Differences between FHA and VA Government loans

Educational content | by Advisor Voices | August 1, 2016
Differences between FHA and VA Government loans

Both the VA and the FHA financing programs are not really loans; they are instead insurance. The actual money for the loans comes from the private sector. The VA and FHA simply provide insurance for loans that meet their standards.

An FHA loan is a mortgage insured by the Federal Housing Administration. Borrowers with FHA loans pay for mortgage insurance, which protects the lender from a loss if the borrower defaults on the loan.
A VA loan is a mortgage loan in the United States guaranteed by the U.S. Department of Veterans Affairs (VA). The VA loan was designed to offer long-term financing to eligible American veterans or their surviving spouses (provided they do not remarry).

The two government-backed loan programs have distinctions. VA loans offer no down payments and a federal guarantee while FHA mortgages can be obtained for 3.5% down and are insured through HUD. When comparing government-backed mortgage programs, the differences between FHA and VA loans are clear.

The differences between Federal Housing Administration Loans (FHA) and The Department of Veteran’s Affairs Loans (VA).

 FHA LoanVA Loan
Who?Anyone with qualified income.Eligible Veterans only, or widows/widowers of veterans who have not remarried.
Govt. SupportFHA is a Federal Agency under HUD. It insures the lender against loss due to small down payment.Veteran’s Administration: VA guarantees loans by making the veteran personally liable.
Who lends the money?Any lending institution approved by FHA.Any lending institution approved by VA or, on rare occasions, VA itself will lend directly.
Interest ratesNegotiable between lender and borrower. Free-flowing in the market place.Negotiable between lender and borrower. Free-flowing in the market place.
PointsPrepaid interest payable by either buyer or seller or both. Points vary in the market by lender.Prepaid interest payable by either buyer or seller or both. Points vary in the market by lender.
Types of Properties1-4 family, owner-occupied.P1-4 family, owner-occupied.
Down paymentAverages 5% down. Down payment is subtracted and closing cost added to establish an ACQUISITION COST.NO DOWN PAYMENT REQUIRED.
AppraisalHouse must appraise at Acquisition Cost or sale price, whichever is lower.House must appraise at either the sale price or the CERTIFICATE OF REASONABLE VALUE, whichever is lower.
AssumptionsAllowable under some conditions. Must have FHA approval for all loans after 1987.Allowable but must be QUALIFIED VETERAN for the seller to be relieved of liability. Requires substitution of eligibility of new veteran. If non-veteran or non-approved veteran assumes, the original veteran is still liable. If a veteran sells and pays off a VA loan his/her eligibility may be used again without restriction.

If you’re a qualifying member of the military, a VA loan is a great way to take advantage of today’s low mortgage rates. Many people aren’t sure if they want to deal with the perceived hassle of a VA loan. If you are a veteran with no available VA entitlement, FHA loans can make a lot of sense. Whichever option you choose, shop around to find the best offer.