8 Benefits of FHA Loans for Veterans

8 Benefits of FHA Loans for Veterans

When buying houses, veterans typically use the VA home loan. However, depending on their unique circumstances, the FHA loan can be another great option for veterans. As such, we’ll use this article to cover the benefits of FHA loans for veterans.

FHA Loan Basics

FHA loans are the most common type of government-backed home loan. The Federal Housing Administration was created in 1934. Somewhat similar to the VA, the FHA insures mortgages against borrower default. While the VA provides a partial guaranty, the FHA fully insures each loan. That guaranty allows FHA lenders to provide financing to borrowers with lower credit scores and minimal down payments. FHA loans tend to have more lenient credit and underwriting requirements.

While an FHA loan offers some cost-saving benefits, it generally can’t match the advantages of a VA loan. But these can be a fit for borrowers without great credit and assets who don’t qualify for VA or conventional financing.

Here’s a closer look at FHA loans:

Down Payment

The minimum down payment for an FHA loan is 3.5 percent. This is lower than the 5 percent minimum for conventional loans, but it still can’t beat the VA’s no-money down option. Borrowers with sub-580 credit scores would need to put down at least 10 percent to be eligible for financing.

On a typical $200,000 home purchase, FHA borrowers would need a $7,000 down payment.

FHA buyers can use gift funds to cover their down payment and closing costs. This money truly needs to be a gift from an acceptable source, with no expectation of repayment. Acceptable sources include but are not limited to relatives, friends and down payment assistance programs. Gift funds cannot come from anyone involved in the real estate transaction.

Lenders will need a verifiable paper trail for gift funds, usually with a cashier’s or certified check. Both the donor and the borrower will need to sign a gift letter spelling out the dollar amount of the gift, the nature of their relationship and that no repayment is required.

Mortgage Insurance Premiums (MIP)

FHA loans come with their own form of mortgage insurance, known as mortgage insurance premiums (MIP). Borrowers face both an upfront and a yearly mortgage insurance premium.

FHA homebuyers are currently charged an upfront MIP fee of 1.75 percent of the loan amount. This isn’t a sum you pay in cash at closing. Instead, the upfront fee is added to the total amount you’re borrowing – that is, the balance of your loan after subtracting your down payment.

For example, on a $250,000 purchase, an FHA borrower would need to put down $8,750. The upfront fee would then be applied to the remaining loan balance, which in this example is $241,250 ($250,000 - 8,750). Multiply the 1.75 percent times that balance, and you get an upfront MIP fee of $4,222. Tack that fee onto your loan, and that means you’re borrowing $245,472 ($241,250 + 4,222) for this example.

In addition, FHA borrowers face an annual mortgage insurance premium. This cost is spread over the course of the calendar year and paid as part of your monthly mortgage payment. How much you pay depends in part on the length of your loan term and your loan-to-value ratio.

Most FHA borrowers put down the minimum 3.5 percent, meaning their loan-to-value ratio is 96.5 percent.

Annual MIP rates for FHA loans:

0.85 percent: 30-year loan with loan-to-value ratio of 90 percent or higher
0.80 percent: 30-year loan with loan-to-value ratio below 90 percent
0.70 percent: 15-year loan with loan-to-value ratio of 90 percent or higher
0.45 percent: 15-year loan with loan-to-value ratio below 90 percent

The annual MIP charge is based on the outstanding loan balance. Here’s how the annual MIP charge would be applied keeping with our example from above.

$245,472 loan balance x 0.85 percent = $2,087

$2,087 / 12 months = $174 per month in mortgage insurance

This annual MIP fee is a cost most FHA buyers now pay for the life of their loans. Those who put down at least 10 percent will stop paying it after 11 years.

Credit Requirements

Credit score benchmarks will vary by lender. The FHA allows borrowers with scores as low as 500 to be eligible for financing, often with additional down payment requirements. But most FHA lenders will require at least a 580 FICO score to qualify. In the current lending environment, prospective buyers may need more like a 640 or a 660 score. Credit score benchmarks will vary based on the lender and other factors.

Closing Costs

FHA loans allow sellers to contribute up to 6 percent of the purchase price or the appraised value (whichever is less) toward a buyer’s closing costs. This can include loan-related expenses, prepaid costs and fees, discount points and other concessions. Sellers aren’t allowed to contribute toward the buyer’s down payment.

