Tips & Special Topics
VA or FHA- What's the Right Home Loan for You?
Added January 19, 2009 | Updated January 19, 2009
When examining the home loan programs of the Federal Government, one may wonder whether a VA home loan or an FHA mortgage is more appropriate. There are definite differences between “military mortgages” and FHA loans. Some of the variations have to do with loan limits, others have to do with qualifying standards, while still others concern down payments and fees. One way to determine whether VA or FHA is right for a particular borrower is to weigh the advantages of both.
VA loans are available only to veterans and active military personnel who can obtain a Certificate of Eligibility. The Certificate shows that a person is eligible for the unique benefits of the VA Loan Guaranty Program. So, borrowers who are not VA eligible should consider an FHA loan.
The notable benefits of a VA loan are as follows:
• No Down Payment
• Up to 100% Financing on purchase and refinance loans
• In 2009 the Department of Veterans Affairs (VA) guarantees loans of up to $417,000 and more in certain geographic areas
• No Private Mortgage Insurance (PMI)
• Less Strict Credit and Income Requirements
Other benefits associated with VA loans include:
• Equal opportunity lending
• Buyer has access to appraisal
• Negotiable interest rate
• Funding fee may be financed
• Same or lower closing costs compared to those of some other loan programs
• Mortgage may be assumable
• No penalty for prepayment
• One-year builder’s warranty or 10-year insurance-backed protection plan on dwellings proposed or under construction if local inspection is not available
• VA counseling for veteran borrowers in financial distress
FHA loans can provide similar benefits to those of VA loans. However, VA mortgages are still one of the only options available for zero down, 100% financing. By combining veteran mortgage benefits with county-centric loan limits, the VA home loan program is hard to beat for those who qualify. The 2009 county loan limits can make the VA loan guaranty amount even higher than the “maximum” $417,000 in certain U.S. counties. Up-to-date commercial and government data on the cost of living in each county helps both FHA and VA loan programs in determining whether some geographic areas have higher living costs and therefore require higher loan maximums. As a result, in January 2009 VA’s maximum county “loan limit” may be as much as $1,094,625 ($1,642,037 in Alaska, Guam, Hawaii, and the Virgin Islands).
It’s true that for many VA-eligible borrowers, a VA home loan can be the most beneficial option. It’s also true that for VA-eligible borrowers who seek a mortgage but already have a VA loan, an FHA loan can be a great alternative.
With the VA loan program, there is a maximum “entitlement” available to each eligible veteran. The “maximum” VA loan guaranty of $417,000 discussed previously might also be considered the maximum entitlement allowed per veteran. So, those veterans who have already taken “full advantage” of their entitlement will definitely want to consider the option of applying for an FHA loan. There are some terrific examples of how VA loan entitlements are calculated on the Department of Veterans Affairs website.
For those veterans who fall under this “maxed-out entitlement” category, an FHA loan can be very practical. FHA loans, like VA loans, help people buy and keep their homes by providing more manageable terms than those of conventional loans. The Federal Housing Administration (FHA), a division of the Department of Housing and Urban Development (HUD), insures the loans, so private lenders can offer better terms than those offered for conventional loans. Some advantages to choosing an FHA loan over a conventional loan may be:
• Low down payment
• Low closing costs
• More lenient credit qualifying standards
• HUD-approved housing counselors can give free or low-cost advice on home buying, renting, default, foreclosure, credit issues or reverse mortgages.
With FHA loans, first-time home buyers might pay down as little as 3% of the purchase price. And, like VA loans, most of the closing costs and fees can be included in the loan.
Understanding the advantages of FHA loans and VA home loans can help borrowers make the most appropriate choice when looking to purchase or refinance a home.
