Government backed loans: Types and advantages

A loan that has been subsidized by the government and is meant to protect your lenders in case you default on your payments is called a government backed loan. This makes lenders offer you loans at lower interest rates as there is a guarantee that they will get back the loan that they are offering.

It should be clear that a government-backed loan is not a loan that has been provided to you by the government. The government just guarantees that the borrower that is you will make the payments on time. You have to take the loan from a bank or a mortgage borrower while the government will just provide the borrower with the assurance that you will repay the loan.

The types of government backed loans and their advantages are as follows.

1. FHA loans: This is the most common variety of government backed loans. The guarantee behind this loan is provided by the Federal Housing Administration. If you do not have a good credit or do not have a large down payment that you can offer, then this loan is the best suited for you. You can pay only 3.5 % of the price of the house as down payment if you are taking a FHA loan. Even if you have had a bankruptcy or a foreclosure a few years ago, then this loan overlooks it. For conventional mortgage loans you need to have a good credit score, no such thing is essential to qualify for this loan. However, you should keep in mind that mortgage insurance is required for all such loans. Thus, if you are a first time home buyer and do not have a very good credit score, then you can opt for this loan.

2. VA loans: The US department of veteran affairs guarantees this loan. This loan has a complex sort of eligibility requirement thus you must find out from a lender who is aware of this loan to determine if you are eligible for such a loan. This loan is especially for military veterans and also spouses of those who have died serving the country. The primary advantage of these loans is that no down payment is required to be made by you. No mortgage insurance is needed. After a year even if you had filed for bankruptcy it is completely disregarded. The credit score requirements are also very liberal.

3. RD loans: These loans are usually opted by rural borrowers. The guarantee on this loan is provided by the Rural Development Housing, which is a division of the Department of Agriculture of US. This loan is especially meant for those people who have low incomes and want to either buy or build homes in rural areas. In case of such a loan no down payment is needed.

These are the few types of government backed loans that are available. All have their own advantages and can be availed based on the eligibility criteria for qualifying for the loans.