it guarantees all the loans. If it funds the loan, the capital comes from the taxpayer’s money. In the case of the former, you can expect the state to cosign with the borrower. And if he/she defaults, then it repays the lender.
Again, the government loan may either be subsidized or unsubsidized. In the case of the former, the state pays at least a part of the interest, while for the latter, you are responsible for the interest.
Apply for a Government-Backed Loan
Applying for government loans is a simple process that involves filling an application online and submit it to the federal government. For example, for student loans, use the Free Application for Federal Student Aid (FAFSA®) to apply for financial aid online.
In most cases, it is the approved private vendors who issue these loans. The vendors have their own application and approval process.
Benefits of Government Loans
Government loan programs are low-cost to help those who cannot afford the terms of a conventional loan and bridge the capital gap.
- Enhances the quality of life for the citizens
- Improves the national economy
- Provides relief from natural disasters
- Encourage entrepreneurship
- Higher chances of approval even in situations where you otherwise may not qualify.
- No credit checks
- Flexible repayment options
Types of Government Loans
There are quite a few government loans available to cover everything from education to housing and rural services.
- Housing and urban development loans
- Student loans
- Business and industrial loans
- Agriculture, rural, and farm service loans
- Veteran loans
- Disaster relief loans
Housing and Urban Development Loans
A major part of the government loan programs goes to housing loans. There are quite a lot of loan programs for first-time buyers, home repair and refurbishments, interest rate reduction, etc.
Most common loans include:
- First-Time Homebuyer Loan
- FHA Loans
- FHA 203(k) Loan
- Refinancing Loan
- VA Loans
These are safer for the borrower and the lender, more so for the latter since it is secured against the property.
To secure any of these loans, you need to work with an approved lender or financial agency.
Student or educational loans fund undergraduate and graduate college education. They also fund research-related courses in certain areas. Additionally, research in healthcare, AIDs, infertility, contraception, pediatrics, and nursing have their own dedicated loan programs.
Typical education loans include:
- Federal Direct
- Direct PLUS
- Direct Consolidation
Apart from these, they may also fund the unique courses available only at specific foreign locations. However, they may come with conditions like working for the state upon graduation.
These are also considered the riskiest category since they have no collateral of any kind and depend on the individuals paying the loan.
Business and Industrial Loans
The government-backed loans have quite a few loan programs to encourage entrepreneurs, both budding and experienced, to develop the nation’s economy. Be it a small startup or mid-sized businesses or large industries, you can avail of a business loan nevertheless.
You can use the funding to buy land and improve facilities, equipment, repairs, or other business needs. There are separate loan programs for aspiring startups with good growth potential.
Apart from that, there are also the Small Business Administration (SBA) and Paycheck Protection Program (PPP) for businesses with 500 and fewer employees.
Rural and Farm Service Loans
Food security and rural development are essential for a nation’s growth. And to encourage both, the state offers several loans to promote farming. With the capital, the farmers can buy livestock, feed, farmland, machinery, etc.
Besides that, you can also avail of loans for constructing storage, processing, and handling facilities. Other loans include financing for fisheries, aquaculture, commercial fishing industries, etc.
There are separate loan programs for veterans and eligible service members through the U.S. Department of Veterans Affairs (VA). Active members of the military, reservists, national guards, and surviving spouses can avail of the VA loans. The financial benefits can be used to buy and adapt a home and refinance loans.
Few loan programs available for veterans include:
- Veterans’ Life Insurance Policy
- Interest Rate Reduction Refinance
- VA Cash-Out Refinance
Disaster Relief Loans
Disaster relief loans cover damages to farming, commercial, and housing due to natural and man-made disasters. When your business is declared to be in a disaster area, you can utilize the disaster relief loans to re-establish themselves and the business. However, you cannot use it to build structures that were not present before the calamity.
