The VA Loan And The FHA Loan: What's The Difference?

Added November 14, 2007 | Updated January 22, 2008

VA loans and FHA loans are considered government loan products. FHA loans are those that are insured by the Federal Housing Administration, a branch of the government.  VA loans are guaranteed by the Veterans Benefits Administration, a subdivision of the Department of Veterans Affairs. Many times you will hear these referred to as government loans, but this is not technically an accurate statement. The government does not issue the loans themselves, but rather provides a guarantee or insurance to the lenders that do lend to borrowers. While these two loans are both backed by the government, there are significant differences between the two.

FHA Loans

FHA loans are often utilized by individuals who have a lower income, imperfect credit, or are buying their first home.  It may be easier for an individual to qualify for this type of loan than for a conventional or traditional loan. An FHA loan will have a mortgage insurance premium included in the monthly payment and also has an up front insurance premium. It is necessary to meet the guidelines set forth by the FHA program to obtain this type of loan.  Some borrowers are able to obtain an FHA loan with a small down payment (usually as low as just three percent).

VA Loans

VA determines the guidelines for who is eligible to obtain the loan.  You must be a veteran to qualify and you must have been honorably discharged from service, or currently be serving, or be an active reservist with certain minimum service requirements.  Just like the FHA loan, there are income and credit guidelines for obtaining a VA home loan. Some borrowers qualify for a VA loan even though they didn't qualify for a conventional loan. This loan can help those who are struggling to get a conventional loan due to lower income, some minor credit problems, or being a first-time homebuyer.  

There are additional benefits to the VA loan. For example, you do not have to have any down payment when securing this type of loan. With many other types of loans, you have to pay PMI, or mortgage insurance, which protects the lender in case of default.  This is not required on a VA home mortgage loan.  There are strict guidelines that are followed regarding closing costs and origination fees, which can make the loans more affordable than other types of loans.  

The difference in these loans is significant.  It's important to consider options carefully.  Government backed loans have put many borrowers on a successful path to home ownership.

The VA Loan originated in 1944 through the GI Bill of Rights. The GI Bill was signed into law by President Franklin D. Roosevelt. This feature was designed to provide housing, and home ownership became a reality for millions of veterans.

More than 25 million veterans and service personnel are eligible for VA financing, this loan is attractive and has many advantages. Eligibility for the VA loan is defined as Veterans who served on active duty and have a discharge other than dishonorable after a minimum of 90 days of service during wartime or a minimum of 181 continuous days during peacetime. There is a two-year requirement if the veteran enlisted and began service after September 7, 1980 or was an officer and began service after October 16, 1981. There is a six-year requirement for National guards and reservists with certain criteria and there are specific rules concerning the eligibility of surviving spouses.

VA will guarantee a maximum of 25 percent of a home loan amount up to $104,250, which limits the maximum loan amount to $417,000. Generally, the reasonable value of the property or the purchase price, whichever is less, plus the funding fee may be borrowed. All veterans must qualify, for they are not automatically eligible for the program.

VA guaranteed loans are made by private lenders, such as banks, savings & loans, or mortgage companies to eligible veterans for the purchase of a home, which must be for their own personal occupancy. The guaranty means the lender is protected against loss if you or a later owner fails to repay the loan. The guaranty replaces the protection the lender normally receives by requiring a down payment allowing you to obtain favorable financing terms.

 For those home owners interested in saving some money when they sell their home, "For Sale by Owner" may be the way to go. There are many resources available to assist For Sale by Owners and we'll duscuss a few and how to proceed.

Obviously to sell a house, a home owner must expose their property to the most buyers possible. Typically, home owners will post a sign, run an ad occasionally and hold the property open on weekends once in a while. The reality is that all this and more needs to be done.

Firstly, open houses are the best way to expose your home to potential buyers. How else will they ever be able to see the inside? Often times the outside of the home doesn't do the inside justice. Home buyers that are just starting to look for their own place, will typically drive a few favorite neighborhoods to see what's available. They may see your FSBO (for sale by owner) sign, but if there are ten other properties in the area open to the public, they may never get a chance to look at yours. What will probably happen is that they will drive their chosen area and walk into a Realtors open house, and end up working with an agent.

There are very few real estate agents that will work with FSBO's. It's not the Realtors fault. Let me give you the the straight skinny... generally, people offering their home for sale by owner are often times on the moon with their expectations. They don't have a clear understanding of what it takes to sell a home. There are so many properties on the market currently that a real estate agent can't stop to educate a stuborn seller on contracts, attorneys, counter offers and more in order to sell this persons home.

For sale by owners wanting to sell their home need to get a few books on the topic and read up. The sale is not going to happen by itself. For goodness sake, you may save $10,000 or more, why wouldn't you read a book about it. You have to invest your time to save the money. Make sure you pay attention to the disclosure section of the how to book, this section will keep you out of court.

I'll give you a few tips here on what you'll need to do to sell your home For Sale By Owner:

Lot's of open houses. Every weekend, Saturday and Sunday- you need to keep it open for drive-bys. Some weekends you may not get any people and on others you may get ten couples. All you need is one offer.

Six months of classified advertising in the local paper. For sale by owners will try this for one or two weekends and find that it didn't work and stop. The truth is that it's not that expensive, and being in the "open house" section of the paper is an important tool to getting buyers to come by.

You can also advertise on the internet. RealestateloanS.com has just created a property listing site for all property sellers or brokers that would like to sell and have their property looked at by a huge national and international market. You can also list your home on other internet sites. Do a search on "for sale by owner" and see what comes up as internet resources.

Putting you're property on the MLS through a discount broker is an option but not always a good way to spend your money. Discount brokerages and full service realtors are like oil and water. No self respecting agent would show a home through an MLS listing service or discount broker. If you are utilizing a discount broker to get on the internet, thats one thing. If you are doing it to attract Realtors, it probably won't happen.

