Government Backed Loans and First Time Homebuyers

The following guest post is by Robert Stretch. Robert works in the marketing department of VA Mortgage, America’s Number One Dedicated VA lender.VA Mortgage helped over 500,000 families find their dream homes in conjunction with the VA home loan program in 2009.

If you’re like most people, buying your first home can be one of the most exciting moments in your life. From deciding which features you’d like in your new place to determining which neighborhood is the right one for you, the house buying process is an exhilarating one full of fun decisions. However, the fun generally stops when it comes to financing. Finding a way to purchase your dream home can be stressful, but getting just the right loan is one of the most important steps you’ll ever take to financial security.

While traditional loan programs often have high down payment minimums (as much as 20% of the purchase price in most cases, which translates to about $40,000 on a $200,000 purchase) and stringent credit score requirements, a government-sponsored loan program is often a great solution for first time homebuyers.

While government-backed loan programs don’t lend money directly to consumers, each program works with conventional lenders and provides each lender with a guaranty to reduce the risk of the loan. Essentially, the loan program assumes some of the risk for the loan which makes the lender able to reduce their usually strict lending requirements since the risk of exposure is also reduced.

FHA Loans

The Federal Housing Administration manages one such loan program. FHA loans are primarily for first time homebuyers and feature not only lower down payment requirements but also less stringent credit regulations. Buyers who have less than stellar credit can often still qualify for an FHA loan while not sacrificing a good interest rate, which is critical to a low monthly payment.

FHA loans feature a variety of interest rate plans and have both adjustable and fixed rates, making the program a great one regardless of your financial picture. The program allows a 3% down payment and allows buyers to roll closing costs into the loan.

VA Loans

If you’re a veteran or active duty service member who is buying your first home, the VA home loan program is worth close examination. Sponsored by the Department of Veterans Affairs, VA home loans are geared towards ensuring that those who have served our country can afford to purchase a home if at all possible.

The program features both a zero down payment option (excellent for buyers who haven’t had time to save a down payment) and a small down payment program (perfect for borrowers who need relaxed credit requirements but have saved a bit of money). Veterans and service members may use the VA loan program more than once, making it an excellent option at any stage in life.

USDA Loans

Another great government-backed loan program is the one backed by the United States Department of Agriculture. USDA loans are geared towards lower income buyers (borrowers must not exceed 80% of the median income for their particular area) and offer great payment and loan options. The USDA program just may be the only legitimate loan program remaining to civilians which offers a zero down payment option and in fact, borrowers can finance 102% of the property sale price if the home in question needs repairs. These repairs can be completed before or after the sale takes place.

The USDA program also boasts no need for private mortgage insurance, which is often required on other loans to protect the lender against default. PMI can cost borrowers up to several hundred dollars each month, so not having to pay this fee represents a huge savings to the average borrower.

Each government program has maximum loan limits to which each borrower must adhere. These limits are generally based on the cost of living in your area and are set at a very reasonable rate to ensure that every buyer, regardless of the area’s cost of living, can still afford a modest home anywhere in the country. For more information on these wonderful alternatives to traditional financing, visit your lender or visit each program’s website at, or


  1. Great post! We bought our first home in January and it was with a FHA loan. I think we got a decent deal on our mortgage. We went with a 30 year fixed mortgage with a 5% interest rate.

    For us, we were looking for something that was within our income, so we based the house price target on just my husband’s income, not both of our incomes.

    Just because you have a lower required down payment with an FHA, I think you still should look at the monthly cash flow for your family. Running the numbers is important and you have to do your own homework when you buy a house.

  2. Nice post. A word of warning, though…friends of ours applied for a USDA loan and were accepted but before the final paperwork went through they were told that the program ran out of money. I don’t know if that means in the area they were looking (West Virginia) or the program in general but just be aware that you may not get this type of loan.

  3. Good post, but some of the FHA information is outdated. FHA currently requires a 3.5% down payment, and does not allow buyers to roll closing costs into the loan. The seller can pay closing costs up to 6% of the purchase price (but there is talk that that will be reduced to 3% sometime this summer). Still a great program though!

  4. Great, encourage more government spending. Thanks. Do you realize when property values go down more (which they will), and more people default (which they will), the government will have to print more money to cover the losses in the housing sector. This devalues the dollar and your savings. No bueno for the USA. The private sector demands good credit scores and high down payments to protect themselves. The government can just tax us more an print money when they incur huge losses.

    You should think more about problems associated with government spending and stop encouraging the use of government programs.

  5. I don’t understand apparently. In 2007 we got a 15 year mortgage via WaMu (now Chase) at 5.375% (great rate back then). We put 20% down and had no PMI. Why would a government backed loan have been better?

    • I think you did it right. My take on government-backed loans is that they are good for those who don’t have much to put down. Of course, you could make the argument that these government-backed programs are what got us into the mortgage mess, at least in part, because no one had any wiggle room when home values fell.

  6. My boyfriend and I actually bought our house the old-school way – by working extra hours and living in an inexpensive co-op (him) and working two jobs and living at home (me) to save up a 20% down payment. Although I think that everyone should strive for the 20% down, just for the financial security, I understand that not everyone has the same situation as we did that allowed us to save. For that reason, I think the government backed programs are a great alternative, but I think there should be greater education with regard to the risks of ending up underwater on what is most likely the biggest loan of your life. I know that for government backed student loans, entrance and exit counseling is required – does this type of policy exist for home loans as well? I worry that some people get into these loans not fully aware of the risks and responsilities involved.

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