FHA & VA Guidelines

By Craig Woodman

FHA and VA mortgages are two government mortgage programs. VA, or Veterans Administration, loans are guaranteed against default by the U.S. Department of Veterans Affairs. These loans are available to former or current military personnel. FHA mortgages are insured with premiums paid by borrowers to the Federal Housing Authority. FHA loans are available to anyone. Both of these loans have standard underwriting guidelines for approval.

VA loans are typically known for providing financing to veterans and current military personnel without a required down payment. While VA loans do not require a down payment, they do require the borrower to pay other fees and costs associated with the loan. If the seller is not willing to pay the closing costs on the home, then the buyer will need to pay these costs. VA loans require a funding fee of anywhere from 0.5 percent to 3.3 percent of the loan amount, with the average running between 2 to 2.5 percent. The funding fee can be rolled into the loan and paid out of loan proceeds.

You will need to demonstrate that you are creditworthy to finance your home with a VA loan. According to Bankrate.com, the average VA borrower has a FICO score of 680. You should have a reliable employment history for at least two years and cannot be delinquent on any government loan. If you have not established credit with loans, you may use proof of prompt payment on rent or other regular expenses. Be prepared to explain any inconstancies with your credit or income in writing.

FHA loans are used by many borrowers because they do not require large down payments. They are also known for somewhat looser credit guidelines than most conventional mortgages. This has made them very popular with borrowers who experience declining credit scores due to financial problems and still need mortgage financing. FHA mortgages charge an up-front mortgage insurance premium, and then a monthly insurance fee to insure the loan against default. You can also make a down payment as low as 3.5 percent on an FHA mortgage.

FHA guidelines allow a lender to look at the borrower's overall credit situation and do not rely on an automatic credit scoring approval that has become common with loans today. Individual circumstances can be considered, and the underwriter is free to consider the overall reasons why a person may have experienced challenges with their credit. FHA underwriting guidelines also prohibit the lender from using a lack of credit as a reason to deny a loan. FHA loans also allow a much higher loan-to-value ratio, which is good for borrowers with more debt. A solid two-year job and income history will help you get approved for an FHA loan more easily.

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