What’s the difference between VA, FHA, and Conventional Loans?
The differences between VA, FHA, and Conventional loans are based on two things: the borrower’s down payment and qualifications, and the condition of the property.
VA loans are zero down, but are only available to veterans or active duty military personnel and their families. Do note that zero down doesn’t mean there’s nothing to pay. Either the veteran or the seller must pay closing costs, which may include a VA funding fee of from 1.5% to 2.4%. The funding fee may also be rolled into the loan balance. For more, see this article on The Mortgage Reports.
Note that the sellers are not required to pay any of the buyer’s loan costs. This is an item for negotiation. Direct loan costs would include appraisal and title fees, credit reporting fees, etc. In addition to these, the borrower will have “non-loan” fees such as prepaid insurance and taxes, recording fees, HOA fees, and daily interest charges.
Regulations allow the seller to pay up to 4% of the purchase price to assist with these fees. Again, there’s no obligation for the seller to do so – this is an item for negotiation before the purchase offer is accepted.
VA loans are not subject to mortgage insurance.
FHA loans require 3.5% down. Its typically a loan for those with middle of the road credit. FHA sets limits on loan amounts. This limit varies from one community to another. Visit https://www.fha.com/lending_limits to see the limit in your city.
In addition to seller’s closing costs, the seller may contribute up to six percent for actual buyer costs related to closing, interest rate buydowns, discount points or other concessions.
FHA loans are subject to Mortgage Insurance for the life of the loan if your loan is for 15 years or more and if your down payment is less than 20%.
For more information visit: https://www.fha.com/fha_article?id=234
Conventional loans require a minimum of 5% down and are typically for borrowers who have good credit.
Borrowers with less than 20% down will be required to pay Private Mortgage Insurance. This rate is based on the borrower’s credit, combined with the amount of their down payment. Typically, they must keep the PMI for at least two years, then it can be eliminated after the borrower has at least 25% equity in the home.
The condition of the property:
Both VA and FHA have strict requirements regarding the condition of the property to be mortgaged.
While this is touted as a safeguard for the borrowers, in reality it is a safeguard for the bank. The house is their collateral for the loan, and when the down payment is low, they want to know that the house will be fit for resale should the borrower default.
For eligibility the house must provide safety and security, and must be structurally sound. It can have no broken glass, tripping hazards such as cracked cement or torn flooring, defective wiring, missing handrails, plumbing leaks, or inoperable doors.
Homes must have the basic requirements of kitchen, bath, and bedrooms. They must have a steady and safe water supply and be free from mold.
These are just examples, as conditions are extensive. For a complete list of requirements, visit http://www.military.com/money/va-loans/easy-to-understand-va-minimum-property-requirements.html and http://www.investopedia.com/articles/mortgages-real-estate/11/fha-minimum-property-standards.asp
When a home does not meet the minimum standards, buyers can negotiate with the seller for repairs or move on to choose a different home.
Conventional loans do not have minimum property standards, but are accepted based on the appraised value. Thus, a borrower may purchase a fixer-upper property and do the repairs or renovations after the purchase.
Talk with your lender to see which loans you qualify for based on your credit scores and down payment. Do always realize that the better your scores, the less interest you’ll pay. If your scores are marginal, your lender will be happy to provide you with instructions for bringing them up before you begin shopping for a home.
If you don’t yet have a lender, get in touch. I’ll be happy to refer you to those who have helped my Alexandria VA home buyers in the past.