Government Loans

A Government Loan is a mortgage loan that is guaranteed or insured by an agency of the federal or state government such as VA, FHA, or USDA. Government loans are also known as government-backed loans.

Government loans are issued by private lenders and not by the government agency itself. The private lenders originate the loans as per the guidelines of the government agency and then obtain insurance or guarantee from the government agency. The government’s insurance or guarantee protects the lender against losses arising out of borrower’s default. The reduced risk allows the lender to offer loans to the borrower at a lower interest rate.

Common Types of Government Loans

The most common government loans are:

1. FHA Loans: Loans that are insured by Federal Housing Administration (FHA).
2. VA Loans: Loans that are guaranteed by the Department of Veterans Affairs (VA).
3. RD Loans: Rural Development (RD) Loans are guaranteed by United States Department of Agriculture (USDA). The loans are offered under the Housing and Community Facilities Programs.

Benefits to the Borrower

1. Lower Interest Rate: The government guarantees the repayment of the loan to the lender. This reduces the risk to lender and allows it to offer loans at a lower interest rate.
2. Lower Closing and Other Costs: The government agency guaranteeing the loans usually regulate the closing costs so that the borrower is able to obtain loans with low closing costs. Also, government loans do not carry prepayment penalty which makes it cheaper to refinance or payoff the mortgage.
3. Greater Assistance: The loans provide greater assistance for borrowers. For example, government loans may allow high LTV or no money down.

Updated: May 25, 2010