The Best Government Mortgages

government mortgages

Government mortgages are loans backed and subsidized by the government for those who are buying or refinancing a home. Government mortgages are designed to protect the lenders against defaults on payment, which makes them easier to qualify for compared to other conventional loans.

The three most common types of government mortgages are FHA, VA, and USDA loans. We will take you through the features and benefits of each. Then, if you would like a rate quote or have any questions, please complete the short loan scenario form and we will contact you to discuss your options.

FHA Loans best government mortgages

An FHA loan is a mortgage insured by the Federal Housing Administration (FHA) and issued by FHA-approved lenders, like banks, online lenders, and credit unions.

FHA loans are ideal for first-time home buyers with low to moderate-income, low down payment, and low credit scores because the qualifications are not as rigid as those of a conventional loan. For this reason, they may be the best government mortgage.

How Do FHA Loan Work?

An FHA loan is a government mortgage guaranteed by the Federal Housing Administration that comes in fixed-rate terms of 15 or 30 years. The FHA only provides the guarantee for the loan and doesn’t actually lend the money for the mortgage. You apply directly to a private FHA-approved lender who will evaluate your qualifications for the loan and underwrite the mortgage.

Although FHA loans are popular among first-time home buyers, anyone who is buying a single-family or multifamily home as a primary residence can apply for one. You don’t need to have a high credit score or make a big down payment to qualify. However, FHA loans come with limits and restrictions, and the Federal Housing Administration requires you to pay for mortgage insurance.

There are two types of mortgage insurance premiums that are required for FHA loans: upfront mortgage insurance premium (UFMIP) and annual MIP. The upfront MIP is equivalent to 1.75% of the loan amount and should be paid by the borrower upon approval. The annual MIP is equivalent to 0.45% to 1.05%, depending on the loan term, loan amount, and initial loan-to-value ratio and should be paid monthly.

FHA Loan Qualifications

While the qualifications for an FHA loan may not be as strict as a conventional loan, some lenders may set stricter standards than the minimum FHA requirements. Typically, lenders will check your employment history for the past two years instead of your credit report. Other factors may also be considered, such as your payment history for utility, rent, and other liabilities.

Here are the standard qualifications for FHA loans:

  • Borrowers should purchase, refinance, or renovate a single-family or multifamily home as a primary residence
  • 5% down payment for borrowers with a minimum credit score of 580
  • 10% downpayment for borrowers with a credit score of 500 to 579
  • Employment history for the past 2 years
  • Proof of income
  • A debt-to-income ratio of 31% or less for housing payments and 43% or less for total debts
  • Annual and upfront mortgage insurance premiums

An FHA loan is a good option for first-time home buyers with low to moderate-income and others who are planning to buy or renovate a primary residence. It is also recommended for borrowers who have a low credit score, those who are planning to put a down payment below 20%, and those who have a bankruptcy or foreclosure history.

Pros & Cons of FHA Loans

It’s generally easier to qualify for FHA loans compared to most conventional mortgages. However, an FHA loan also comes with its benefits and drawbacks and this is not for everyone. Here are the pros and cons of FHA loans:


    • Low credit score requirement
    • Low down payment required
    • Allows financial gift or financial assistance from an approved source as a down payment
    • Allows sellers to pay up to 6% of the closing costs for an FHA loan
    • Lower interest rates compared to most conventional loans
    • No prepayment penalty
    • FHA loans may be assumable, which allows homeowners to sell their homes and let their buyers take over the remaining loan
    • Borrowers who have a history of bankruptcy or foreclosure may still qualify


    • Has a capped limit for the loan amount
    • Requires two types of mortgage insurance premiums
    • Only for primary residences, not for investments

If you would like to learn more, read our comprehensive article on FHA loans where you can get a more in depth description.

VA Loans

A VA loan is a type of government mortgage backed by the U.S. Department of Veterans Affairs (VA) and is offered to qualified veterans, service members, and eligible military spouses. VA loans require zero down payments and are issued by private lenders, including banks, credit unions, and other mortgage companies.

How Does a VA Loan Work?

The Veterans Affairs guarantees a portion of the loan, which protects the VA-approved lender against the risk of defaults. VA loans are for eligible veterans and select surviving spouses who want to take a loan to purchase, build, or repair a primary residence at zero percent down payment.

The loan does not come from the Veterans Affairs who only sets the qualifying standards and the terms of the mortgage, and offers a guarantee. The applicants for VA loans do not have to be first-time home buyers as long as the loan is to be used for a primary residence.

Since this is a government-backed mortgage, lenders have more lenient qualification requirements as they assume less risk, making VA loans easier to qualify for. Further, you do not need to buy mortgage insurance to get approved for a VA loan. However, you need to pay a VA funding fee, which will depend on the amount of your down payment, and whether it’s your first-time use of the benefit.

An important feature of a VA loan is the entitlement, which is the amount of the loan that the Veterans Affairs will guarantee to the lender in case of default. The two types of entitlement are basic entitlement and bonus entitlement. The basic entitlement is 25% of your total mortgage or $36,000, whichever is higher. The bonus entitlement is equivalent to 25% of the Federal Housing Finance Agency (FHFA) loan limit, less the basic entitlement.

