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.
What Are Fha Loans
If you are looking to buy your first home, then you owe it to yourself to check out the loans offered by the Federal Housing Administration (FHA). These loans can offer significant benefits designed to help you achieve the dream of owning your own home. Designed with first-time homebuyers in mind, the FHA has designed these loans not only to be competitive in the mortgage marketplace, but also easier for you to qualify for if you are having problems getting a loan from a typical mortgage lender on terms you can live with.
The FHA offers several types of loans; these include traditional fixed rate loans as well as adjustable rate loans. One of the benefits of a FHA adjustable rate mortgage is they guarantee the interest rate on your loan will only change at most by one or two percentage points - no sudden surprises and massive jumps that may knock you off balance financially.
They also offer a type of loan known as a purchase/rehabilitation loan that allows you to buy a home that needs a lot of work done to it. The loan combines the purchase price of the home plus the cost of doing the repairs to the home. No more having to take out a mortgage loan and then worrying about where you will find the money to fix the house up to make it your dream home. In fact, by doing a lot of the work yourself many home buyers find they can easily afford to get more home than they could buying one that is ready to move into.
Another big benefit of FHA loans is that they typically don't require as large of a down payment as a conventional mortgage loan would. They also offer loans to those whose credit may otherwise disqualify them for a convention mortgage. In addition, the interest on an FHA loan is typically lower for those with less than perfect credit than it would be through a conventional loan program.
It is important to know that the FHA itself does not lend you the money for the home and it does not set the interest rates on the loans. The FHA is actually insuring the loan you are getting from a traditional lender.
They are guaranteeing if you default, they will pay for you loan. FHA-approved lenders therefore typically offer loans with better interest rates and less of a down payment because they are guaranteed they will get their money back no matter what may happen in the future. Of course, to get the best rates possible you should still shop around and compare mortgages offered by several FHA-approved lenders.
One easy way for most people to understand how the FHA works is by thinking back to when they were in college. If you took out a student loan while in college it was guaranteed by the federal government that they would step in and repay it should you default on the loan. As such, interest rates were typically low and standard across the board and the loans were available to everyone regardless of their credit history. The same holds true with FHA backed loans, except there is no guarantee on interest - it is up to you to still make sure you are getting the best deal out there.
If you are a first time homebuyer with limited amounts of funds to put towards your purchase, or if you have had credit problems in the past, you may find that an FHA loan gives you the freedom and flexibility you need to get into a house and start making it a home for your family.
Both Gen Wright & Ratetake are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
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