Government/Agency Loans

What Is a Government/Agency Loan?

Government-backed home loans like VA, FHA, and USDA loans play a crucial role in making homeownership accessible to various groups of people. These loans are insured or guaranteed by federal agencies, providing better terms and interest rates for qualified applicants. Since they are insured by the federal government, they’re not held to the more traditional guidelines for income, debt, credit, and down payment that Fannie Mae and Freddie Mac set.

FHA loans are easier for some borrowers to get approved for because they have more lenient qualifying guidelines, especially when it comes to savings and credit scores. Here’s a quick dive into FHA loans: what they are, who issues them, how to qualify, how to apply, and how to figure out if they could be a good fit for you.

What does FHA stand for?

FHA stands for Federal Housing Administration, and the FHA is a government agency that insures mortgages. It was created just after the Great Depression, at a time when homeownership was prohibitively expensive and difficult to achieve because so many Americans lacked the savings and credit history to qualify for a loan. The government stepped in and began backing mortgages with more accessible terms. Approved lenders began funding FHA loans, which offered more reasonable down payment and credit score standards.

Today, government-backed mortgages still offer a safety net to lenders—because a federal entity (in this case, the FHA) is guaranteeing the loans, there’s less financial risk if a borrower defaults on their payments. Lenders are then able to loosen their qualifying guidelines, making mortgages available to middle and low income borrowers who might not otherwise be approved under conventional standards.

What’s the difference between FHA and conventional loans?

A conventional loan is any mortgage that is not insured by a federal entity. Because private lenders assume all the risk in funding conventional loans, the requirements to qualify for these loans are more strict. Generally speaking, FHA loans might be a good fit if you have less money set aside to fund your down payment and/or you have a below-average credit score. While low down payment minimums and competitive interest rates are still possible with a conventional loan, you’ll need to show a strong credit score to qualify for those advantages.

Each loan type has advantages and disadvantages—including different mortgage insurance requirements, loan limits, and property appraisal guidelines—so choosing the one that works best for you really depends on your financial profile and your homebuying priorities.

FHA loans pros and cons

FHA loans are meant to make homeownership more accessible to people with fewer savings set aside and lower credit scores. They can be a great fit for some borrowers, particularly first time homebuyers who often need lower down payment options, but you should weigh the costs and benefits of any mortgage before committing. Here’s a breakdown of the key pros and cons when it comes to FHA loans:


  • Low down payment. Down payments make up the majority of cash to close in any purchase loan, and saving up for one can be a significant barrier for some borrowers. FHA loans make it possible to put down as little as 3.5% upfront and still get competitive rates.
  • Lower credit score. Credit scores can be a major hurdle when it comes to conventional loans, but borrowers with credit scores starting at 500 can qualify for FHA loans.
  • Higher DTI accepted. Your debt-to-income (DTI) ratio gives lenders an understanding of other major financial obligations in your life. This ratio is a key factor in any loan application because it indicates your ability to afford a mortgage based on current household income and existing debt. Again, FHA loans offer more leniency here and borrowers at or below 43% DTI can qualify.
  • No income limitations. It’s a common misconception that FHA loans are only available to first-time homebuyers or borrowers with limited income—but they’re not. There’s no maximum income limit that would disqualify you from this type of loan.


  • Mandatory MIP payments. FHA loans are more lenient, but they also come with insurance costs to mitigate risk to the lender. You’ll have to pay Mortgage Insurance Premiums (MIP) no matter what—either for 11 years or for the life of your loan, depending on your down payment.
  • Less competitive. Sometimes sellers can be more hesitant to accept FHA loans. In a competitive market, you might not win out against conventional loan bids.
  • Stricter property standards. To offset risk and further protect lenders, FHA loans have strict criteria when it comes to assessing the condition of any property being purchased with an FHA loan. The downside? The house you want to buy might not qualify for an FHA loan. The upside? You’re less likely to be financially burdened by a home that requires expensive repairs or updates.
  • Loan limits: FHA loan limits are typically lower than conventional loan limits, which means you might not be able to get funding for more expensive houses. This isn’t necessarily a bad thing, since it helps ensure that borrowers get loans they can afford to repay.

How to qualify for an FHA loan

Qualifying for an FHA loan is generally easier than qualifying for a conventional loan, but you’ll still need to meet some basic minimum standards set by the FHA. While the government insures these loans, the funding itself comes through FHA-approved lenders (like Better Mortgage) and each lending institution may have slightly different qualifying guidelines for its borrowers. Keep in mind that, while these FHA standards offer a basic framework, you’ll need to confirm the individual qualifying rules with your specific lender.

