There are two main types of government loans: VA, sponsored by the Veterans Administration, and FHA, sponsored by the U.S. Department of Housing and Urban Development.

VA home loans are available only to qualified veterans, and offer the benefit of a very low downpayment without mortgage insurance. They are available only as fixed rates which may be significantly higher than conventional loans but may be assumed by future qualified purchasers of your home, a good selling tool in times when interest rates are higher and you decide to sell your home.

FHA loans require a downpayment of only roughly 3% of the sales price, making it a good option for homebuyers with limited cash. Furthermore, 93% of the rental income from units not owner-occupied can be used to help you qualify for the loan when purchasing multi-family homes. FHA offers both fixed and adjustable rate program (ARMs); ARMs are particularly good, as they offer low annual and lifetime caps which limit the amount the interest rate can adjust upward. Increases are typically 2% annually for most conventional loans, but only 1% annually for FHA loans.

The drawbacks of an FHA loan are higher interest rates and mortgage insurance premiums that are paid for the life of the loan. Mortgage insurance premiums paid on an FHA loan is typically equal to 2.25% of the purchase price of the property with a renewal premium of .500% in subsequent years. Compare this to the mortgage insurance premium charged for a conventional program, typically as low as .500% (with 10% down payment) with a renewal rate as low as .300%.