Government housing loans help lower the costs of mortgages so that more people can afford to own their own home. There are three government agencies that insure mortgages. The Federal Housing Administration (FHA), which is part of the U.S. Department of Housing and Urban Development, the Veterans Administration (VA), and the Rural Housing Service (RHS), which is a branch of the U.S. Department of Agriculture. Only approved lenders can offer these loans, and there will be required standards that the property has to meet in order to qualify.
The FHA offers a mortgage financing program that insures home loans. The FHA doesn't make the loans itself; rather, it serves as an insurance policy for lenders. Because the financial requirements for FHA loans are relaxed compared to traditional commercial loans, more people are able to afford to buy homes.
FHA insurance makes lenders more willing to work with someone who might not completely fit their usual loan qualification requirements. FHA requirements reduce the debt-to-income ratio from 28/36, which is the traditional loan requirement, to 29/41 for FHA loans (we'll discuss how this ratio works a bit later). FHA loans also require a low down payment of 5 percent or less, and allow 100 percent of the money used for the down payment and closing costs to come from a family member. Traditional loans won't allow you to borrow the money used for those payments.
There are maximum loan limits with FHA loans. These limits vary by state or region. Visit the FHA Web page to find the limit for your area.
VA loans are designed for qualified veterans and offer more relaxed standards for qualification than either FHA loans or traditional loans. As of 2002, loans can be for amounts up to $240,000 and require no down payment.
Like FHA loans, these loans are not made by the Veterans Administration, but are simply guaranteed by the Administration.
If you live in a rural area or small town, you may qualify for a low-interest loan through the Rural Housing Service. RHS offers both guaranteed loans through approved lenders and direct loans that are government funded. These loans enable low-income families to get loans for homes.