  • Credit score minimum 500. Your exact credit score will play a big role in determining your down payment minimum; typically, the higher your credit score, the lower your down payment and the more favorable your interest rate.
  • Debt-to-income ratio at or below 43%. DTI is a standard way of comparing the amount of money you earn to the amount you spend paying off other debts, and FHA loans are more lax on this number.
  • Steady income and proof of employment. Being able to provide at least 2 years of income and employment records is a standard requirement for all loans.
  • Down payment between 3.5%-10%. The down payment minimum for an FHA loan is typically lower than conventional loan and can be as little as 3.5% depending on your credit score and lender.
  • Property standards apply. You won’t qualify for an FHA loan if the house you want to buy doesn’t pass the appraisal process, which is stricter with this type of loan than conventional mortgages.
  • Maximum FHA loan amount. The amount of money you borrow cannot exceed the FHA loan limits; this number changes based on your county and is determined by how expensive the local market is; the maximum FHA loan limit in 2021 is $822,375 (check HUD resources to confirm the latest limits.)

Steps to getting approved for an FHA loan:

Step 1: Decide if an FHA loan is the right fit for you.

The first step in the FHA process is determining whether this type of loan truly suits your needs. If you’re having trouble qualifying for a conventional mortgage, either because of an imperfect credit score, high debt-to-income ratio, or limited down payment savings, an FHA loan might provide a feasible path to homeownership. Review the qualifications above to get a sense of whether you meet the minimum requirements for FHA borrowers, and then take a look at your credit score and savings to see what kinds of specific FHA lending options might be available to you.

Step 2: Choose which lender you want to work with.

Keep in mind that there are more conventional loan lenders than approved FHA loan lenders, so you may need to do some research before finding one. BM offers both options.. Note: if you apply for an FHA loan with Better, you’ll need a 580 minimum credit score.

Step 3: Get pre-approved to find out how much you can borrow.

Once you know the lender you want to work with, get pre-approved to find out how much you can borrow with your FHA loan. Most lenders will want to see a set of basic documentation, like proof of identification, proof of employment, proof of residence, and valid W2 and tax forms for the past two years. At Better, our online process is super simple—we’ll ask you about your income and assets then do a soft credit pull (this won’t affect your credit score). Then voila! You’ll have a free, no commitment pre-approval letter that gives you an accurate estimate of your homebuying potential. Because different lenders offer different rates, you should shop around to find the most competitive option by comparing loan estimates.

Step 4: Submit your application when you find a home you love.

If you want to increase your chances of getting approved for an FHA loan, make sure you meet the minimum requirements outlined above: namely, be sure to have a credit score of at least 500, a debt-to-income ratio of 43% or less, and enough money set aside for a down payment between 3.5% and 10% depending on your exact credit score. Beyond these minimums requirements, keep in mind that you may have trouble qualifying for an FHA loan if you have insufficient credit history, a track record of making late payments, significant outstanding debt, or any recent foreclosures or bankruptcies. When you work with Better Mortgage, you’ll be assigned a loan consultant who will walk you through the process and address any questions you have.

Apply for an FHA loan online today

Many people encounter financial setbacks and challenges in the homebuying process. If conventional loans aren’t flexible enough to fit your needs, it doesn’t mean you can’t qualify for a mortgage. Working with BM allows you to explore different loan products and decide whether an FHA loan might be right for you.

Basic Home Mortgage 203(b)

What is it? This type of loan is the most popular and traditional mortgage the FHA offers. The rest of the loans mentioned in this article are still FHA loans, but this type of loan is usually what people mean when they say “FHA loan.” It’s ideal for first-time homebuyers because its down payment requirements are as low as 3.5%, and its interest rates and credit criteria may be lower than with conventional mortgages.

Key requirements

These loans are for a principal residence only, though they can be used for one- to four-unit structures. The amount you can borrow with a 203(b) mortgage depends on your location; you can look up FHA mortgage limits in your area. The home must pass strict HUD appraisal standards, and homeowners must pay mandatory mortgage insurance unless they can provide a down payment of 10% or more.

FHA’s Energy Efficient Mortgage

What is it? This mortgage helps homebuyers (or those wanting to refinance) make their home more energy-efficient, which lowers utility bills. The FHA’s Energy Efficient Mortgage program gives borrowers more than what’s needed to purchase a home, with the remaining amount used for updates. The homebuyer only has to qualify for enough to buy the home—not the additional “energy package.” Eligible expenses include energy-saving equipment and wind or solar energy technologies.

Key requirements

There are limits to how much extra you can borrow for the energy-efficient improvements, which are dependent on several factors specific to your situation. You must have a qualified home energy rater or assessor identify what measures should be added, and any improvements must be considered cost-effective.

FHA 203(k) Rehab Mortgage

What is it? While you can find a more affordable property by purchasing a home in need of repairs, the cost of

renovation can be significant. The FHA’s 203(k) Rehab Mortgage helps homebuyers purchase and repair or modernize a home with a single mortgage. It can also be used to rehabilitate a home someone already lives in.

