If you are currently in the market to buy your first home, you may be feeling a little overwhelmed regarding your financing options. You are probably hearing terms you've never heard before and get many of them confused. The following are explanations of what FHA loans and VA loans are and how they can assist you in purchasing your first home.

In simple terms, an FHA loan is a loan insured by the government. The Federal Housing Administration guarantees payment on the loan should the buyer go into default. While you will find there is no income limit for the buyer, there is a preset amount that can be borrowed. This preset amount is generally different for each area, depending upon the current housing market. The buyer must also have a good debt to income ratio and a decent credit rating to get approved for an FHA loan.

The FHA loan is beneficial to many borrows as it allows one to purchase a home with a down payment of as little as 3%. It also does not have any penalties should you pay off the loan sooner. However, they will require a mortgage insurance premium of 1.5%. This allows them to use the insurance premiums if a borrower can not pay on the loan. The FHA loan is great for first home buyers, however, if you require a larger mortgage, you will find that they may not meet your needs.

The VA loan, on the other hand, is guaranteed by the Veterans Administration. The loan guarantee amount is known as an entitlement and it is the amount the VA guarantees. While it is not actually a loan, it is a guarantee that the amount will be paid to the lender if the buyer was to default on the loan. For example, if you took out a home loan for $144,000, the VA entitlement would be a maximum of $60,000. If you should default on the loan, the VA would pay the lender $60,000 toward the cost of your unpaid balance.

The VA loan is available for those Veterans who meet the eligibility requirements. When you apply, if you are eligible, you will receive a Certificate of Eligibility from the VA. However, this is not a guarantee of a loan. This just simply states to the lender that you are eligible for a VA loan. You must still meet all of the requirements of the actual lender to receive your mortgage loan.

While the financial aspects of mortgage loans can be confusing, you will find there are many advantages to both the FHA loan and VA loan. The FHA loan allows you to purchase a home with a small down payment and the VA loan will allow you many options in the type of home you purchase. The most important thing you can do in deciding what mortgage option is best for you is to be diligent in your research and find a knowledgeable lender to discuss all of your loan options.