The Differences Between a VA, FHA, and USDA Mortgage
There are various loan types and programs available for homebuyers. These include FHA-insured, VA-guaranteed, and USDA Mortgage loans. While they are all similar in that they are issued by banks and other approved lenders, they differ greatly in type and who qualifies.
FHA Loans
FHA-Insured Loans are insured by the Federal Housing Administration. If a homeowner defaults on their loan and the house isn’t worth enough to fully repay the debt through a foreclosure, the FHA compensates the lender for the loss.
Since this type of mortgage loan is government-insured, lenders are able to offer competitive terms, including low down payments (as low as 3.5%).
FHA loans are also easier to qualify for than conventional mortgages. Borrowers with lower credit scores – even as low as 500 – may be found eligible for this type of loan depending on the circumstances. However, to qualify for the lowest down payment, a score of 580 or higher is required.
FHA-insured loans also have maximum loan limits that vary depending on the average cost of housing in a specific region.
Borrowers also have to pay a “mortgage insurance premium” (MIP) as part of an FHA loan. While most conventional mortgages have PMI (Private Mortgage Insurance), MIP is what borrowers pay to contribute to a Mutual Mortgage Insurance Fund. FHA uses this fund to pay lenders’ claims if a borrower defaults.
FHA loans also require a property appraisal from an FHA-approved appraiser. Additionally, if borrowers are behind in their mortgage payments, with an FHA loan, they have access to special loss mitigation options.
Though the FHA does not have minimum income requirements, borrowers need to prove they can afford the loan they are seeking, and there are limits on loan amounts. With FHA loans, there is also the upfront mortgage insurance premium that is due at closing, but is rolled into your loan for you.
As of 2019, the agency has tightened the underwriting requirements for FHA-insured loans. Four to five percent of the total mortgages that the FHA insures on an annual basis—which would have previously been approved automatically – will now be put through a more rigorous manual underwriting review.
VA Loans
The VA loan program is available to veterans who have served or are serving in the armed forces, a reservist/national guard member, or an eligible surviving spouse. These types of loans are insured by the Department of Veteran Affairs. VA loans typically do not require any money down.
Borrowers need a satisfactory credit score but are allowed some flexibility in debt-to-income criteria. Borrowers must also have a VA Certificate of Eligibility (COE). The COE proves that the applicant officially meets the minimum military service requirements. This type of loan is only available through VA-approved lenders. With the VA guarantee, lenders are protected against a portion of the loss if the borrower defaults.
VA loans usually come with low-interest rates. Additionally, there are up to 30 years of loan terms available for your mortgage. Most importantly though, with a VA loan, no PMI is required. That means there is no extra expense to the borrower for mortgage insurance on top of their normal monthly mortgage payment. Additionally, with a VA loan, there is no prepayment penalty.
Borrowers do, however, normally pay a funding fee to VA. This is a one-time charge of between 1.3%-3.6% of the total loan amount, depending on the down payment and if the veteran has used the VA loan benefit before. The VA funding fee can be rolled into the loan. Additionally, veterans with a service-related disability of 10% or more are exempt from paying the VA funding fee.
As the VA does not lend directly, borrowers have to find their own VA-approved lender.
USDA Loans
The U.S. Department of Agriculture (USDA) offers one of the most overlooked mortgage loan programs. USDA loans are for rural areas, though many other suburban communities and locations are also able to qualify. This loan makes purchasing a home more affordable for low-income individuals living in these designated areas.
With a USDA loan, borrowers can secure a home with zero to low-down-payment as well as low-interest rates. The loan is subsidized through the USDA. Borrowers can also qualify for a USDA loan with a lower than average credit score.
Since USDA loans are for families who demonstrate economic need, the qualifying adjusted gross income can not exceed more than 115% of the median income in the specified area.
Borrowers must demonstrate stable income and the ability to make mortgage payments without incident for at least 12 months based on assets, savings, and income.
Lenders also take the debt-to-income (DTI) ratio into consideration with a recommended DTI of 44% or lower. Additionally, many lenders will require a credit score of 640 or more.
The house must be the primary home and cannot be a working farm and the home appraisal must meet USDA standards.
USDA loans come with upfront and annual guarantee fees. The annual fee is added to the monthly payment and lasts for the life of the loan. The USDA monthly guarantee fee is typically lower than PMI or the FHA MIP. And borrowers can roll the upfront guarantee fee into the loan. These fees are similar to MIP and go towards the funding of the USDA loan program and guarantee.
Closing costs can also be rolled into the loan as long as the home appraises for enough to cover it. Additionally, borrowers who already have a USDA loan can refinance it into a new USDA loan.
HomeLander Mortgage will be there every step of the way. Schedule a call to begin the process at www.homelandermortgage.com