Key requirements

To qualify for an FHA loan for rehab, the home must be at least one year old. The rehabilitation cost must be at least $5,000, though the property’s total value—rehabilitation included—must still fall within FHA’s mortgage limits for the location. Covered improvements range from smaller modernizations to complete reconstruction. The property must meet certain structural and energy efficiency standards, though the list of eligible activities covered is extensive.

Mortgage Insurance for Disaster Victims Section 203(h)

What is it? Americans who lost their homes in a major disaster can qualify for a special FHA loan with no down payment. This 203(h) program is intended to provide low-cost mortgages to help disaster victims recover and either rebuild or buy another home. Unlike other FHA loans, no down payment is needed (though there are still the typical closing costs).

Key requirements

You must have lived in a presidentially designated disaster area, and your home must have been either destroyed or damaged enough that replacement or reconstruction is needed. The mortgage can be used to reconstruct or buy a single-family home, and it must be your principal residence. Those interested in qualifying for a Section 203(h) mortgage must submit their application to a lender within one year of the president declaring the disaster.

Good Neighbor Next Door

What is it? This program allows certain professionals to purchase homes in designated revitalization areas at a steep discount. Eligible workers include teachers, firefighters, law enforcement officers and emergency medical technicians. A limited number of properties are sold through the Good Neighbor Next Door program to eligible borrowers at 50% off the listing price. Additionally, these borrowers can apply for an FHA-insured mortgage and only pay a $100 down payment. If more than one person wants a property, someone is selected via random lottery.

Key requirements

You must be a full-time employee in a specified profession and plan to remain employed for at least a year. You and your spouse cannot have owned a home for a year prior, though you don’t have to be first-time homebuyers. With a Good Neighbor Next Door loan, you commit to living in the home for three years as your sole residence, re-certifying this annually (unless you’re active-duty military). HUD requires participants to sign a second mortgage and note for the discount amount, but this “silent mortgage” has no interest or payments, and it goes away if the three-year occupancy requirement is met.

VA Home Purchase Loan

A VA loan is a mortgage loan available through a program established by the U.S. Department of Veterans Affairs (VA) (previously the Veterans Administration). With VA loans, veterans, service members, and their surviving spouses can purchase homes with little to no down payment and no private mortgage insurance and generally get a competitive interest rate. This program helps service members, veterans, and surviving spouses by providing a mortgage guarantee for loans that can have a loan-to-value (LTV) ratio as high as 100 percent.

VA Backed Home Purchase Benefits:

  • More money down reduces funding fees.
  • No money down
  • Competitively low interest rates
  • Most favorable credit guidelines
  • Limited closing costs
  • No need for Private Mortgage Insurance (PMI)
  • The VA home loan is a lifetime benefit: you can use the guarantee multiple times.
  • No prepayment penalty

Am I eligible for a VA-backed cash-out refinance loan?

You may be eligible for this type of loan if you meet all of these requirements.

All of these must be true:

  • You qualify for a VA-backed home loan Certificate of Eligibility, and
  • You meet VA’s—and your lender’s—standards for credit, income, and any other requirements, and
  • You’ll live in the home you’re refinancing with the loan

Why might I want to get a VA-backed cash-out refinance loan?

A VA-backed cash-out refinance loan may help you to:

  • Take cash out of your home equity to pay off debt, pay for school, make home improvements, or take care of other needs, or
  • Refinance a non-VA loan into a VA-backed loan.

Types of VA Loans

Interest Rate Reduction Refinance Loan (IRRRL)

The program offers special flexibility for borrowers wishing to refinance to reduce the interest rate on their VA-guaranteed mortgage. All FDIC-insured lenders are automatically approved to write VA loans.

VA backed Cash-out refinance

A VA-backed cash-out refinance loan lets you replace your current loan with a new one under different terms. If you want to take cash out of your home equity or refinance a non-VA loan into a VA-backed loan, a VA-backed cash-out refinance loan may be right for you. Find out if you’re eligible—and how to apply for your Certificate of Eligibility.

A USDA Home Loan from the USDA loan program, also known as the USDA Rural Development Guaranteed Housing Loan Program, is a mortgage loan offered to rural property owners by the United States Department of Agriculture, Rural Development.

What is a USDA Rural Housing Service loan?

The Rural Housing Service (RHS) offers mortgage programs that can help low- to moderate-income rural residents purchase, construct, and repair homes.

USDA Guaranteed Loan

For home loans that may have an income of up to 115% of the median income for the area. Families must be without adequate housing, but be able to afford the mortgage payments, including taxes and insurance. In addition, applicants must have reasonable credit histories. Additionally, the property must be located within the USDA RD Home Loan “footprint.” USDA Loans offer 100% financing to qualified buyers and allow for all closing costs to be either paid for by the seller or financed into the loan.

