VA Home Loans or FHA Home Loans: What is the Right Choice?

Written by Isaac F. Davis

VA and FHA loans are terrific, federal-backed mortgage programs for those who qualify. When considering mortgage options, one should look closely at the benefits of each of these programs. There are differences between military and FHA mortgages.  Qualifying requirements, down payments and fees can all vary between the two programs.  Deciding which loan program is right for you comes down to facts.

The eligibility requirement alone may eliminate many from the VA Loan program.  A potential borrower must obtain the Certificate of Eligibility needed to pursue a VA mortgage. Veterans and active military personnel need to have served for a designated duration, depending on war or peace time, in order to be considered eligible.  The Certificate states entitlement amount. Entitlement is the portion of mortgage that the VA will guarantee for each service person.  Loan seekers who do not have entitlement are not VA eligible, and should consider an FHA loan.

Non-VA-eligibility can mean many things.  One might simply not be affiliated with the military, may not have served long enough, may have been dishonorably discharged, may be using full entitlement that has not been restored or may be using partial entitlement that has not been restored and does not have enough entitlement left over for another VA Loan.  A loan specialist can help determine quickly whether you are eligible or not.  If it turns out you are not, then FHA can provide an excellent alternative government backed loan program for your mortgage needs.

Some advantages to choosing an FHA loan over a conventional loan may be:

·       A down payment of around 3% for first-time homebuyers

·       Lower closing costs

·       Less stringent qualifying standards

·       HUD-approved mortgage counseling

If you are eligible for a VA Loan, the VA will guarantee loans up to $417,000 in 2009.  Basic entitlement for each VA-eligible borrower is $36,000 on loans up to $144,000.  Bonus entitlement is $68,250 for loans over $144,000. Full entitlement is $104,250 (more in high-cost counties).  VA Loan entitlement is calculated as follows:

            $144,000 x 25% = $36,000 basic entitlement

            $417,000 – $144,000 = $273,000

            $273,000 x 25% = $68,250 bonus entitlement

            Full entitlement for most veterans: $36,000 + $68,250 = $104,250

For those veterans with no available entitlement, an FHA loan can make a lot of sense. Like VA Loans, FHA loans assist people in buying and keeping their homes by providing more affordable terms than those of conventional loans.  The Federal Housing Administration (FHA), a division of the Department of Housing and Urban Development (HUD), insures the loans, so private lenders can offer better terms than those offered for conventional loans. 

First-time home buyers pay as little as 3% down with FHA Loans, and most of the closing costs and fees can be included in the loan. 

The FHA program can provide similar benefits to those of the VA Home Loan Guaranty program. However, a VA Loan is the only option for a zero-down purchase or 100% refinancing. For loans up to $417,000 for those who are eligible, the VA program is tough to beat. Higher loan amounts are available in U.S. counties where it costs more to live.  In 2009, VA’s county “loan limits” are as much as $1,094,625 in parts of California, Colorado, and Massachusetts.  Ask your lender what the VA loan limits are in your county. 

For many VA-eligible borrowers, a VA home loan can be the most affordable option.  Some of the benefits associated with VA loans include:

·       Zero Down

·       100% Financing on purchases and refinances

·       Loans up to $417,000 in 2009 (higher in some counties)

·       No Private Mortgage Insurance (PMI)

·       No Prepayment Penalty

·       Easier Credit and Income Standards

Other VA Loan benefits are:

• Equal opportunity VA-approved lenders
• Buyer has access to appraisal
• Negotiable interest rates
• Financeable funding fee
• Low closing costs
• Assumable mortgage
• No penalty for prepayment
• One-year builder’s warranty or 10-year insurance-backed protection plan
• VA mortgage counseling

Knowing the benefits of each program, FHA vs.VA, can help borrowers make the right mortgage choices when purchasing or refinancing their homes.