VA Loan Qualifications

The standard qualification requirements for VA loans are set by the Veterans Affairs. However, lenders may impose stricter qualification standards and consider other factors such as your income and total obligations. Also, while the Veterans Affairs has no minimum required credit score, some lenders would still prefer a credit score of at least 620 to get qualified.

Here are the people who may be qualified for VA loans:

  • Either an active military or an honorably discharged veteran
  • An eligible surviving spouse of an active-duty veteran who died in the line of duty
  • Must have rendered at least 90 consecutive days of service during wartime or at least 180 consecutive days of service during peacetime
  • Must have served in the National Guard or Selective Reserve for more than six years
  • Service persons on active duty who served for 90 consecutive days of active service
  • Members of the National Guard as well as Reservists
  • Cadets or Midshipmen from the Military Academy, Air force Academy, Coast Guard Academy or US Naval Academy
  • World War II Merchant Seamen
  • US Public Health Service Officers
  • National Oceanic and Atmospheric Administration Officers

Other qualification requirements that may be imposed by the lenders:

  • With enough verifiable income to cover mortgage payments
  • With a reasonable debt-to-income ratio
  • FICO score of at least 620

Pros & Cons of VA Loans

If you are eligible for a VA loan, it is easier to qualify for it compared to other conventional loans. However, there are advantages and disadvantages that you also need to consider. Below are the pros and cons of VA loans:


    • Zero downpayment
    • Mortgage insurance is not required
    • Lower interest rates
    • Limited closing costs and may be paid by the home seller
    • Possible property tax deductions
    • May not be charged with a prepayment penalty


    • Not available for everyone
    • Only for primary residences, not vacation homes or investments
    • VA funding fee is an additional expense

If you would like more information, read our full article on VA loans or complete the short loan scenario form and we will call to discuss your options.

USDA Loans

USDA loans are mortgages backed by the U.S. Department of Agriculture and are designed for low- to average-income borrowers who have low credit.

USDA loans offer low interest, zero down payments, and reduced mortgage insurance, and they should be used to buy a home in eligible rural and suburban locations. With this kind of flexibility, it is possible that a a USDA loan is the best government mortgage.

How Do USDA Loans Work?

USDA loans can work in three ways: through loan guarantees, direct loans, or home improvement loans and grants.

With loan guarantees, the USDA provides a guarantee for a mortgage issued by an approved private lender, similar to FHA and VA loans. Direct loans are directly issued by USDA and are only available to borrowers with low and very low-income limits set by the government in the area. With home improvement loans and grants, eligible homeowners should use the proceeds to repair or upgrade their homes.

USD loans allow borrowers to take a fixed-rate loan with zero down payment at low interest rates. However, USDA requires that your household income should be within or below the applicable low-income limit in the area where you want to buy a home. Also, the USDA loan should only be used to purchase a home in a designated rural area.

USDA Loan Qualifications

USDA loan qualifications focus more on the borrower’s household income. The eligible income limits vary by location where you plan to buy a home. Also, it’s important to take note that the home you are buying should be located in a designated rural area.

Here are the standard qualifying requirements for USDA loans:

  • Household income should fall within or below the low-income limit set by the government in your area
  • The home is located in a designated rural area
  • Debt-to-income ratio for USDA should be 29% or lower
  • Debt-to-income ratio for other monthly liabilities should not exceed 41%
  • Should be used for primary residence only
  • The home should meet the property requirements set by USDA, including its size and market value
  • Requires mortgage insurance premiums
  • Borrowers should have a verifiable income for the past two years

USDA loans are a good option for borrowers with very low household income and want to live in a designated rural area. Borrowers with low credit scores may still qualify for a USDA loan.

Pros & Cons of USDA Loans

USDA loans offer many benefits especially to low-income borrowers. However, there are also disadvantages associated with USDA loans that you need to be aware of. Here are the pros and cons of USDA loans:


    • Zero down payment
    • Low interest rates
    • Very low-income earners can qualify
    • Borrowers with low credit score can qualify


    • Limited location, metropolitan areas are generally excluded from USDA programs
    • Not available for those with higher income
    • The property should meet all program criteria
    • For primary residence only, cannot be used for vacation homes or investments
    • Mortgage insurance premium is required

If you would like more information you can complete the short loan scenario form and we will call you to discuss. OR, you can read our full article on USDA loans.

Government Home Loans for Bad Credit

FHA, VA, and USDA loans are government mortgages that are recommended for borrowers who cannot easily qualify for conventional loans. Since these loans are backed by the government, the qualification requirements are less stringent and the interest rates are typically lower compared to traditional loans. Further, these government home loans can qualify even those borrowers with low income and bad credit.

While these loans are government mortgages, they are still issued by approved private lenders. Some lenders set stricter qualifications than the standard eligibility requirements set by the government agencies. With this, it’s important to shop around among private lenders that offer these government home loans and work with the one that offers the most favorable terms.

If you are looking for an FHA, USDA or VA mortgage and have bad credit with scores as low as 500, we can help.


The best government mortgage will vary depending upon your personal situation and qualifications. For you the best mortgage may be an FHA loan while for a friend who is a veteran, it may be a VA mortgage. We recommend you review all of your options and make the decision that makes the most sense for you.

Click to complete the short loan scenario form and we will contact you to discuss your options.

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Read [Should I Put More than 20% Down on a House?]

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