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