For more than four decades, FHA and VA mortgages have been enormously popular with home buyers throughout the country. Requiring little or no money down and featuring liberal qualification standards, FHA and VA loans are an attractive alternative to conventional mortgages, loans that require large down payments at closing.
The most popular FHA loans, those insured under Section 203(b) of the National Housing Act, offer many advantages to home buyers, particularly those with few down payment dollars. Here's how the FHA loans compare with conventional or VA-backed loans:
* FHA mortgages feature low down payments, usually 5% or less, compared to 20% down for conventional loans and no-money-down VA financing.
* FHA loans are assumable, and may be prepaid in whole or in part without penalty.
* Unlike VA or conventional financing, there is an FHA loan limit. This limit is established by the federal government and varies according to whether or not a region is considered a "high cost" housing area such as the Southland. Current congressional guidelines allow up to $124,875 for single-family homes in many high-cost areas.
In addition to the down-payment, FHA requires all borrowers to pay a mortgage-insurance fee. The fee is 3.8% of the total loan amount.
With an $85,000 mortgage, for instance, the fee would amount to $3,230. While purchasers can pay this sum in cash when they close escrow, most prefer to pay it off over the life of the loan by adding a few extra dollars to their monthly mortgage payment.
FHA loans are designed to help families acquire real property by reducing down payment requirements. The basic FHA down payment formula is 3% of the first $25,000 and 5% of the balance. With an $85,000 FHA mortgage, the down payment would be $750 (3% of $25,000) plus $3,000 (5% of $60,000), or a total of $3,750. In this example, the down payment is equal to only 4.4% of the mortgage.
FHA loans can be used to acquire not only single-family homes but also structures with two, three and four units as well. As the number of units increases, so does the maximum mortgage that the FHA will insure.
Current guidelines allow FHA loans up to $124,875 for a single-family home, $140,600 for a duplex, $170,200 for a triplex and $197,950 for a four-unit property. Be sure to check with lenders for the latest loan limits in your area.
To obtain FHA-backed loans buyers must be financially qualified and have the property evaluated by an FHA-approved appraiser. If it is found that the FHA appraised value is less than the selling price, then either the sales price must be lowered or the purchaser must be willing to cover the difference in cash.
There are 4 million VA-backed loans outstanding and together they represent some of the best financing around. What makes VA financing unique? There are several major factors:
* The VA is not a lender. Instead, the VA acts as a co-signer to assist qualified individuals who need home mortgages.
* Unlike conventional loans that require 20% down, there is no VA requirement for a down payment unless the purchase price of the property is greater than the VA's estimate of reasonable value.
* There is no VA limitation on the size of a mortgage. Lenders, however, may elect to limit the size of VA financing they will process.
* Historically, the VA mortgage program has been seen as a loan "guarantee" rather than insurance on which individuals pay premiums. Today, however, the VA charges a "funding fee" to vets based on the amount of the down payment.
Since Jan, 1, 1990, funding fees have been based on the following schedule: With less than 5% down, the fee is 1.25% of the loan value; with more than 5% down but less than 10% down, the fee is .75% of the amount borrowed; with at least 10% down, the funding fee drops to .5% of the loan value.
* A major attraction of VA financing has historically been the ability to freely assume such loans. That policy has now been replaced with a new standard that requires that would-be purchasers obtain the approval of both the VA and the lender who made the loan. The result is that VA loans made after March 1, 1988--are no longer freely assumable.
* VA financing is self-amortizing over a long term, thus there is no balloon payment.
* VA-backed loans may be prepaid without penalty.
VA loans are available to those currently in the armed services as well as most veterans with active duty experience since World War II, generally individuals with 90 days of continuous active duty service during wartime or 181 days of such service in peaceful periods.
In addition, certain other individuals, such as officers in the Public Health Service, qualify for VA benefits.
To qualify for VA financing, a veteran must possess DD Form 214, a form given out when leaving the service, and VA Form 26-1880, Request for Certificate of Eligibility. These forms are utilized to obtain a Certificate of Eligibility. For current information visit VA regional offices, write the VA, or call (800) 352-6592.
