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Welcome to the third edition of First Fed’s Mortgage Guide! This installment covers the topic of Government Mortgage Loans: Federal Housing Administration (FHA), Veterans Affairs (VA), and U.S. Department of Agriculture (USDA) loans.

As the name implies, government agencies back these loans, and each has its own set of guidelines. There’s quite a bit to cover so let’s get started!

FHA (Federal Housing Administration) Loans

FHA loans are one of the most popular government-backed loans, designed to help borrowers with lower credit scores or smaller down payments achieve homeownership. The key features of an FHA loan are:

1. Credit Score Requirements - Typically, FHA loans require a minimum credit score of 580 for maximum financing (96.5% loan-to-value).
2. Down Payment Requirements: The minimum down payment is 3.5% of the purchase price. A higher down payment may be required for borrowers with lower credit scores.
3. Private Mortgage Insurance (PMI): FHA loans require Mortgage Insurance Premium (MIP), which is similar to Private mortgage insurance (PMI) but structured differently. MIP includes an upfront premium (which can be included in the loan amount) and an annual premium paid monthly. The annual premium varies depending on the loan term, loan amount, and loan-to-value.
4. Debt-to-Income (DTI) Ratio: FHA loans generally allow a front-end debt-to-income (DTI) ratio of up to 31% and a back-end DTI ratio of up to 43%. In addition, First Federal may consider additional factors like strong credit history or substantial assets to determine DTI. (For more information on front-end and back-end debt-to-income, click here.)

VA (Veterans Affairs) Loans

VA loans are available to eligible veterans, active-duty military members, and certain surviving military spouses. These loans are one of the best options for eligible borrowers due to their favorable terms.

1. Credit Score Requirements: VA loans do not have a minimum credit score requirement, but most lenders prefer 620 or higher for approval.
2. Down Payment Requirements: VA loans offer 100% financing, requiring no down payment, which is one of the most significant advantages of a VA loan.
3. Private Mortgage Insurance (PMI): VA loans do not require Private Mortgage Insurance (PMI), which can result in significant savings for borrowers. VA loans do require a funding fee that can vary based on eligibility type, but can be waived for qualifying Veterans, and is generally financed in the loan amount.
4. Debt-to-Income (DTI) Ratio: VA loans do not have strict DTI limits, but most lenders prefer a back-end DTI of 41% or less. However, VA loans can have higher DTI ratios if the borrower has compensating factors like residual income (money left over after all monthly expenses).

USDA Loans (U.S. Department of Agriculture)

A USDA loan is a government-backed mortgage for low-to-moderate-income borrowers purchasing homes in designated rural areas. A rural area for a USDA home loan in Idaho is defined as, “A location outside major metropolitan areas with a population of 35,000 or fewer, where the community has limited access to urban amenities and infrastructure.”

For example, a home in Jerome or Burley would qualify as rural in the Magic Valley. In Treasure Valley, much of Kuna qualifies.

1. Credit Score Requirements: While USDA loans do not have a set minimum score, most lenders require a minimum of 640. Borrowers with scores below 640 may still qualify but will be subject to further approval conditions.
2. Down Payment Requirements: USDA loans offer 100% financing, meaning no down payment is required for eligible borrowers.
3. Private Mortgage Insurance (PMI): There is no PMI. Instead, USDA loans require Guaranteed Loan Fees, which are similar but typically lower than PMI. These fees include an upfront guarantee fee (1% is added to the loan amount) and possibly an annual fee.
4. Debt-to-Income (DTI) Ratio: USDA loans typically allow a back-end DTI ratio of up to 41%. However, higher ratios may be acceptable with compensating factors. There is also a front-end DTI of 29% for housing expenses.

Use this calculator to figure out your DTI!

Key Takeaways

1. FHA loans are ideal for buyers with lower credit scores but requires a Mortgage Insurance Premium and a moderate debt-to-income ratio.
2. VA loans are available to veterans and service members, with no down payment or Private Mortgage Insurance, and flexible debt-to-income requirements.
3. USDA loans support rural homebuyers with no down payment, low fees, and competitive debt-to-income limits.

Whether you are a first-time homebuyer or looking for specific benefits, these government mortgage loans open doors to homeownership for many who may not qualify for or want conventional financing.

We hope you found this blog helpful and that it has assisted you in your financial well-being journey. If you have a question about mortgages, please contact a First Federal Mortgage Loan Professional.

In our next Mortgage Guide, we'll focus on Construction Loans.

*All credit products subject to approval.