The Difference Between FHA & VA Loans

By JaKaye Jesse

The main purpose of the Federal Housing Administration (FHA) and the Veterans Administration (VA) is to provide an opportunity for individuals with lower income to purchase a home. Both departments do not actually provide loans; they insure loans that are made to individuals by private lenders. Each program will take into consideration your credit rating. The main difference between the two programs is that FHA loans are open to the general public and VA loans are open to military personnel.

In 1934, during the Great Depression the Federal Housing Administration was created to give lower income individuals the chance to own a piece of the American dream. The department is part of the Department of Housing and Urban Development (HUD). HUD provides an added level of security by insuring the loans made by private insurers. One of the advantages of applying for a FHA loan is that you don’t need a high level of income to qualify.

The Veterans Administration Home Loan Guaranty Program was enacted as a part of the Serviceman’s Readjustment Act of 1944. The program is a part of the Veterans Administration and it insures loans made by private lenders to eligible program participants. The main advantage is that any current or former reservist of the armed service can apply to the home loan program without income level restriction. Eligibility is determined by the VA.

FHA loans requires a down payment as low as 3 percent of the home purchase price versus the 20 percent down payment usually required to purchase a home.

VA loans do not have a required minimal down payment. The down payment for a VA loan can be as low as 0 percent on a home up to $417,000. All program participants can apply for a loan over and over again as long as they meet the VA requirements.

FHA and VA loans both offer low interest rates that are generally below the standard market rate. Monthly payments will be low on a newly purchased home.

FHA and VA loans prohibit certain types of fees charged by private lenders, escrow companies, settlement agencies and title companies. These fees are usually paid by the seller, but the catch is that the seller may not want to negotiate or be flexible with the price of the home.

FHA loans require the program participant to pay a Mortgage Insurance Premium (MID) which is usually higher than for a conventional program loan. For FHA loans, the program participant will be charged an MID that is equal to 1.5 percent of the purchase price of the home and a renewal premium of .500 percent for the subsequent years of the loan. The MID can be financed into the mortgage.

VA loans usually require that the participant pay a funding fee, but the fee can be added and financed into the loan. If the program participant can prove disability, a fee exemption is applied.

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