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FHA and VA Loans
FHA
FHA's Title II, Section 203(b) mortgage
insurance program is the most commonly used. The program allows
a borrower to purchase a new or existing one- to four-family
home in an urban or rural area. The program has been essential
in helping low- and moderate-income families become homeowners
for two reasons. First, the program lowers some of the costs
associated with obtaining a mortgage. Second, because lenders
are insured against default, they can take greater risks by
lending in situations which fall outside of conventional
standard underwriting guidelines. FHA charges mortgage insurance
premiums for these loans. The premiums are used to pay lenders
in the event of the borrower's default on the mortgage. The
borrower pays an up-front mortgage insurance premium (MIP) and
an annual premium. The up-front premium can be financed into the
loan. The Mutual Mortgage Insurance Fund is sustained entirely
by borrower premiums. Currently, the up-front MIP is 2.25
percent of the base loan amount, or 1.75 percent for a qualified
first-time homebuyer. The monthly premium is 1/12 of 1/2
percent of the outstanding principal loan balance. Unlike
Private Mortgage Insurance (PMI), which can be cancelled, FHA
mortgage insurance lasts for the life of the loan. MIP is also
generally more expensive than PMI. Any Unused MIP is
refunded when the loan is paid off.
VA
The U.S. Department of Veterans Affairs
guarantees loans made by institutional lenders to eligible
veterans. The guarantee helps protect the lender in the event of
the borrower's default. The VA charges a funding fee for each
loan, which varies with the amount of the down payment and the
status of the borrower (reservist/active duty/veteran). The
funding fee may be included in the loan amount.
The funding fee for veterans is 2 percent for
purchase or construction loans with down payments of less than 5
percent, refinancing loans and home improvement/repair loans.
The funding fee for veterans is 1.5 percent for purchase or
construction loans with down payments of at least 5 percent but
less than 10 percent. |
