All About FHA/VA/USDA Loans

Broker or adviser with a young couple

Are you considering buying a home but not sure what type of loan you need? The good news is that there are more options available than one might think. In addition to the conventional loans found at banks and lending institutions, there are also other loans available to eligible homebuyers. You may find that you’re eligible for one of these uniquely helpful mortgage loans. Learn the basics on three home loans that are beneficial to many potential homeowners: FHA, VA, and USDA.

FHA Loans

FHA loans are mortgage loans that are offered at banks but insured through the Federal Housing Administration (FHA). One unique feature of the FHA loan is the mortgage insurance requirement. Mortgage insurance guarantees the lender that the FHA will cover the balance of the loan in case the homeowner defaults on the loan.

Because FHA loans are covered by mortgage insurance, the ender is able to offer lower interest rates, making them more attractive to potential homebuyers. Mortgage insurance also allows FHA loans to have more flexible eligibility requirements than conventional mortgage loans. Several eligibility requirements make FHA loans a popular choice among homebuyers.

There are also certain factors consistent with FHA loans.

  • Credit scores – While credit scores must be at least 500 for a borrower, homebuyers may be eligible for an FHA loan with much lower scores than are allowable with other types of mortgage loans.
  • Down payment – Homebuyers can get an FHA loan with a down payment as low as 3.5 percent. They can also use cash gifts or grants toward the down payment requirement.
  • Closing costs – The FHA allows the closing costs to be paid by the lender, seller, or the builder without it affecting the interest rates.
  • FHA-approved lenders – A homebuyer can only get an FHA loan through a lender that is approved by the FHA.
  • Mortgage insurance premiums – The borrower must pay two types of mortgage insurance premiums. The first type, which is 1.75 percent of the loan amount, must be paid at the time of the loan. The second type, which is based on loan amount, loan term, and loan-to-value ratio, is paid in monthly installments until the loan is paid.
  • Additional loan for cash – The FHA offers the 203(k) loan, which allows the borrower to get additional cash for remodeling or making home repairs. The amount is based on the value of the home after the repairs.
  • Financial assistance – FHA offers financial assistance programs to borrowers who may be having difficulties making payments.

VA Loans

VA loans, also referred to as the GI Bill, are mortgage loans that are available to U.S. veterans, spouses of U.S. veterans, and similar service members such as National Guard and Reserves. The U.S. Department of Veterans Affairs guarantees these loans as long as they are offered through VA-approved lenders. The following factors are consistent with VA loans.

  • VA eligibility – To be eligible for a VA loan, the applicant must by a veteran who served on active duty for at least 181 continuous days during peacetime or 90 days during wartime. Those in National Guards and Reserves must be members for at least six years.
  • Interest rates – VA loans typically have the lowest interest rates of all loan types.
  • Mortgage insurance – Unlike FHA loans, VA loans do not require the purchase of mortgage insurance.
  • Down payment – Homebuyers using VA loans are generally not required to have a down payment.
  • Loan guarantees – The VA guarantees a maximum amount of $424,100. Homebuyers can generally borrow an amount equal to the property value plus funding costs.
  • Personal property – The VA loan must be for personal property of the veteran or his or her spouse.
  • Lenders – Homebuyers must get their money from banks, mortgage companies, savings and loans, or credit unions that are approved through the VA Lender Appraisal Processing Program.
  • Credit – Although the VA does not have specific credit score requirements, the lenders typically require a good credit history for the previous 12 months. Bankruptcies, foreclosures or collections can affect eligibility.

USDA Loans

The USDA loan is a mortgage loan offered to property owners in rural areas through the United States Department of Agriculture. In addition to being available in all 50 states, the USDA loan is also offered in Puerto Rico, Virgin Islands, and the Western Pacific.

The USDA loan offers two types of home loans. One is aimed at low-income households and the second type, the 502-Guaranteed Program, is aimed at those with an average income. Borrowers can use funding to purchase and prepare sites, relocate a home, renovate and repair a home, or build a home from scratch. Any homes purchased with a USDA loan must meet HUD requirements. Below are requirements and designations found with USDA loans.

  • Loan term – USDA loans are set for thirty years.
  • Interest rates – Interest rates on USDA are consistent with other government-backed mortgage loans.
  • Monthly payments – Monthly payments on USDA loans are lower than conventional mortgage loans through banks and lenders.
  • Fees – USDA loans have an annual fee that’s .35 percent of the loan amount. This is paid in monthly installments.
  • Credit – Applicants must have middle credit scores of at least 620 to be eligible for a USDA loan.
  • Debt-to-Income (DTI) – Applicants must have a maximum DTI of 34 percent/46 percent. However, the USDA prefers around 39 percent/41 percent.
  • Location – The home must be in an area that’s eligible through the USDA program.