FHA and VA Loans

If you are a prospective homebuyer with a low- to moderate-income, your borrowing options with a private lending institution can be somewhat limited. Let’s face it: banks want you to have a lot of money, and lenders want you to have a good credit rating and a high income. So, what do you do if you want to buy a home but your income and your down payment aren’t very high?

The federal government has a number of programs in place to help people with lower incomes realize the American dream of home ownership. One of these programs is administered by the Federal Housing Administration (FHA). Another is governed by the Veterans Administration (VA). There are some differences between the two programs, but their main purpose is very similar: to provide those with lower incomes the opportunity to enjoy home ownership. Let’s examine each one.

The FHA was created in 1934 for the purpose of “promoting home ownership in the United States.” During that time home ownership was not very common. The FHA currently resides as a section of the Department of Housing and Urban Development (HUD). The FHA does not actually provide mortgage loans. It insures loans made by private lenders. This provides those lenders with added security, thus making them more willing to write loans to people with lower incomes.

The VA Home Loan Guaranty Program was conceived as a part of the Servicemen’s Readjustment Act of 1944. The VA Loan Guaranty Service is the organization within the VA that administers the home loan program. The mission of the program is to “help veterans and active-duty personnel to purchase and retain homes in recognition of their service to the Nation.” Although it is only for this specific group of citizens, the purpose of the VA program is identical to that of its’ FHA counterpart: to promote home ownership to those who might otherwise not have the opportunity. And, like the FHA, the VA does not make loans; it guarantees those loans made by private lenders to eligible program participants.

There are a number of benefits associated with FHA and VA loans. One major advantage is that you don’t need a high income in order to qualify for the loan (your credit file would be taken into consideration, however). Another benefit of these loans is the extremely low down payment that is typically required to purchase your home. For the FHA program, the down payment can be as low as 3% of the purchase price. That’s a big difference from the 20% down payment that’s normally required for a conventional loan. For VA loans, it’s even better. If you qualify, the down payment can be as low as 0%. A veteran can also re-use his or her VA eligibility over and over again.

Both loan programs normally offer interest rates that are below standard market rates. This means lower monthly payments, as well as huge savings over the life of the loan. The FHA program does require the payment of a Mortgage Insurance Premium (MIP). It can, however, be financed into the loan at closing.

The FHA and VA loan guaranty programs are two great ways to assist you in purchasing your new home. For more detailed information on these U. S. federal government-backed loans, please click on the above links to visit their websites.