Are VA or FHA loans good or bad in borrowing to buy a home? Here’s what to know
With housing prices marching ever upward, government-backed mortgages are among the most popular forms of financing these days. But misguided buyers and sellers too often turn their noses up at these loans.
They mistakenly believe that only borrowers with poor credit need FHA or VA loans, and that the financing often falls through. Some think the loans are too paperwork-intensive or that they take longer to close.
These are just misconceptions, but they linger. Let’s take them one at a time:
VA loans
The basic advantage of VA loans, which are guaranteed by the Department of Veterans Affairs, is that borrowers don’t have to put any of their own money into the deal. At a time when it is more difficult than ever to come up with a down payment, that feature alone opens up homeownership to a wide swath of buyers.
With a VA loan, first-time borrowers can borrow up to $832,750 in most places with nothing down. In high-end markets, like some parts of California, the limit approaches $1.3 million.
But there are funding fees. For first-time VA borrowers with nothing down, and with a few exceptions, the fee is 2.15% of the loan amount. With 5% down, it drops to 1.5%, and with 10% down, it slips again to 1.25%.
VA borrowers have to meet other lending requirements — considerations like income, assets and credit history — just like anyone else. The VA doesn’t have credit score requirements — another advantage — but the lenders who actually make the loans often do. This means that, once approved, these loans are just as sound as any others.
Buyers using VA financing close just as quickly as everyone else, if not faster. In fact, one study found they went to settlement two days quicker.
It’s true that the paperwork is a little more intensive for VA borrowers, so sellers should make sure their buyers have done the legwork before signing a contract. But once borrowers obtain the necessary documents, they can be off and running.
FHA loans
Loans insured by the Federal Housing Administration come with their own set of myths. For example, it doesn’t take any longer to close on an FHA mortgage than on a conventional loan.
However, these fables persist:
FHA loans are not just for first-time buyers. Yes, rookies account for the lion’s share of FHA loans, but anyone can apply, regardless of whether they’ve owned a house before.
They’re not just for low-income borrowers, either. There are no income ceilings. The only maximum is the amount you can borrow, currently $541,287 for single-family houses in most places, and $1.25 million in high-cost markets.
It is actually easier, not harder, to qualify for an FHA loan than a conventional one. For example, the rules allow for higher debt-to-income ratios than other loans allow, which helps many buyers who have strong credit records but lack cash to put down.
At the same time, you don’t need to have pristine credit. While the majority of FHA borrowers have credit scores of 600 or higher, a score of 580 is acceptable for a low-down-payment FHA mortgage. And your score can be as low as 500 if you can put down 10% of the purchase price.
Like other loans, FHA generally requires a two-year work history. But you don’t need to have been at the same job for the last two years — just in the same field. And you can use utility bills, car insurance and cellphone bills to qualify.
FHA loans can require as little as 3.5% down. Better yet, the rules allow borrowers to put gift funds and other forms of assistance toward their up-front requirements.
Another persistent tale is that FHA appraisals are tougher than others, but the rules are essentially the same for all valuations. Yes, lenders will require that major safety problems be addressed prior to closing. But that’s the rule for any type of loan.
All loans with less than 20% down require borrowers to pay for mortgage insurance, which protects the lender in case the buyer defaults. If you put down 10% or more on an FHA loan, you can cancel coverage after 11 years. But if you put down less, the only way to drop coverage is to refinance.
Many people mistakenly believe that if your application is denied by one FHA lender, all other FHA lenders will also reject you. That’s just not so. Each FHA lender has its own requirements, known as overlays, and some are stricter than others. So it’s best to contact a few.
The government is known for its paperwork. But lenders can approve FHA loans without obtaining Uncle Sam’s approval each time. If there is a bottleneck, it likely will be with the appraisal. But again, that can happen with any loan.
Another myth concerns interest rates. Many people think FHA rates are higher, but you may actually be able to score a lower rate on an FHA loan, depending on your credit profile.
Bankruptcies and foreclosures also don’t count against you as much as they do with a conventional mortgage. Depending on the circumstances, you could be eligible for an FHA loan just one year after a bankruptcy. You’ll have to wait three years if you owned a house that was foreclosed on, unless you can prove the foreclosure was caused by an event beyond your control.
Lew Sichelman has been covering real estate for more than 50 years. He is a regular contributor to numerous shelter magazines and housing and housing-finance industry publications. Readers can contact him at lsichelman@aol.com