There are many different home loan programs available that individuals can obtain depending on their circumstances. Whether you are a student or in retirement, getting your first or sixth home mortgage – this will always be an interesting topic of conversation. With so many options to wade through, we wanted to focus on two different government loan programs: FHA and VA. Though they are backed or insured by the federal government, that doesn’t mean they are the same.
An FHA loan is a home mortgage that the Federal Housing Administration insures in case the borrower defaults on their payments. In a conventional mortgage, the down payment is generally around 20% of the home value. For FHA loans, it is typically a minimum of 3.5%. Generally, you will need to have a credit score of 580 or higher to qualify. Should your credit score fall between 500 to 579, you may still qualify for an FHA loan provided you increase your down payment to 10% or more. You will also need a debt to income ratio of no more than 43%, although in some circumstances, a debt to income ratio of 50% may be permitted, depending on credit score and other factors.
Because you can get an FHA loan with a lower credit score and a smaller down payment versus conventional loans, this can be an attractive option for first-time homeowners who might not have a 20% down payment available. There are different FHA loan programs available, like Title I Property Improvement Loans for manufactured homes to be bought or repaired. There are limits to how much someone can borrow, which is determined by the county you live in. According to the HUD website, the limits in 2020 (for a single unit residence) ranged from $331,760 in Lucas County, Ohio to $765,600 in San Francisco County, California.
Quite a vast difference. For most FHA loans, there is an Upfront Mortgage Insurance Payment (UFMIP) in addition to the monthly mortgage principal and interest payment and a Mortgage Insurance Premium (MIP). Depending on your down payment, and when you first took out the loan, FHA MIP usually lasts 11 years or the life of the loan.
VA-Backed Home Loans
A VA loan is for active duty personnel, veterans, and their surviving family members. The U.S. Department of Veteran Affairs (VA) guarantees a portion of the loan so that the borrower is able to get more favorable terms from private lenders. A down payment is not usually required and neither is mortgage insurance. If the borrower does not make payments, the government will repay a portion of the loan to the lender. When it comes to other requirements, besides having served or currently serving their country, there really aren’t many.
The most important VA requirement is getting a Certificate of Eligibility, which shows your lender that you qualify based on your service history and duty status. For one, the VA doesn’t have a set minimum credit score, though a private lender may have their own requirements to take into consideration. In addition, the property has to meet the VA’s safety and building codes. There are also different types of VA loans that are available, such as a purchase loan, a cash-out refinance loan, an Interest Rate Reduction Refinance Loan (IRRRL), and a Native American Direct Loan (NADL). It is important to note that even though there are no closing costs, there is a VA funding fee, unless you qualify to be exempt. The fee is set by the federal government and currently ranges, for a purchase loan, from 1.4% for a first use if your down payment is 10% or more, to 2.3% for a first use if your down payment is less than 5%. For IRRRLs, the funding fee is a flat 0.5% of the loan amount. Note that VA-backed home loans are only available on primary residences, but a COE may be used again if the initial home purchased with the prior loan has been paid in full.
There are pros and cons to both situations. How much you are willing to put into a down payment, what your credit pay history looks like, and how much you are able to pay back each month, all factor into deciding which of these two loan options could be the right one for you.
If you are interested in looking into getting a VA-backed home loan or FHA loan, make sure to talk to one of our Loan Advisors. We can help you understand the nuances of these federal loan programs and help you determine what is right for you.