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Government home loans: Definition, types, and requirements

Yahoo Personal Finance· Getty Images
Updated 9 min read

Government home loans are instrumental in making homeownership affordable for Americans. By encouraging mortgage lenders to broaden service to households of modest means, more first-time home buyers can get into a house, make necessary repairs, and refinance when the time is right.

However, there can be downsides to government loans too.

Here is a comprehensive digest of the types of government home loans — and what you need to know.

Dig deeper: Types of mortgage loans

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Government home loans are insured by the federal government. That financial backing encourages lenders to extend loans to borrowers who might not otherwise qualify for a mortgage.

Government-backed mortgages typically have more relaxed credit standards than conventional loans and are intended to assist first-time, low- to moderate-income, military-related, and rural home buyers.

Private lenders make government loans that generally follow the credit criteria required for each type of loan. However, in some instances, they can add additional qualifying standards, such as a minimum credit score.

Not to confuse the matter, but in reality, most home loans have some kind of government connection. Even conventional loans are facilitated by government-authorized companies (Fannie Mae and Freddie Mac) that provide financial resources to support mortgage markets. Only mortgages issued for higher-priced homes, called jumbo loans, usually have no government backing and are issued from lenders' own assets.

Government home loans generally fall into three categories:

  • FHA mortgages

  • VA loans

  • USDA loans

However, the variations run deep for all the different types of borrowers and situations served by government home loan programs.

Mortgages backed by the Federal Housing Administration (FHA) and the Department of Housing and Urban Development (HUD) are called FHA loans. They generally offer down payments as low as 3.5% but are saddled with mortgage insurance premiums.

Learn more: Understanding FHA mortgage insurance

FHA home purchase 203(b) loan

The 203(b) loan is the primary purchase and refinance lending tool and the foundation of the FHA mortgage program. It’s probably what you think of when you hear the term “FHA loan.” It can finance a single-family home or units of up to four units.

FHA adjustable-rate mortgage

While FHA loans usually have fixed interest rates that never change, they can also be adjustable-rate mortgages. Your loan begins with an initial interest rate and then periodically changes — up or down — based on an interest rate index. It can be a useful loan option to consider when interest rates are expected to move lower over time.

FHA condominium mortgage

Condo lending is also available through an FHA-backed mortgage. Thing is, the condo has to be approved by the FHA. You can search condominiums in your area to see which ones qualify or seek approval for just the unit you want to buy.

FHA Manufactured Home Loan (Title I)

New and used manufactured housing can also qualify for an FHA loan. You can apply through an FHA-approved lender, and some manufactured home dealers also work with lenders through the loan process. You can also apply for an FHA loan to buy the lot where you want to place the home.

FHA Streamline Refinance

When you want to exchange your existing FHA home loan for one with a lower interest rate, the FHA Streamline Refinance is the way to go. It requires less paperwork and offers quicker approval.

FHA cash-out refinance

An FHA cash-out refinance allows you to access some of your home's equity by replacing your loan, taking a lump sum of cash from the value of your house, and adding that amount back into a new FHA loan's balance.

FHA Energy Efficient Mortgage Program

Improving your home's energy efficiency can help you save money on utility bills. The FHA EEM program can help you finance weatherization improvements and even solar and wind installations. A home energy assessment will determine the most cost-effective improvements.

FHA Rehabilitation Mortgage Standard 203(k)

If you want to make extensive home improvements, the FHA 203(k) allows you to finance your project. This can be for a home you own or are buying. It's often used to repair structural issues or for additions and major upgrades.

FHA Rehabilitation Mortgage Limited 203(k)

Limited 203(k) loans are usually appropriate for home improvements that are less significant than those of the Standard Rehabilitation Mortgage. They're good options when you need to fund remodeling, painting, and other upgrades to improve a home or prepare it for sale.

FHA Disaster Victims Mortgage 203(h)

A unique mortgage among the FHA loan roster is the 203(h) for low- and moderate-income victims of major disasters. The loan offers 100% financing to rebuild or buy another home for those whose houses have been destroyed or heavily damaged in a Presidentially Declared Major Disaster Area.

FHA Hawaiian Home Lands Mortgage

FHA loans for Native Hawaiians allow the purchase of single-family or up to four-unit homes on Hawaiian homelands. The program addresses the need to lend to borrowers whose houses are built on leased land granted by the Department of Hawaiian Homelands.

