Understanding the differences between conventional, FHA and VA loans can help you decide which loan program will best meet your needs. All three types of loans are issued by banks and other approved lenders, but FHA and VA loans are backed by the government, while conventional loans are not. Each type of loan has other distinct characteristics. Let’s take a look.
(Veterans Administration) loans are guaranteed by the government and are only offered to qualifying veterans and surviving spouses. A VA loan offers several advantages to borrowers who qualify. For example, the VA streamline refinance (also known as a VA to VA loan, or an Interest Rate Reduction Refinancing Loan, or IRRRL). Borrowers who have a VA loan and meet certain criteria can refinance at a lower interest rate when the new rate hits the market. The borrower may roll the closing costs into the loan. Cash-out refinance options are available on VA loans for borrowers who live at the property and have sufficient equity.
Income restrictions do not apply, and VA loans do not require a down payment or private mortgage insurance (PMI). Loan fees are typically rolled into the loan.
VA loans are great for borrowers of limited income, with no cash reserves and with average or lower credit scores.
FHA (Federal Housing Administration) loans are available to all borrowers and are guaranteed by the government. The mortgage itself is issued by traditional lenders, but the government insures the loan against default. For this reason, lending requirements are less stringent and down payments can be much lower (as low as 3.5% of the purchase price). The market’s lowest interest rates are not available for FHA loans.
FHA loans require PMI, but to a lesser extent than conventional loans. Fees for FHA loans are typically rolled into the loan, and sellers can contribute up to 6% toward closing costs. FHA loans sometimes allow a higher debt-to-income ratio than conventional mortgages, but the actual number will depend on the lender you’re working with.
FHA loans may not exceed certain limits. The limit for most single unit properties is $417,000; in some high-cost areas, the limit is $729,750. Limits are higher for multiple-unit properties, up to four units. FHA loans are not available for properties with more than four units. Click here to check the loan limits for your area.
FHA loans are best for borrowers with limited cash reserves and/or average credit.
A conventional loan is a mortgage offered by a lender to borrowers who meet specific criteria, including a minimum credit score, stable employment, cash reserves, a down payment, a healthy debt-to-income ratio, and so on. The best interest rates are offered to borrowers who have the best credit scores. Conventional loans are free from the additional fees charged on FHA and VA loans, but sellers cannot contribute more than 3% toward closing costs. Conventional loans with a loan-to-value ratio of more than 80% require private mortgage insurance until the borrower has at least 20% equity in the home. Large (jumbo) loans may require a down payment of more than 20%.
Conventional loans are best for borrowers who have great credit scores and a down payment equal to at least 20% – the combination that garners the lowest possible interest rates.
In all cases, ultimate approval of the loan rests in the hands of the lender.
Mortgage Capital Associates (MCA)
Blog submitted by: Ebun Muhammad of The Real Estate Marketplace – Servicing the Greater Fort Hood area which includes:Killeen, Harker Heights, Temple, Belton, Copperas Cove and Nolanville. Feel free to call Ebun(254) 371-3117 if you have any questions regarding Central Texas Real Estate.
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