FHA and VA Loans

Common Questions About FHA and VA Loans

Why choose an FHA loan?
What kinds of loans does FHA offer?
How do FHA loans compare to conventional loans?
Do you have to buy mortgage insurance on an FHA loan?

Why choose a VA loan?

Why choose an FHA loan? - (Top)

There are lots of good reasons to choose an FHA loan, especially if one or more of the following apply to you:

  • You're a first-time homebuyer
  • You don't have a lot of money to put down on a house
  • You want to keep your monthly payments as low as possible
  • You're worried about your monthly payments going up
  • You're worried about qualifying for a loan
  • You don't have perfect credit
You're worried about what will happen if you fall behind on your payments

If any of these things describe you, then an FHA loan may be right for you. Why? FHA-insured loans offer many benefits and protections that you won't find in other loans including:

Lower cost: FHA loans have competitive interest rates because the Federal government insures the loans for lenders. Always compare an FHA loan with other loan types.

Smaller down payment: FHA loans have a low 3% down payment and the money can come from a family member, employer or charitable organization as a gift. Other loan programs don't allow this.

Easier qualification: Because FHA insures your mortgage, lenders may be more willing to give you loan terms that make it easier for you to qualify.

Less than perfect credit: You don't have to have perfect credit to get an FHA mortgage. In fact, even if you have had credit problems, such as a bankruptcy, it's easier for you to qualify for an FHA loan than a conventional loan.

More protection to keep your home: The FHA has been around since 1934 and will continue to be here to protect you. Should you encounter hard times after buying your home, the FHA has many options to help you keep you in your home and avoid foreclosure.

The FHA does not give money to people for a home and it does not set the interest rates on mortgages it insures. FHA insures loans for lenders against defaults. For the best interest rate and terms on a mortgage, you should compare mortgages from several different lenders. An FHA-approved lender can help you start the loan application process.

You may use an FHA-insured mortgage to purchase or refinance a new or existing 1-4 family home, a condominium unit or a manufactured or mobile home (provided it is on a permanent foundation).

What kinds of loans does FHA offer? - (Top)

Fixed rate loans - Most FHA loans are fixed-rate mortgages (loans). In a fixed rate mortgage, your interest rate stays the same during the whole loan period, normally 30 years. The advantage of a fixed-rate mortgage is that you always know exactly how much your monthly payment will be, and you can plan for it.

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Adjustable rate loans - Most first-time homebuyers are a little stretched financially, so they want payments as low as possible at the beginning. With FHA's adjustable rate mortgage (ARM), the initial interest rate and monthly payments are low, but these may change during the life of the loan. FHA uses the 1-Year Constant Maturity Treasury Index (1 Yr CMT the most widely used index, to calculate the changes in interest rates. An index is a measure of interest rate changes that determine how much the interest rate on an ARM will change over time.

The maximum amount that the interest rate on your loan may increase or decrease in any one year is 1 or 2 percentage points, depending upon the type of ARM you choose. Over the life of the loan, the maximum interest rate change is 5 or 6 percentage points from the initial rate, again depending upon the type of ARM you choose. The advantage of an ARM is that you may be able to afford more house because your initial interest rate will be lower, as will your payment.

Purchase/rehabilitation loans - Sometimes you might see a home you'd like to buy, but it needs a lot of work. FHA has a loan for rehabilitating and repairing single-family properties called the SF Rehabilitation Loan program (203k). You can get just one mortgage loan which includes the mortgage and the cost of repairs combined. The mortgage amount is based on the projected value of the property with the work completed, taking into account the cost of the work. The advantage of this loan is that you can buy a home that needs a lot of work, but you still have only one mortgage payment, and you can complete the repairs after buying the home.

How do FHA loans compare to conventional loans? - (Top)

Conventional loans usually require a larger down payment. And, if you have less than perfect credit you may not qualify for many conventional loans and find yourself being offered loans with higher interest rates and/or fees than you expected. The best thing to do is compare the cost of the conventional loan to an FHA loan line-by-line. What are the fees on each? What is the interest rate? How much is the mortgage insurance on each? How much down payment is required? For some borrowers, a conventional loan may be less expensive. For many others, it will be more expensive than FHA.

Do you have to buy mortgage insurance on an FHA loan? - (Top)

Yes - as you will with most all of them. There is an up front mortgage insurance premium equal to 1.5% of the loan amount that is paid at settlement. In most cases, this mortgage insurance premium is included in your loan amount, so you are really paying it over the life of the loan. In addition, on loans with a term of greater than 15 years and a loan-to-value ratio of 90% or greater (meaning you are borrowing more than 90% of the value of the home), you will pay an annual mortgage insurance premium of 0.5% of the loan amount in monthly installments.

Example:

Up Front Mortgage Insurance Premium
Mortgage amount: $100,000 X 1.5% = $1,500 @ 6.5% for 30 years = $ 9.48 per month

Annual Mortgage Insurance Premium
Mortgage amount: $100,000 X 0.5% = $ 500/12 months = $41.67 per month

Total Mortgage Insurance Premium $51.15 per month

Most loans require mortgage insurance when your down payment is less than 20% of the sales price. On conventional and subprime loans, mortgage insurance is provided by private companies. Whether private mortgage insurance is less than, equal to, or more than FHA loan insurance will depend upon the loan program and your qualifications.

Compare the cost of FHA over the life of your loan and how much it costs monthly to subprime and conventional types of loans. With the protection you get with FHA - it's a very good deal.

Why choose a VA loan? - (Top)

VA guaranteed loans are made by lenders and guaranteed by the U.S. Department of Veteran Affairs (VA) to eligible veterans for the purchase of a home. The guaranty means the lender is protected against loss if you fail to repay the loan. In most cases, no down payment is required on a VA guaranteed loan and the borrower usually receives a lower interest rate than is ordinarily available with other loans.

Other benefits of a VA loan include:

  • Negotiable interest rate.

  • Closing costs comparable – and sometimes lower - than other financing types.

  • No private mortgage insurance requirement.

  • Right to prepay loan without penalties

  • Mortgage can be taken over (or “assumed”) by the buyer when a home is sold.

  • Counseling and assistance available to veteran borrowers having financial difficulty or facing default on their loan.

    Although mortgage insurance is not required, the VA charges a funding fee to issue a guarantee to a lender against borrower default on a mortgage. The fee may be paid in cash by the buyer or seller, or it may be financed in the loan amount.

    A VA loan can be used to buy a home, build a home and even improve a home with energy-saving features such as solar or heating/cooling systems, water heaters, insulation, weather-stripping/ caulking, storm windows/doors or other energy efficient improvements approved by the lender and VA.

    Veterans can apply for a VA loan with any mortgage lender that participates in the VA home loan program. A Certificate of Eligibility from the VA must be presented to the lender to qualify for the loan.