USDA Home Loans have Maximum Household Income Limits which vary by the county in which you purchase a home; the income limits change annually. The Maximum Household Income Limits are based upon everyone in the home who is a wage earner, even if their income is not going to be used to qualify for the USDA Loan. For instance, Social Security Income from an elderly relative living in the home would be considered when determining the maximum household income – even if that relative was not going to apply to be on the mortgage loan. There are deductions, however, that USDA Underwriters allow, and oftentimes those calculations will pull a family under the Maximum Household Income Limit.

Single Family Housing Guaranteed Loans

Approved lenders under the SINGLE-FAMILY Housing Guaranteed Loan program include:

Any State housing agency; lenders approved by HUD for submission of applications for Federal Housing Mortgage Insurance or as an issuer of Ginnie Mae mortgage backed securities; the U.S. Veterans Administration as a qualified mortgagee; Fannie Mae for participation in family mortgage loans; Freddie Mac for participation in family mortgage loans; any FCS (Farm Credit System) institution with direct lending authority; any lender participating in other USDA Rural Development and/or Farm Service Agency guaranteed loan programs.

Mortgage Insurance:

USDA Loans require 1.0% of the loan amount in upfront funding fee, and a monthly mortgage insurance premium based on up to 0.5% of the balance annually. The annual premium is divided by 12 to arrive at the premium charge per month. Effective 10/1/19, the annual fee is 0.35%.

What does this program do?

The Section 502 Guaranteed Loan Program assists approved lenders in providing low- and moderate-income households the opportunity to own adequate, modest, decent, safe and sanitary dwellings as their primary residence in eligible rural areas. Eligible applicants may purchase, build, rehabilitate, improve or relocate a dwelling in an eligible rural area with 100% financing. The program provides a 90% loan note guarantee to approved lenders in order to reduce the risk of extending 100% loans to eligible rural home buyers – so no money down for those who qualify!

Who may apply for this program?
Applicants must:
  • Meet income-eligibility (cannot exceed 115% of median household income)
  • Agree to personally occupy the dwelling as their primary residence
  • Be a U.S. Citizen, U.S. non-citizen national or Qualified Alien

USDA Direct Loans

Purpose: Section 502 loans are primarily used to help low-income individuals or households purchase homes in rural areas. Funds can be used to build, repair, renovate or relocate a home, or to purchase and prepare sites, including providing water and sewage facilities.

Eligibility: Applicants for direct loans from USDA must have very low or low incomes. Very low income is defined as below 50 percent of the area median income (AMI); low income is between 50 and 80 percent of AMI; moderate income is 80 to 115 percent of AMI. Families must be without adequate housing, but be able to afford the mortgage payments, including taxes and insurance, which are typically 24 percent of an applicant’s income. However, payment subsidies are available to applicants to enhance repayment ability. Applicants must be unable to obtain credit elsewhere yet have reasonable credit histories.

Single Family Housing Direct Home Loans

What does this program do?

Also known as the Section 502 Direct Loan Program, this program assists low- and very-low-income applicants obtain decent, safe and sanitary housing in eligible rural areas by providing payment assistance to increase an applicant’s repayment ability. Payment assistance is a type of subsidy that reduces the mortgage payment for a short time. The amount of assistance is determined by the adjusted family income.

Who may apply for this program?

A number of factors are considered when determining an applicant’s eligibility for Single Family Direct Home Loans. At a minimum, applicants interested in obtaining a direct loan must have an adjusted income that is at or below the applicable low-income limit for the area where they wish to buy a house and they must demonstrate a willingness and ability to repay debt.

Applicants must:
  • Be without decent, safe and sanitary housing
  • Be unable to obtain a loan from other resources on terms and conditions that can reasonably be expected to meet
  • Agree to occupy the property as your primary residence
  • Have the legal capacity to incur a loan obligation
  • Meet citizenship or eligible noncitizen requirements
  • Not be suspended or debarred from participation in federal programs
  • Properties financed with direct loan funds must:
  • Not have market value in excess of the applicable area loan limit
  • Not be designed for income producing activities

Rural Repair and Rehabilitation Loan

Purpose: The Very Low-Income Housing Repair program provides loans and grants to very low-income homeowners to repair, improve, or modernize their dwellings or to remove health and safety hazards. Eligibility: To obtain a loan, homeowner-occupants must be unable to obtain affordable credit elsewhere and must have very low incomes, defined as below 50 percent of the area median income. They must need to make repairs and improvements to make the dwelling safer and more sanitary or to remove health and safety hazards. Grants are only available to homeowners who are 62 years old or older and cannot repay a Section 504 loan.

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