Basics of FHA and VA Loan Programs
How do homebuyers determine which loan is right for them? It can be confusing with all the factors, types, and programs available. Basically, there’re conventional loans, which lack government guarantees and often require higher down payment or property mortgage insurance. It’s more difficult to qualify for conventional loans due to stricter credit and income requirements. You need steady income, good credit, and a down payment. FHA loans are insured by the FHA and VA loans are guaranteed by the VA so qualifying is easier.
If you think you might have trouble qualifying for a conventional loan, consider FHA or VA loan programs.
FHA Loans
Charged with promoting homeownership and healthy communities, the Federal Housing Administration (FHA) insures private loans made to consumers.
Who Qualifies?
Anyone who is a legal resident of the United States may qualify for an FHA loan. FHA loans are attractive to first-time homebuyers without much cash for a down payment. Lenders view FHA-insured loans as less risky.
Advantages
Borrowers pay a mortgage insurance premium in exchange for the FHA’s insurance. Some advantages of FHA loans include:
- Loans with higher loan-to-value ratios
- Lower down payments
- Longer terms
- No prepayment penalty (a charge on loans paid off earlier than expected)
- FHA programs insure a variety of loans.
- Section 203(b): The main FHA program insures 10-, 15-, 25-, and 30-year fixed-interest rate loans for owner-occupied houses.
- Title XI (Section 202): Advances interest-free federal capital for housing and services for the elderly.
- Section 203(v): Veterans eligible for a VA loan also may receive this loan to avoid using up their VA entitlement or if they’ve already used it.
- Section 221(d)(3): For nonprofit sponsors to construct, purchase, or rehabilitate multifamily housing for moderate-income families.
- Section 223(e): Insures loans in declining urban areas where financing is difficult to obtain.
- Section 223(f): For the purchase, rehabilitation, or refinancing of existing multifamily housing (such as an apartment complex).
- Purchase the mortgage insurance premium (1.75% of the loan amount) upfront at closing and an annual premium of 1.35% for 30-year loans.
- Minimum 3.5% down payment
- 6% max on closing costs and points the seller can pay
- FHA appraisal
- The difference between actual sale price and maximum loan amount must be paid in cash by the borrower as a down payment at closing.
- Rules regarding the buyer’s closing costs. Overages must be waived or paid by the seller.
- Purchase or construction of an owner-occupied house
- Refinancing of an extant VA loan for lower interest rates
- Refinancing of another mortgage loan
- Repair, alteration, or improvement of owner-occupied property
- Purchase of a condo unit in a VA-approved complex
- Purchase of a farm residence
- Addition of energy efficient improvements
- Traditional fixed-rate loan
- Cash-out refinancing: The borrower re-borrows the money that has been repaid.
- Interest rate reduction refinancing loans: Refinance a VA loan to reduce the interest rate.
- Hybrid ARMs: With aspects of fixed-rate and adjustable rate mortgages, the initial interest rate is fixed for the first three years and then may vary with the index.
- Discharged (other than dishonorably) military personnel with wartime service of a specified duration
- Discharged (other than dishonorably) military personnel with certain peacetime service
- Active-duty personnel
- Reservists with six years in the reserves or National Guard
- Eligible surviving spouses