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Your Complete Guide to the VA Home Loan

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    FHA Loans

    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.)

    One major difference between FHA loans and VA loans is the requirement to pay mortgage insurance premiums (MIP). (An MIP is similar to but not the same as the private mortgage insurance (PMI) paid on conventional loans.) MIP offers security for lenders in case their borrowers default on their loans. The FHA requires that MIP be paid both up front and annually. So once the down payment on an FHA loan has been made, the MIP will be taken as a percentage (currently 1.75%) of the remaining purchase price, and that amount will be added onto the balance of the loan principal. The annual MIP is determined by both the length of the loan term and the amount of the loan remaining after the down payment (loan-to-value, or LTV). The value of the annual MIP is divided by twelve and added onto each monthly mortgage payment. These days, most FHA borrowers pay MIP for the entire life of their loan. If you put at least 10% down, you will be able to stop paying it after eleven years.
    FHA Loans

    There are many types of available FHA loans:

    • Fixed-Rate 203(b) Mortgage – This is the most common type of FHA loan, and it’s great for first-time home buyers. Its interest rates will not change over the loan’s lifetime.
    • Adjustable-Rate Mortgage – Its major benefit is that early payments will stay low. While the interest rates may change over the lifetime of the loan, they cannot increase more than 1% each year, nor can they increase more than 5% from the initial rate.
    • Energy Efficient Mortgage – This allows borrowers to include the cost of energy-saving home upgrades in their loan, and it can be used to build a home or purchase an existing one.
    • Section 203(k) Loan – This loan can be used to repair or rehabilitate certain kinds of single-family dwellings, and it can be used in conjunction with the FHA Energy Efficient Mortgage.
    • Reverse Mortgage – Designed for home owners ages sixty-two and older, it converts home equity into income or a line of credit.
    • Graduated Payment Mortgage – Payments start small but get bigger each year. This is a great choice for people who expect their income to rise over the next several years.
    • Growing Equity Mortgage – Intended for first-time home buyers and young families, this loan’s payments start small and gradually get larger, with an increasing amount going toward the loan’s principal, which will reduce the mortgage term.
    • Loans for Condominiums – These are only applicable to purchases of condominium units, and they’re structured similarly to Section 203(b) loans.
    • Cash-Out Refinance Loan – This allows home owners to either lower their monthly payments or convert home equity into cash.
    • Streamline Refinance Loan – This refinance process is quick and reduces the borrower’s interest rate. No cash can be received.

    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!