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.

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.

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.