Create lots of color fliers so that you'll have something nice to give shoppers when they come through your home during the open houses. Home shoppers are avid collectors of information and they will look at the nicest fliers most. Make sure all the most important information is on the flier.

Do you have a lender that will prequalify buyers? It may be a good idea to have a lender be available in case you do get a buyer. It would be a shame to tie up the property for a buyer, that you find out doesn't qualify eight weeks later. Some lenders can also give you some great support to sell your home, including loan programs that will support your sale and attract buyers.

Call me for information on Chicago real estate, for sale by owners, fsbo, va loans, referrals for real esate brokerages, home builders and homebuyers.

Benchmark 10-year Treasury Hits 3.8%

Rates are going up, up, up back to normal.

The yield on the benchmark 10-year Treasury was rising as the weekend approached with the rate reaching 3.83%, and stoking fears that the refi boom may get clipped. The yield on the 10-year had reached 3.70% during the recent rate spike but then subsequently had been trading in a range below that point. Contributing to the yield's move to a higher range were employment statistics that remained largely negative but included a job loss figure that was not as bad as expected. This adds to evidence that the economic downturn may be slowly decelerating over the next six to nine months as part of a "troughing" process, Credit Suisse chief economist Neal Soss said in a call to investors Friday morning. When it comes to how this affects housing "the most important thing will be mortgage rates" and how rates affect affordability, said Dan Oppenheim, U.S. homebuilders and building products equity analyst at Credit Suisse. However, he said that the increase in rates to date has not hurt affordability.

The Laborers’ International Union of North America has recommended a bill be introduced in California to exclude homebuilders from mortgage business. They argue that homebuilders in California pressured homebuyers to finance home purchases directly through their owned or affiliated mortgage companies with high-risk loans.

One example cited DR Horton increased its use of subprime lending in Riverside and San Bernardino Counties from six percent in 2004 to 36 percent by 2006. Once subprime loans were gone builders turned to FHA loans for money. A sad statistic shows that 5.5 percent of the government-backed loans from Lennar’s mortgage subsidiary "Universal American" in 2007-2008 have already defaulted. High compared to the 2.8 percent default rate seen within the first two years on the FHA loans the company originated in 2005 and 2006.

Many real estate brokerage firms are also guilty of steering clients to their own in-house mortgage lending firms in order to increase closing rates and subsidize operational expenses. The pressure to originate loans at the behest of the managers and Realtors in these real estate brokerage offices can raise the risk with most mortgages.

Almost always with a property transaction that includes financing and probably most private party transactions, someone will order a title insurance policy which includes a title search.

Title searches offer a way for interested parties to determine how a property is encumbered. Title searches are also run on potential home buyers to show if they have any publicly recorded information. If you ask most lenders or involved properties about what a title search is, they will often tell you that the search is to determine easements and liens against the property. However, title searches are also conducted on the potential buyer of the property in certain circumstances.

It doesn't happen a lot but occasionally you'll get someone buying a home that has certain types of public information recorded against them. If this information will negatively impact the title to the property, the lender may not want to lend on the property until the adverse record is removed.

Government recordings against the borrower, such at tax liens, are the primary culprit for causing problems with financing. If the bank is lending most of the money to purchase the home, such as in the case of 95% to 100% financing, there simply won't be enough equity to risk being able to clear this type of lien in cases of borrower default.

Government liens can usurp the banks 1st mortgage or 2nd mortgage position which can easily jeapordize financing. Some credit report give you an indication if there is trouble to come. More often than not lenders won't know for sure until the title policy comes to them.

The VA Jumbo Loan:

On October 10th, 2008 President Obama signed into law the Veterans Benefit Improvement Act of 2008. The law allows $0 down payment VA loans in certain counties to go up to $729,750 for loans closed through December 31, 2011.

The loan amount can be $729,750 but the purchase price can be much higher. For instance a borrower can purchase a home valued at $1,000,000. and put down the difference between the $729,750 and the $1,000,000.

Most counties around the country though are not in a high cost area and will be limited to a loan amount of $417,000.

Ask your loan officer if you are in a high cost or low cost area.

An IRRRL is a VA guaranteed loan made to refinance an existing VA guaranteed loan. Typically the loan is closed at a lower interest rate than the existing VA loan. The new payments should offer a lower principal and interest payments than the existing VA loan.

The one "cash out" exception is the reimbursement of the veteran for the cost of energy efficiency improvements up to $6,000 completed within the 90 days immediately before the date of loan closing.

A veteran is eligible for VA home loan benefits up to $417,000 if he or she served on active duty in the Armed forces or Coast Guard after September 15, 1940, and was discharged under conditions other than dishonorable.
    
Required duty: 90 days or more any part of which occurred during wartime or 181 continuous days or more during peacetime.
    
2 Year Requirement rule:  A longer period of service is required for veterans who enlisted (and service began) after September 7, 1980, or entered service as an officer after October 16, 1981.
    
These veterans must have completed either 24 continuous months of active duty, or the full period for which called to active duty but not less than 90 days wartime or 181 continuous days peacetime.

Eligibility for Reserves, Guard Members of the Reserves or National Guard who are not otherwise eligible for loan guaranty benefits are eligible upon completion of 6 years service.  
   
Some spouses of veterans may have home loan eligibility. They are:
    
The unmarried surviving spouse of a veteran who died as a result of service or service connected cause and the spouse of an active duty member who is listed as missing in action or a prisoner of war for at least 90 days.  
 
There are numerous exceptions to the length of service requirements outlined in this section.  For example, one day of service is sufficient for an individual who is discharged or released from service due to a service-connected disability.

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