Homeowners can claim up to $200,000 for rebuilding their homes and an additional $40,000 for possessions. In the case of business, you are free to apply for up to $2 million to restore your business.
As per the CARES (Coronavirus Aid, Relief, and Economic Security) Act, the Small Business Administration (SBA) now includes the businesses affected by the COVID-19 pandemic.
A mortgage loan that is backed by the federal government is called a government-backed mortgage. Since the state subsidizes them, they are much easier to obtain than the conventional home loan.
How Does the Government-Backed Mortgage Work?
A government-backed mortgage is insured by any one of the three federal agencies, namely the Federal Housing Administration (FHA), U.S. Department of Veterans Affairs (VA), and U.S. Department of Agriculture (USDA).
Depending on the mortgage, the corresponding agency insures the home loan. Since this reduces the risk for the lenders, they often offer lower interest rates and no down payment requirements.
Private agencies and finance companies offer these mortgage loans on behalf of the federal government. They cater to certain requirements that are not possible through conventional loan programs. Hence, they have different requirements, costs, upfront fees, to name a few.
Fannie Mae and Freddie Mac are both federal agencies, but they do not issue loans. They instead buy and guarantee loans that qualify through a secondary market.
Qualifications for a Government-Backed Home Loan
- FICO score of 580 and a down payment of 3.5%
- FICO score between 500 and 579 and a down payment of 10%.
- Mortgage insurance premium
- Debt to income ratio lesser than 43%
- Steady income and proof of employment
- The primary residence of the borrower
Types of Government-Backed Mortgages
There are three types of government-backed mortgages based on the agency that backs your loan:
- FHA Loan
- USDA Loan
- VA Loan
Federal Housing Administration (FHA) Loans
The Federal Housing Administration (FHA) loan is the easiest to obtain among the three since it doesn’t cater to military member like the VA loan or require you to build your home in a specific area like the USDA.
The mortgage requires you to have a minimum credit score of 580 and a minimal down payment of 3.5%. However, you can apply for the loan program even if the credit score is less with a down payment of 10% of the purchase price of your home. This situation is ideal for people looking to buy their first homes with a bad credit score.
However, on the downside, the FHA loan requires you to have a Mortgage Insurance Requirement. With this, you’ll need to pay 1.75% of the loan amount upfront and an additional 0.45% – 1.05% as an annual premium. When you pay 10% on your FHA loan, the lender removes the Mortgage Insurance premium after 11 years.
U.S. Department of Agriculture (USDA) Loans
The Rural Development Guaranteed Housing Loans and Grants Program backs the loans for low-income borrowers. However, the only condition is that they build in rural areas or eligible suburban areas (depending on the state).
There are a few different types of USDA loans depending on the credit and the income requirement, so you may want to shop around first.
As per the standard rules of the loan program, there is no need to put down money. On the other hand, you may have to get a mortgage insurance premium which you may not be able to get rid of. The upfront premium is 1%, and the annual premium is .35%, both of which are lesser than the FHA loans.
Government loans that cater to military people like active-duty members or veterans or the spouse of the member or veteran are the VA loans. The advantage of these loans is that they do not have a credit score requirement. You can finance up to 100% of the purchase price.
They do not have a mortgage insurance premium, but you will have to pay closing costs amounting to 1.4% to 3.6% of the loan amount.
Mortgages that are backed by the federal government or government-sponsored entities are called federally-backed mortgages. They are of 5 types:
- FHA Loan
- VA Loan
- USDA Loan
- Fannie Mae
- Freddie Mac
There are quite a lot of government loans available for the common man, from education to disaster relief and farming. These loans are backed by the government who repays if a borrower lapses, presenting a much lesser risk to the lender.
While a common man may qualify for these loans, they come with certain conditions and requirements as to who benefits from the loans.
Since most of these loans are issued by private lenders and finance companies, you might want to shop around before applying for a mortgage loan. Regardless of the loans, you may want to improve your credit score at least six months before you start the process.
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