Direct VA Loans

Compare VA FHA and Conventional Loans

Many want to compare VA, FHA, and Conventional loans to determine which program is best for them. Examining each mortgage program can help to understand them.

VA Loans Have Great Benefits Like Zero Down

VA loans have several unique features. They are available only to qualified consumers with honorable and ample time in the U.S. military. The VA guarantees 25 percent of each military mortgage made by VA-approved lenders based on the VA loan limits for each county.

VA-eligible borrowers must first obtain a Certificate of Eligibility, or COE. For most borrowers, this can be done through the lender with a quick online system called ACE.

The COE tells the lender how much entitlement each borrower has.  Full entitlement for most VA borrowers is enough for a zero-down purchase loan of $417,000. Of course, borrowers need to qualify with respect to income and credit.

For VA-eligible borrowers, a VA loan may require the least out-of-pocket cash of all the programs available. The VA requires each lender to collect a VA funding fee from most borrowers, but the fee can be rolled into the loan in most cases. The fee varies depending on the borrower and type of loan and can be between 0.5 and 3.3 percent of the loan amount. Certain borrowers may be exempt from this fee.

Another feature that distinguishes VA loans is the fact that no private mortgage insurance (PMI) is required, which can save borrowers hundreds each month. Also, veterans do not have to be first-time homebuyers and they may reuse their benefits again and again. The loans are assumable by another VA-eligible borrower provided he or she is qualified. With a VA loan, the seller can pay the buyer’s closing costs.

FHA Loans Require as Little as 3.5% Down

The Federal Housing Administration (FHA) loan program has been popular for first-time homebuyers and borrowers who may have less-than-perfect credit, moderate debt-to-income ratios (DTI), and not a lot of money to put down.

Like the VA, FHA does not lend money directly. Rather, FHA loans are insured by the Federal Government to protect the lender if the borrower defaults.

The minimum down payment for FHA loans is 3.5 percent. For most FHA programs, there is a "one time" mortgage insurance premium (OTMIP) required at loan closing that can be up to 3 percent. This OTMIP may be rolled into the loan amount along with a required Mortgage Insurance Premium (MIP) which is paid each month. The monthly MIP is applicable on all loans in addition to the OTMIP.

One of the benefits of the VA and FHA loan programs is that many lenders are willing to look at a borrower's overall credit picture rather than basing a loan decision on automated underwriting software alone. Such software generally incorporates a credit-score requirement. VA and FHA guidelines have no stated minimum credit score requirement, but lenders may have their own guidelines. Despite the obvious benefits of VA and FHA mortgage programs, the bulk of home loans are still conventional.

Conventional loans require good credit and larger down payments

Conventional loans can be conforming or nonconforming. Loans above the lending limits used by Fannie Mae are considered nonconforming or jumbo loans. Conforming loan limits can be higher in pricier counties for all loan programs, including VA and FHA.

There are guidelines established for borrower income and minimum down payments. For example, most conventional loans require somewhere between 5 percent and 20 percent down. Conventional loan borrowers are required to pay PMI if they have less than 20 percent down payment. Today’s conventional loans require excellent credit to qualify for the best interest rates. Fees and rate hikes may be added for lower credit scores, a practice which is not standard with VA and FHA loans.

Each consumer’s financial situation is different. And, there are many reasons why a borrower would choose one program over another. To learn more about VA, FHA and conventional loan programs contact a loan professional.


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