FHA and VA loans are both backed by the federal government. They are similar in different ways but they have details that set them apart. To really understand how you can benefit from each option is to review details carefully and choose based on what you feel is best for your situation. The following details provide more insight on each loan and why they are different.
What Are FHA Loans?
FHA stands for Federal Housing Administration. The loss the bank experiences when you default on the loan is repaid by FHA. Borrowers seek this loan option because it offers good incentives including a low down payment based on the purchase price (at roughly 3.5 percent). Some closing costs are financed or included in the amount of the loan, and the loan has low costs at closing. Most people can apply for this loan. The region you live in may have an effect on how much you can borrow. There are FHA Limits for each year and you can learn more about them through their website.
The Mutual Mortgage Insurance Fund is a funding source the FHA uses to repay lenders when default occurs by the borrower. This fund is funded when borrowers make monthly payments on insurance premiums (also known as mortgage insurance premium or MIP). This loan is considered easier to qualify for compared to conventional loans with less pressure on income and credit requirements.
With FHA you have the option to finance and refinance. You can get a 30 year or 15 year fix mortgage with rates varying. You can check their website to learn about most recent rates and get an idea of how much monthly mortgage payments would be. There is an assortment of requirements FHA has in place for borrowers including:
• FHA mortgage insurance protection.
• Lending limits based on housing type, county and state.
• Documentation such as credit report and property appraisal you are required to pay for.
• Meeting debt-income ratios set by FHA.
• Pay FHA closing costs and what they consider allowable costs.
• Previous credit history that could affect getting approved.
If you are dealing with credit issues FHA encourages credit consumer counseling to improve chances of getting approved. The underwriting process can be completed and submitted online. Veterans interested in applying are required to provide documentation including the DD Form 214 to show discharge of service. FHA has a program for first time borrowers called the FHA Fixed Rate Mortgage Loan Program to assist in establishing a good monthly payment.
The FHA doesn’t fund the loan but they guarantee such loans to help keep lender risk low, while allowing applicants to have more leverage borrowing. You can prequalify for this loan but you should be able to demonstrate your ability to reliable, employed and ability to maintain steady employment.
What Are VA Loans?
The Veterans Administration (VA) guarantees these loans. This means they will provide protection to lenders if the borrower does not repay or defaults on the loan. Certain borrowers qualify for this loan and it is available through VA approved loan service lenders. In order to get a VA loan you should either be a current U.S active military member, veteran, National Guard or reservist, or a surviving spouse meeting eligibility requirements. When you apply and you are approved you may not need to pay any money down. Private insurance does not have to be obtained VA loans not only assist in purchasing a home, but they can be used to help cover home repairs.
Mortgage companies and banks or private lenders provide funding for loans. A portion of the loan is guaranteed to be repaid which is an advantage to have if you want to change terms in your loan. These loans offer competitive rates and borrowers can participate in what is called Cash Out Refinance loans. This allows borrowers to take cash out of their home (or equity) and use it to pay other financial obligations such as home improvements or school.
You can get a lower interest rate on your loan through the Interest Rate Reduction Refinance Loan or IRRRL or Streamline Finance. This option allows for refinancing of your current VA loan. If veteran applicants have a disability they may qualify for housing grants through the VA. These grants are used to acquire a new home or to make changes to their current home to accompany their disability. Some veterans may also qualify for reductions on property taxes.
Eligibility for each loan option varies. The amount of time you have spent in the military and active duty helps determine which program you qualify for. For Cash-Out Refinance you should have good credit, meet income guidelines and provide valid COE or Certificate of Eligibility. This may also be applied for an eligible spouse or dependent of a service member who is active. The IRRRL is completed on existing VA loan to lower mortgage payments through an interest rate reduction. There is a VA loan option for Native American veterans and housing grants such as Special Housing Adaption (SHA) and Specially Adapted Housing (SAH) for those with permanent disabilities.
FHA and VA Loan Comparisons
The FHA loan is known to be a common option for first-time homebuyers. These loans can be obtained through HUD (Housing and Urban Development). Veterans can apply for this or the VA loan, but some feel veterans may have a better advantage when using a VA loan. Here are additional points to help you compare each option starting with VA loans.
• If you are within loan limits you don’t need to put cash down.
• Mortgage insurance premiums are not necessary.
• Some borrowers are subject to a VA funding fee.
• Standards to qualify have less pressure.
• Closing cost flexibility with seller obtaining 4 percent of concessions.
• Eligible for VA benefits and occupancy as owner.
The following points provide most significant details to remember for FHA mortgage loans.
• A down payment may be required in the amount adding up to 3.5 percent of the home’s total cost.
• Mortgage insurance payment is due and total’s roughly 1.75 percent. These insurance premiums have a rate that could last as long as 5 years.
• Qualifying aspects have less pressure compare to other home loan programs.
• Closing cost flexibility with seller obtaining 3 percent of concessions and owner occupancy.
Three Reasons VA Loans May Be Better
Since veterans can obtain either loan if you had to make a choice it should be based on what is best for your situation and personal goals. Upon comparing details for both loans there are three details that stand out making VA loans look like prime contenders.
1. Most parts of the United States have a loan limit in the amount of $417,000. If you wanted a loan for this amount through FHA you would be required to pay roughly 3.5 percent or $7,000 upfront in cash. A VA loan at half of that amount (about $200,000) could be approved with no cash to pay upfront.
2. Monthly mortgage insurance premiums are not necessary for VA loans. Also known as PMI, VA loan borrowers are not required to pay this fee. There is what is called an Upfront Mortgage Insurance Premium required by the FHA that is roughly 1.75 percent. This is also to be paid with PMI set at just over 1 percent. For FHA there were rate changes that took effect recently but they can be assessed by visiting their website (FHA.gov). The rate could be set for as long as 15 years or depending on loan-to-value ratio.
3. The funding fee required for VA borrowers is .5 to 3.3 percent. Most borrowers approved for a VA loan will be required to pay this fee if they use benefits. The rate can change or be the same depending on terms of the loan. Borrowers are eligible depending on their military status (National Guard/reserves or active military). For first time users they may be required to pay a fee set at the rate of 2.14 percent. VA loans issued through streamline refinancing options have fee rates set at .5 percent. Veterans who are disabled or are a surviving spouse are exempt from paying the funding fee.
Additional Details You May Not Know about FHA Loans
Lending limits for FHA loans may change but have said to steadily increase overtime. This may vary depending on the type of how you are seeking a loan for such as a single-family home. The FHA may charge fees for document preparation, credit reports, appraisals, inspections and more.
You will obtain a list of details describing fees you are required to pay for FHA, but you can ask questions about fees before applying. You may also pay additional fees to FHA that are not part of closing such as real estate broker, courier, recording taxes, and wire fees. Borrowers may be eligible to obtain assistance to pay for related costs offered through state and local agencies. The FHA wants potential borrowers to avoid making large purchases just before applying for a loan with them. This could affect debt-to-income ratio requirements and hurt chances of getting approved.