Should you take an FHA Loan instead of a VA Loan?
by Francisco Lozano, VA and FHA Loan Specialist for Amerisave Mortgage
In most cases, the answer is NO! But sometimes…….
The Federal Housing Administration (FHA) runs several programs to promote home ownership. In most cases, FHA loans are mortgages obtained with the help of the FHA. With a small down payment, buyers can purchase a home. FHA loans make it easier for people to qualify for a mortgage, but they’re not for everybody.
What is an FHA Loan?
An FHA loan is a loan insured against default by the FHA. In other words, the FHA guarantees that a lender won’t have to write off a loan if the borrower defaults – the FHA will pay. Because of this guarantee, lenders are willing to make large mortgage loans.
Who Can Get an FHA Loan?
Almost anybody can get an FHA loan. There are no income limits – like you may find with first time home buyer programs. However, there are limits on how much you can borrow. In general, you’re limited to relatively small mortgage loans relative to home prices in your area. To find the limits in your region, visit HUD’s Website.
To qualify for an FHA loan, you’ll need to have reasonable debt to income ratios. In general, you have to be better than 29/41. In addition, you have to have decent credit. You don’t need wonderful credit to get an FHA loan; it just needs to be decent.
Why are FHA Loans so Great?
FHA loans are not for everybody. Nevertheless, they are a great help to some borrowers. FHA loans allow people to buy a home with a down payment as small as 3%. Other loans might not allow such a low down payment.
FHA loans offer a few other bells and whistles:
* Easier to use gifts for down payment and closing costs
* No prepayment penalty (a big plus for subprime borrowers)
* An FHA loan may be assumable
* Possible leniency during financial hard times
How do FHA Loans Work?
The FHA promises to pay lenders if a borrower defaults on an FHA loan. To fund this obligation, the FHA charges borrowers a fee. Home buyers who use FHA loans pay an upfront mortgage insurance premium (MIP) of 1.5%. They also pay a small ongoing fee with each monthly payment.
If a borrower defaults on an FHA loan, the FHA uses collected insurance premiums to pay off the mortgage.
When is an FHA Loan better to use than a VA Home Loan?
Currently, FHA loans can now be made up to $ 725,000 in some areas. WIth VA Loans, the maximum loan amount is typcially $ 417,000 except for Hawaii. So if you need a loan more than $ 417,000, then it’s wise to go FHA
With FHA, you pay that darn Mortgage Insurance Premium (MIP) and with VA you do not pay that fee. So it saves you money to go with VA.
Also, VA Loans offer 100% financing with no down payment. FHA requires a 3% down payment. So that’s a big difference right?
Now, in some market conditions, FHA may have the better interest rate and so that has to be taken into consideration. But mostly, if your a U.S. Veteran, it more than likely that the best loan for you is a VA Loan. As always, you should compare offers for VA and FHA loans against each other.
If you more questions on this issue, contact me and I will be glad to provide clarity for you and your family.
ABOUT THE AUTHOR: Francisco Lozano is a VA and FHA Home Loan Specialist with Amerisave Mortgage. He can be reached at [email protected] or by phone at 1.951.571.3040