A government-insured mortgage is just what it sounds like: a mortgage loan that is insured or backed by a government agency. The government doesn’t issue the mortgage or lend the money directly to borrowers. The loan is originated (or funded) by a mortgage company. The loan is then insured (or guaranteed) by the government.
There are three main types of government loans for buying a home: FHA, VA, and USDA.
Each type of mortgage has its own requirements regarding what down payment , credit score, and debt-to-income ratio you'll need to qualify.
FHA
An FHA loan is a mortgage that’s insured by the Federal Housing Administration (FHA). This type of loan requires a lower minimum credit score than most conventional loans and the minimum required down payment is 3.5%. FHA loans come in 15-year and 30-year terms with fixed interest rates. However, all FHA loans require the borrower to pay two mortgage insurance premiums, which protects the lender if a borrower defaults:
Upfront mortgage insurance premium: 1.75 percent of the loan amount, paid when the borrower gets the loan. The premium can be rolled into the financed loan amount.
Annual mortgage insurance premium: 0.45 percent to 1.05 percent, depending on the loan term (15 years vs. 30 years), the loan amount, and the initial loan-to-value ratio, or LTV. This premium amount is paid monthly.
VA
A VA loan is a mortgage loan guaranteed by the United States Department of Veterans Affairs (VA). VA loans help active service members, veterans, and their surviving spouses become homeowners. VA purchase loans provide up to 100% financing on the value of a home and do not have private mortgage insurance. When borrowers apply for a loan, they need to provide the lender with a certificate of eligibility from the VA.
USDA
USDA loans are home loans issued or guaranteed by the United States Department of Agriculture. These loans are part of the USDA’s Rural Development program, meant to encourage homeownership in small communities across the U.S. by offering low-interest, low-down-payment mortgages to borrowers with low to moderate incomes. The loan must be used for a primary residence, the property must be in a rural area, defined as having fewer than 35,000 residents and borrowers' qualification for a loan will depend on their household's income relative to the median income in the area.
Borrowers are required to pay two types of mortgage insurance premiums :