VA AND FHA Loan Comparison
Military Families and Veterans have a great benefit in the VA Loan. In the current market with the higher VA loan limits, favorable interest rates, and minimum or no down payment, VA loans have made a major comeback and are once again the preferred loan for qualified families. However, like the general population, Military Families and Veterans are also eligible for FHA Loans which have tremendous benefits and advantages as well. So which is right for your circumstances? In this article, I will compare VA and FHA loans, both federally insured, based on: down payment requirements, maximum loan limits, interest rates, appraisal issues, and other important features.
Let’s start by clarifying who is eligible for each type of loan.
Good, no, great news! Most Military Families and Veterans are eligible for both!
Eligibility:
VA – Must be a current or former military member. Please click on the following link to view full qualifications. http://www.homeloans.va.gov/elig2.htm
FHA – Open to the general public
Maximum Loan Limits:
VA – $812,500 in most of the Northern Virginia counties. You can look up your county specifically at the following link.
http://www.homeloans.va.gov/docs/2009_county_loan_limits.pdf
FHA – $729,750 in most of the Northern Virginia area. You can look up your specific county at http://www.hud.gov/offices/hsg/sfh/lender/sfhmolin.cfm
Down payment requirements:
VA – No down payment required.
FHA – 3.5% down payment required, but significantly less than most conventional loan requirements.
Settlement Costs and Funding Fees
Each program has a funding fee and that funding fee can be rolled into the loan amount.
VA – The standard funding fee for a VA Purchase loan first time use is 2.15%. Subsequent use is 3.3%. These funding fees can be reduced to 1.5% by putting down 5% or 1.25% by putting down 10%.
On a VA Refinance the funding fee is .50% if you are doing a streamline, meaning you currently have a VA loan and are refinancing it to a VA loan. If you have any other type of loan and are refinancing it into a VA loan, it is considered a cash out refinance and the funding fees are as follows. First time use 2.15% and subsequent use is 3.3%.
If you receive any type of disability income from the VA the funding fees are generally waived, but should be verified with the VA through your lender in advance.
FHA – The funding fee for an FHA purchase or refinance is 1.75%, it is called the Up Front Mortgage Insurance Protection.
Interest Rates
The interest rate for either of these loans run right in line with each other. Different lenders may have “specials” on one or the other depending upon which type of loan they prefer to fund or buy, but typically there is not much difference in rate.
Can both VA and FHA Loans be “assumed?” What does this mean and is it really important?
Both VA and FHA loans are “assumable,” and are the only assumable loans available! Having a low interest rate, assumable loan when interest rates are likely to rise can be a definite advantage. For example, if you have a loan with a 5% interest rate today and sell your home 5 years from now when rates could be 9%, 10% or higher, a qualified buyer could assume your loan (and low rate) for an agreed upon amount. Could rates really go that high? In the early 1980’s, fixed home loan rates topped 17%! Let’s hope that doesn’t happen again, but they most certainly could go 3-4% higher.
This could be the difference between you selling your home vs. your neighbor who has a conventional loan that is not assumable as their prospective buyers would be subject to market rates.
Appraisal Issues
VA – The appraisal for this loan is ordered directly through the VA and will be done by an approved VA appraiser. Lenders do not have any control over the choice of the appraiser.
It is the appraiser’s job to determine the value of the home and note any safety or structural issues that would need to be addressed or repaired prior to the purchase transaction closing.
The appraiser is given typically up to 10 days to complete the appraisal, although under current market conditions may take a bit longer. The Veterans Loan Administration is always available via email or phone if you have any concerns on the length of time the appraisal is taking or feel the value is not reasonable. They are there to support the buyer not the seller.
FHA – Appraisals for an FHA loan are currently still ordered through any approved FHA appraiser by your loan officer. The borrower may request their choice of appraiser as long as he/she is FHA approved. This may change in the near future due to the new HVCC law implemented. This new law requires the lender to order the appraisal through an appraisal management system that is a 3rd party so as not to “sway” the final value of the home. This is currently required on all conventional transactions and may become required on FHA transactions as well.
It is the FHA appraiser’s job to determine the value of the home and note any safety or structural issues that would need to be addressed and repaired prior to the purchase transaction closing.
What about the $8000 first time buyer credit? Does it work with both VA and FHA?
The $8000 tax credit is good for both VA and FHA loans. It is for first time home buyers or buyers not having owned a home in the last 3 years. (Please see http://vrsam.conforums.com/index.cgi?board=Find&action=display&num=1243680388 link for detailed information)
There has been one recent update to the FHA guidelines that will allow the tax credit to be used as a down payment in addition to the required 3.5%. The credit will be given as a “bridge loan” at the time of purchase until the actual credit is received.
Here is the link to the FHA mortgagee letter that gives specific details about the tax credit being used as a down payment.
http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/09-15ml.doc
On May 29, 2009, the Federal Housing Administration (FHA) started allowing buyers to borrow against the credit or sell it to their lender or another 3rd party in order to use the funds to help with the down payment. Be aware of the following pitfalls: if the tax credit is less than expected, you will be responsible for repaying the difference to the party that “loaned” you the money. Also, there can be payments required and fees charged for “borrowing” your tax credit.
We hope this helps. As always, please call or email me with questions.
Susan Wallace, Mortgage Loan Specialist
Jacob Dean Mortgage
571-283-1337 www.LoansbySusan.com |