The Department of Veterans Affairs isn’t the only sector of the government that makes guaranties for home buyers. The Federal Housing Authority (FHA), begun in 1934 as part of President Franklin D. Roosevelt’s New Deal initiatives, offers the most common type of government-backed home loan. VA loans are nearly always a better deal overall than FHA loans, but the VA requires borrowers to meet stricter criteria, so if you’re currently unable to secure a VA home loan, consider going through the FHA instead.
While VA lenders will probably require you to have a FICO credit score of 620 or higher, FHA lenders will most likely work with you as long as your score is 580 – in fact, sometimes they will work with borrowers whose FICO scores are as low as 500. FHA loans require a down payment of at least 3.5% (compare this with the 5% minimum for conventional loans and 0% for VA loans); if your credit score is particularly low, you’ll probably have to put down at least 10%. Closing costs must be paid for FHA loans, although the seller can contribute up to 6% of the purchase price or appraised value of the home (whichever is less) to go toward your closing costs. The seller cannot contribute to your downpayment. One benefit of FHA loans is that gift funds can be used to cover your down payment and closing costs. Gift funds must truly be a gift, with no expectation of repayment. They must be given by an approved party, such as family, friends, or a down payment assistance program, and they cannot come from anyone involved in your transaction on the home. Gift funds must have a verifiable paper trail, usually a certified or cashier’s check, and they must have a letter of documentation signed by both you and the donor.
Like VA loans, FHA loans must be used to purchase a primary residence, and they have maximum dollar limits attached. Currently, the FHA limit for a single family is $271,050 in most markets (compare this to $417,000 from the VA), although limits are raised in certain areas of the country with higher costs of living. FHA loans are also assumable, meaning that if you want to sell your home before you’ve finished paying off your FHA loan, the person who buys it from you may be able to simply take over the rest of your loan, rather than getting a whole new mortgage for themselves. (This can be an advantage to buyers when interest rates are high.)
There are many types of available FHA loans:
At Fortress VA Loans, we want our clients to obtain the best loan for their situation, so they can save money for the long-term and accomplish dreams and goals outside of home owning. If at all possible, our family of VA loan specialists and lenders will get you set up with a VA home loan, but if you don’t meet those financial requirements, an FHA loan is often the next-best option. If you have any questions about the FHA home loan process and how it compares to the VA loans process, get in touch with us today!