Loan Limits

The FHA limits the size of the loan you can obtain based on where you’re purchasing and the type of property. In much of the country, the limit for a one-family residence is $314,827. But there are higher limits in some of the nation’s more expensive housing markets. These limits are subject to change annually. You can view the latest FHA loan limits at the Department of Housing and Urban Development website.

Occupancy

Like VA loans, FHA loans are focused on helping people purchase primary residences. You wouldn’t be able to use an FHA loan to purchase a vacation home or an investment property.

Assumable

FHA loans are assumable, meaning another person can effectively take over your mortgage loan and the monthly payments. This can be a big benefit to buyers if interest rates are on an upward trend. Buyers who want to assume an FHA loan typically need to meet credit and underwriting requirements, similar to consumers seeking a new loan. Upon the approval of an assumption, the seller is no longer legally obligated on the loan.

FHA and VA Mortgages - What Is The Difference?

FHA Mortgages

FHA Mortgages are also insured by the US Government by the Federal Housing Administration. The FHA was created by the National Housing Act of 1934. The FHA sets standards for construction and underwriting and insures loans made by banks and other lenders. The goal of the FHA is to improve housing standards and conditions by providing a reasonable home financing system, and to stabilize the mortgage market.

FHA loans are commonly used by first time home buyers.

To qualify for an FHA loan, borrowers must meet the following qualifications:

- Borrower must have a satisfactory credit score, which is typically 580 and above to qualify for the 3.5% low down payment advantage.

- A credit score of 500 - 579 will require 10% down for an FHA loan.

- The lower the credit score, the higher the interest rate.

- An FHA qualified home must be a primary residence.

- Also, an FHA mortgage requires that the borrower pay mortgagee insurance premiums (MIP) in order to insure the loan against borrower default on the payments.

- The borrower must pay a minimum down payment of 3.5% which can be gifted by a family member.

- Borrowers must have a valid Social Security Number, lawful US residency, and be of legal age to sign a mortgage.

- FHA loans require a property appraisal from an FHA approved appraiser.

- Borrowers must have two years of steady employment history with same employer for the last two years.

- The borrower's mortgage payments plus HOA fees, property taxes, mortgage insurance, and homeowners insurance (known as the front-end ratio) must be 31% of their gross income. There are exceptions up to 40%, but the lender will have to provide ample documentation proving the risk to be acceptable.

- The borrower total debt including mortgage and all other monthly debt such as credit card payments, car payment, student loans etc. need to be less than 43%. This is called the back-end ratio.

There are exceptions up to 50%, but the lender will have to provide ample documentation proving the risk to be acceptable.

- Typically borrowers must be two year out of bankruptcy. Typically borrowers must be three years out of foreclosure.

More information regarding FHA Loans and Qualifications can be found here:

https://www.benefits.va.gov/homeloans/purchaseco_eligibility.asp

VA and FHA Loan Limits

The maximum conforming loan limits are the maximum loan amounts on mortgages that the government entities Freddie Mac and Fannie Mae will buy on the secondary market. This means that Freddie Mac and Fannie Mae will buy the mortgage to create bonds and securities that are backed by millions of US Homeowners' mortgage payments. The 2018 Conforming Guidelines Loan Limits start at $453,100 and go up to $679,650 for a single family residence depending on which county the residence is located. As long as your loan value is below the required limit, your loan will meet the conforming limits to qualify for an FHA or VA loan.

VA Mortgages

VA mortgages are insured by the US Government through the US Department of Veterans Affairs. In order to qualify, a borrower must be a service member or veteran or a spouse of a military service member or veteran.

Borrowers must have satisfactory credit score, which is typically 620 and above.

The borrower must also have a Certificate of Eligibility. The Certificate of Eligibility (COE) proves that the applicant officially meets the minimum military service requirements to qualify for a VA loan.

The home must be a primary residence.

The required down payment from the borrower for VA loans is zero percent.

More information on Veterans Affairs guidelines can be found the US Department of Veterans Affairs Website here:

https://www.benefits.va.gov/homeloans/purchaseco_eligibility.asp

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