Government-Insured Mortgage Loan Programs, Explained

If you’ve been doing some home loan research online, you’ve probably encountered the terms “government-backed mortgage” and “government-insured mortgage.” But what does that mean, exactly? This article explains what these programs are and how they work.

What Is a Government-Insured Mortgage Loan?

The term “government mortgage loan” can mean a couple of different things. In most cases, however, the general concept is the same.

Definition: A government-backed or insured mortgage program is when a private-sector lender issues the loan to the borrower, and the government insures or guarantees it. The insurance / guarantee means that the mortgage lender is protected against losses, if the homeowner fails to repay later on.

The term “government-insured mortgage loan” (or “backed” or “guaranteed”) is used to distinguish these programs from conventional home loans that do not receive any kind of government backing.

Conventional and government loans

Three Main Types of Government Mortgage Programs

There are three main types of government-insured or guaranteed mortgage loans available to borrowers in the U.S.

Those three programs are:

1. FHA — The Federal Housing Administration (FHA) mortgage insurance program is the most popular type of government-backed home loan. This program allows borrowers to make a down payment as low as 3.5%. FHA loans also tend to be easier to qualify for, when compared to “conventional” or regular home loans. Through this program, mortgage lenders receive insurance protection from the government via the Federal Housing Administration (part of HUD).

2. VA — The Department of Veterans Affairs (VA) home loan program is reserved for eligible military members and veterans, and in some cases their spouses. VA loans offer the benefit of 100% financing. This means borrowers can buy a house with no down payment whatsoever. These loans are partially guaranteed by the VA, which gives the lender a degree of protection should the homeowner default (fail to pay).

3. USDA — The USDA home loan program offers financing to borrowers in rural or low-population areas who meet certain income requirements. Generally, this means that the borrower can have a household income up to (but no higher than) 115% of the median income for the area. This government-insured mortgage program “provides a 90% loan note guarantee to approved lenders in order to reduce the risk of extending 100% loans to eligible rural homebuyers.”

Conventional Loans Are Most Popular

While government-backed home loans offer certain benefits, they are not nearly as popular as conventional mortgage loans.

Definition: In this context, a “conventional” loan is one that does not receive any kind of government insurance, backing or guarantee.

The vast majority of home buyers use conventional mortgage products when financing a home.

  • According to the U.S. Census Bureau, conventional loans accounted for 75% of home purchases in 2018 (where a mortgage was used).
  • The FHA program accounted for 12% of all purchase loans during that year.
  • VA-guaranteed home loans accounted for 7% of purchases.

So the majority of home buyers who use a mortgage loan to finance their purchases opt for conventional financing, as opposed to the government-backed loan programs.

For many borrowers, conventional mortgage products are the cheapest alternative, over the long term. But the government-backed programs tend to have the most flexible qualification criteria (credit scores, debt ratios, etc.).

According to the Consumer Financial Protection Agency: “Conventional loans typically cost less than FHA but can be more difficult to get.”

Key Benefits for Borrowers

As mentioned above, government-backed loan programs (like FHA and VA) offer certain benefits for borrowers. These include small down payments and flexible qualification criteria.

Low Down Payments

The VA and USDA programs allow for 100% financing, which means borrowers can avoid the down payment altogether. The FHA loan program allows for a down payment as low as 3.5%, if the borrower has a credit score of 580 or higher.

Flexible Qualification Criteria

Borrowers often have an easier time qualifying for government-insured mortgage loans, when compared to conventional financing. The FHA, VA and USDA programs give lenders an added layer of protection against borrower default, in the form of government insurance or guarantees. So lenders are often more “lenient” with their qualification requirements when issuing government-backed loans.

Possible Drawbacks and Disadvantages

As mentioned above, there are some key benefits to using a government-backed mortgage program. But there are some potential disadvantages as well. Borrowers need to understand both the pros and cons in order to make an informed decision.

Disadvantages of using a government-insured mortgage include:

1. Extra mortgage insurance and fees.

All three of the government-backed loan programs above require some form of mortgage insurance or additional fee.

The VA calls this premium the VA funding fee. For home buyers who finance 100% of the purchase (with no money down), this fee usually ranges from 2.15% to 3.3% of the loan amount. In most cases, this fee can be financed or “rolled into” the loan. Or it can be paid up front.

Similarly, borrowers who use the USDA loan program must pay a “guarantee fee” that typically equals 1% of the loan amount. Here again, the fee can be paid up front or financed.

Borrowers who use an FHA-insured loan to buy a house have to pay additional mortgage insurance premiums. There are two premiums. Most home buyers who use this government-backed loan program pay an annual premium equaling 0.85% of the amount borrowed, along with an upfront premium of 1.75%. (Both can be financed into the loan.)

2. Size limits or restrictions.

Another possible disadvantage of government-insured mortgage loans is that borrowers are often limited to a certain dollar amount. FHA, VA and USDA programs all have “loan limits” associated with them.

Technically speaking, the VA does not limit how much a person can borrow. But home buyers who want to use a VA loan with no money down are typically limited to the conforming loan limits established by the Federal Housing Finance Agency. Learn more here.

The FHA and USDA programs have their own unique limits. These vary by county, because they are based on home values.

(Note: You can use the main menu above to learn more about the limits for the various government-backed home loan programs.)

Programs Available at State & Local Level

The three main government-insured mortgage programs explained above (FHA, VA and USDA) are available to borrowers nationwide. In addition to those, there are many loan programs offered at the state and local level. Borrowers should explore these options as well.

These state and local programs are often cooperatives or partnerships between government housing agencies, non-profit organizations, and mortgage lenders.

Most states across the country offer some kind of financing assistance for first-time home buyers. Maybe it’s a grant to help with down-payment funds, or a special low-interest loan. Many of these programs require some form of education as well, such as counseling for home buyers.

To learn more about financing options available in your state, just do a Google search for “home buying programs” followed by your state name. Then repeat the search with the name of your county and/or city.

Disclaimer: This page provides a basic overview of the different types of government-insured mortgage programs. These are complex loan programs with a lot of specific requirements and criteria. Some details have been left out for the sake of brevity. Borrowers who are considering one of these programs should conduct additional research beyond our website.