VA and FHA Loans are both great federal backed mortgage programs. When comparing the two federal home loan programs, it’s only natural to wonder which one might be right for you. There are obvious distinctions between military and FHA mortgages. Loan limits, qualifying requirements, down payments and fees can all vary between the two programs. Determining whether VA or FHA is the appropriate loan for a specific situation involves weighing the advantages of both.
Because there is an eligibility requirement with VA loans, some borrowers can rule out this option early if they cannot obtain the Certificate of Eligibility necessary to participate in the VA Home Loan Program. Veterans and active military personnel need to have served for a certain number of days in order to be considered eligible. The Certificate shows how much (if any) entitlement a person has with the VA Loan Guaranty Program. Entitlement is the portion of mortgage that the VA will guarantee for each service person. Loan seekers who do not have entitlement are not VA eligible, and should consider an FHA loan.
Non-VA-eligibility could mean that a person is not affiliated with the military, has not accumulated enough service time, has been dishonorably discharged, or is using full entitlement that has not been restored, or is using partial entitlement that has not been restored and does not have enough entitlement left over for another VA Loan. Whichever the case, FHA can provide an excellent alternative government backed loan program for your mortgage needs.
Some advantages to choosing an FHA loan over a conventional loan may be:
- Low down payment of around 3%
- Low closing costs
- More lenient 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 the VA loan program, the 2009 maximum loan amount that the VA will guarantee is $417,000. Each eligible veteran has basic entitlement of $36,000 on loans up to $144,000 and bonus entitlement of $68,250 on loans over $144,000, for a total entitlement of $104,250 (more in high-cost counties). Entitlement is calculated as follows:
– $144,000 x 25% = $36,000 basic entitlement
– $417,000 – $144,000 = $273,000
– $273,000 x 25% = $68,250 bonus entitlement
– Full entitlement for most veterans: $104,250
Veterans who are using all or a portion of their entitlement, and do not have enough entitlement left for another VA Loan, will definitely want to consider an FHA loan.
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.
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.
FHA loans can provide similar benefits to those of VA loans. However, VA mortgages are still the only option available for zero down purchase loans and 100% refinancing. For a mortgage of up to $417,000, the VA home loan program is hard to beat for those who qualify. And, for U.S. counties where the cost of living is higher than the rest of the country, the VA loan guaranty amount can be even higher than the “maximum” $417,000. For instance, in 2009 VA’s maximum county “loan limit” may be as much as $1,094,625 in parts of California, Colorado, and Massachusetts. Check with your loan provider to see what the VA entitlement limits are in your county.
It’s true that for many VA-eligible borrowers, a VA home loan can be the most beneficial option. The notable benefits of a VA loan are as follows:
- No Down Payment
- Up to 100% Financing on purchases and refinances
- The 2009 VA guaranty is for loans up to $417,000 (higher in some counties)
- No Private Mortgage Insurance (PMI)
- No Prepayment Penalty
- 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
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.