Government loans are guaranteed loans by one of two federal agencies, allowing lenders to lend money with miniscule risk. However, government doesn't lend the money, they do guarantee repayment to the lender and ensure any potential loss that may incurred if any loan go into default and subsequently foreclosure. There are two types of government loans.
- Federal Housing Administration (FHA) loans,
- and Veterans Administration (VA) loans.
The advantages of financing using FHA loans are that they are easier to qualify for, and allow a borrower to finance more of the loan amount than non-government loans. With a Conforming Loan a borrower may only be able to finance 80% of the loan amount, a FHA loan allows a borrower to finance 97% of the loan amount. FHA loans are recommended for those borrowers who are first-time buyers, have low down payment, have a short credit history, or are having trouble qualifying for a Conforming Loan.
The two main advantages of financing using VA loans are that the VA allows borrowers to finance 100% of the loan amount, and that, the VA only requires proof of veteran status to qualify for the loan. The only drawback to government loans is that mortgage insurance is required at all loan to values (LTV), unlike Conventional and Jumbo loans where payment of mortgage insurance is determined by the amount of equity a borrower has in his home.
FHA loans are offered as both 15 and 30 year fixed rate mortgages and 1 year ARMs. The primary advantages of FHA loans are their low down payment requirement and their less stringent qualification requirements. Although FHA loans are not restricted to first-time homebuyers they are well suited for the first-time buyer. The FHA 1 year ARM product is particularly appealing due to its adjustment interval cap of 1% (vs. 2% on most conforming ARMs) and its lifetime cap of 5% (vs. 6% on most conforming ARMs).