Types of Government Home Loans Available in the Bay Area

Government-backed home loans are a common mortgage option within the San Francisco Bay Area. While they’re not as popular as conventional or “regular” mortgage products, government home loans do offer some key advantages for certain types of borrowers.

But what are these programs, and how do they work? Below, we’ll take an in-depth look at the three most common types of government home loans available for Bay Area mortgage shoppers.

Government Home Loan Programs in the Bay Area

Let’s start by addressing a common misconception. In most cases, the government does not actually lend money to borrowers. Instead, they insure or guarantee the home loans made by lenders in the private sector. This kind of backing brings certain benefits, such as easier qualification for borrowers and smaller down payments.

FHA and VA loans are a prime example. With both of these Bay Area loan programs, the money comes from a regular lender and is either insured (FHA) or guaranteed (VA) by the federal government. This federal backing is meant to encourage lending to a broader range of home buyers and borrowers, particularly those with low to moderate income.

The one exception is the USDA’s rural housing program. With this program, the government actually does lend money directly to consumers in some cases. But aside from that, it is usually indirect aid in the form of mortgage insurance or guarantees.

There are many different types of federal housing programs. But when you hear people talk about “government home loans” in the Bay Area, they are usually referring to one of the big three — FHA, VA or USDA.

FHA: A Low-Down-Payment Alternative to Conventional

The FHA program is one of the most popular examples of a government home loan within the Bay Area. This program is managed by the Federal Housing Administration, which falls under the Department of Housing and Urban Development (HUD).

The FHA does not lend money directly to borrowers. Instead, it insures the loans made by lenders in the private sector.

The federal insurance backing protects lenders, encouraging them to offer financing to people who might not otherwise qualify for a home loan.

How to qualify the program:

• The minimum down-payment requirement for an FHA loan is 3.5%.
• While HUD allows credit scores as low as 500 for this program, most lenders want to see a score of 600 or higher (though this number is not written in stone).
• You’ll probably need a total debt-to-income ratio, or DTI, below 45%. Or up to 50% in select cases.
• There are exceptions to most of these items. The only hard-and-fast rule is the 3.5% down payment.

There are different types of FHA loans available in the Bay Area. Most home buyers use the FHA 203(b) option, which is the basic mortgage loan used for buying a house. But there’s also an FHA 203(k) loan that allows you to purchase and rehab a home, all with one mortgage product.

VA: 100% Financing for Military Members

The U.S. Department of Veterans Affairs (VA) Guaranteed Home Loan Program is available to most military service members and their surviving spouses.

Commonly referred to as “VA loans,” this government program is unique because it offers 100% financing to qualified borrowers. That means the borrower could buy a home in the Bay Area with no down payment whatsoever.

This program is similar to the FHA program, in the sense that the government insures the loans made by direct lenders. But, as mentioned above, it’s generally limited to U.S. service members and their families.

How to qualify for the program:

• The home must be owner-occupied, meaning it’s going to be your primary residence.
• You must obtain a Certificate of Eligibility (COE) from the VA.
• You must have sufficient income to cover the monthly mortgage payments.
• The property must past a home appraisal and meet HUD’s minimum property requirements.

USDA: Rural Housing Loans for Moderate-Income Borrowers

These loans are offered through the USDA’s Rural Development division. The difference with this program is that the government actually lends money directly to consumers, at least in some cases.

This USDA home loan program is designed to help low-income and moderate-income families in rural areas. Direct and guaranteed loans may be used to buy, build, or improve the applicant’s permanent residence.

How to qualify for the program:

The key requirements for this government home loan program are income and location:

• The home being purchased or improved must be located within an eligible rural area, as defined by the USDA.
• Additionally, the borrower must meet certain income requirements. Borrowers must have low to moderate income, based on the local median.
• In most cases, the maximum income for this program is 115% of the area’s median income. That means your household income can’t be more than 15% above the median income where you live.

Bay Area borrowers who live in an approved rural area and have qualifying income could be eligible for a USDA home loan. A list of eligible locations and income requirements can be found on the USDA website.

Have Mortgage Questions?

This is just a quick overview of government home loans in the San Francisco Bay Area. You can learn more by visiting www.govloans.gov, or by speaking to our knowledgeable staff.

Bridgepoint Funding is a local mortgage company that offers a broad range of financing options, including FHA, VA and conventional. If you’d like to apply for an FHA, VA or conventional mortgage loan in the Bay Area, please contact our staff.