FHA Indian Reservations and Other Restricted Lands (248) Mortgage

For homes on tribal land, the Section 248 loan program works with reservation leadership to meet loan requirements. The FHA will then finance a home that adheres to FHA property standards.

Read more: Best FHA lenders

Loans backed by the Department of Veterans Affairs are a valuable benefit for borrowers with a military connection. VA mortgages are available to active-duty service members, veterans, and eligible surviving spouses. Best of all, a VA home loan typically requires no down payment.

VA home purchase loan

VA purchase loans require a Certificate of Eligibility (COE), and the borrower can qualify under some very generous credit standards. The loan program does not require mortgage insurance but does charge an up-front VA funding fee. The purchase loan can be used to buy or build a single-family home, a four-unit property, a (VA-approved) condominium, or a manufactured home and lot. It can also finance the purchase of a house and fund some improvements at the same time, including energy-efficient upgrades.

Dig deeper: Funding fee exemption — How it works and who qualifies

VA cash-out refinance loan

The same relaxed qualifying standards apply to cash-out refis too. The VA version of the home equity tapping refinance is the same as civilian-available loans — the cash you take out can be used for any purpose. You can also use a VA cash-out refinance to refi a non-VA loan into a new VA loan.

VA Interest Rate Reduction Refinance Loan (IRRRL)

You can reduce the interest rate of an existing VA loan — or replace a VA ARM with a fixed-rate loan — by applying for a VA streamline refinance (VA IRRRL). There are closing costs to pay, so you'll want to determine how long it will take before you break even on what you spend to get a lower-rate loan.

VA Native American Direct Loan (NADL)

This VA loan is for military-connected borrowers who are Native American or have a spouse who is Native American looking to buy, build, or remodel a house on tribal trust land.

Learn more: Best VA loan lenders

Home loans backed or issued by the U.S. Department of Agriculture might make you think you must be a farmer, rancher, or rural resident. And it's true, USDA loans are for borrowers just like that. However, they are also available on properties in some suburban areas.

USDA loans with no down payments in eligible areas are particularly suited for modest-income households.

USDA Section 502 Guaranteed Loan Program

The primary loan program of the USDA is a guaranteed loan is issued by an approved private lender to low-to-moderate-income households. Income limits apply.

USDA Section 502 Direct Loan Program

Unlike the FHA and VA, the USDA offers some loans directly to borrowers through local offices. The Direct Loan Program helps low- and very-low-income households buy "decent, safe, and sanitary housing," the USDA states on its website. Loan proceeds can be used to purchase, build, repair, renovate, or even relocate a home.

USDA Section 504 Home Repair program

Homeowners may obtain financing — or free grants — to repair or improve a home, or to make it safer. Loans have a fixed interest rate of 1%, and grants are available for up to $10,000. The program is for very-low-income households in eligible rural areas.

USDA Home Repair Loans & Grants in Presidentially Declared Disasters Pilot program

Financially at-risk households may also obtain help during declared disasters with USDA loans and grants. The fund amounts vary each year, but the program is available year-round. However, because it is a pilot program subject to congressional funding, qualifying terms and application deadlines can vary. Consult a local USDA office for more information.

Learn more: Best USDA loan lenders

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There is one government home loan designed specifically for borrowers age 62 or older. The Home Equity Conversion Mortgage (HECM), best known as a reverse mortgage, allows homeowners to access the equity in their homes for additional income without moving out of the house. You have several options for receiving your income, including fixed monthly payments, a line of credit, and more.

While the homeowners are drawing the value out of the house, they can remain in the home as long as taxes and insurance remain current.

HECMs are available from FHA-approved lenders. While HECMs are common, you may be able to find a reverse mortgage through private lenders that the FHA does not insure.

If you are looking to have, for example, an FHA loan and a USDA loan at the same time, you will have to choose. Government-backed loan programs typically limit a borrower to one program at a time.

Grants can be available from government programs, including state and local assistance programs. Consult a housing counseling agency in your area to see what options are available where you live.

The USDA has no rules about buying, improving, and quickly selling a home — a transaction called “house flipping.” Neither do VA-backed loans. FHA rules say you must own a home for more than 90 days before flipping it.

You can. Homes that were financed with a government-backed loan where the owner couldn't make the payments may be foreclosed on by the lender. So-called "HUD homes" are offered for sale on a government website.

This article was edited by Laura Grace Tarpley