Many hopeful borrowers are already aware of conventional mortgage lending options, but not as well known are other types that can make the difference between securing a loan and not. These additional mortgage programs are designed to support people even if their credit isn’t great or they don’t have a large down payment — both requirements for conventional loans. In these instances, it’s a good idea to look at government-backed loan options like VA and FHA loans.
There are differences between these two loan types, and some candidates may be better suited to one over the other. Read on for general information about the two, and see if one may be the best option for you.
FHA Loans
Available since the early 1930s, the Federal Housing Administration (FHA) loan program was designed to help consumers who may have some difficulty getting a home loan. With an FHA loan, mortgages are provided by the same lenders and banks that handle conventional mortgages, but the amount of the FHA loan is insured by the US government.
This means that if the borrower defaults on the loan, the FHA guarantees lenders are covered and this makes those organizations more comfortable providing lending to what can be seen as more risky buyers. Another benefit of FHA is that with government backing, lenders can offer more competitive interest rates to borrowers regardless of their credit history.
There are requirements necessary to be eligible for an FHA loan, and they include:
- The credit score needs to be at least 500 to apply. Putting down less than a 10 percent down payment requires a minimum credit score of 580.
- Down payment requirements are 3.5 percent of the home’s purchase price.
- Mortgage Payment Insurance (MPI) is required, despite the governmental guarantee. This can either be a monthly or an upfront payment based on the value and term of the loan. Monthly payments are calculated for the entire term of the loan, and for down payments over 10 percent, the term is for the first 11 years.
VA Loans
As with FHA loans, the Veterans Administration (VA) loan program is a government-insured mortgage program, and loans are still made by private lenders and banks. In the case of the VA program, The Department of Veterans Affairs guarantees the loans.
The major factor for VA loans is that they’re only eligible for veterans or active-duty service members. This factor is the major distinction between FHA and VA for most consumers, but if eligible it’s an ideal resource for potential borrowers.
Requirements necessary to be eligible for a VA loan include:
- Borrowers often have lower down payment requirements than other types of loans, and some are eligible without any money down.
- There is no minimum credit score required, but there is still a review of the loan application to ensure it’s appropriate for the program.
- This type of loan is available only for currently serving military personnel and veterans. In some cases, others may be applicable based on circumstances; these may include surviving spouses, spouses of missing veterans, etc.
This is by no means meant as a full description of FHA and VA loans but is representative of the difference over the conventional mortgages banks and lenders typically provide. The best source of determining the right loan for you is to speak with a loan officer at a qualified lending institution so they can guide you in making the best decision for your particular needs.
Purchasing a home under these programs still requires ample paperwork, supporting documents, and a full loan review. However, the benefits FHA and VA loan programs offer to those qualified borrowers who have less than ideal credit and little or no money to put down, are often instrumental in making homeownership a reality.