FHA & VA Loans

FHA Loan

They are reserved for primary residences and can be used to finance most property types, including single-family homes and condos. FHA Loans are more forgiving than conventional loans concerning credit score and down payment, and benefit many borrowers otherwise struggling to qualify for a loan.

Qualifying

The 203(b) is the standard FHA Loan. They’re ideal for borrowers with low credit scores and/or little money for a down payment, though credit score may influence your required down payment. A credit score 580 or higher will require a 3.5% down payment. A credit score between 500-579, however, will require a 10% down payment. Either way, you can expect lower credit-related fees with an FHA loan.

An FHA loan is also more forgiving of major credit issues, including bankruptcy. You will still need to get the bankruptcy discharged, but FHA underwriting guidelines do not require as long a waiting period between discharge and when you may qualify for a new loan.

*CapCenter requires a minimum 620 credit score on all loan products, including FHA loans.

Mortgage insurance

FHA loans require two types of mortgage insurance, up-front and monthly. Up-front mortgage insurance, sometimes referred to as a funding fee, will be equal to 1.75% of the total loan amount, so it could be significant depending on the price of the house you’re buying.

Unfortunately, paying up-front mortgage insurance does not relieve borrowers of monthly mortgage insurance. The good news is that monthly mortgage insurance on an FHA loan will always be assessed at a fixed rate instead of being dependent of your debt-to-income ratio, credit or any other criteria. The bad news is, depending on the down payment, monthly mortgage insurance could last the entire life of the loan.

Different products

The FHA offers a handful of unique products. An FHA Section 245(a) Loan is a Graduated Payment Mortgage that allows payments to start low and increase over time for borrowers expecting to make a higher salary in the future. There are also renovation options in the 203(k) as well as an FHA Energy Efficient Mortgage, which is essentially the 203(k) with a focus on reducing utility bills. There is also a reverse mortgage program that allows borrowers to convert their home equity. Each program has its own unique underwriting considerations, though all build off of the FHA Standard 203(b) loan.

*Note: CapCenter only offers the FHA 203(b)

FHA streamline

If you are considering refinancing your FHA loan, you may want to consider an FHA Streamline loan. To apply, you just need a current, FHA-insured mortgage and a goal. Your lender will have to show the net tangible benefit of your refinance. What qualifies as a net tangible benefit will depend on the terms of your current mortgage compared to the new terms of the refinance. That said, most of the time it comes down to securing a lower interest rate, a lower monthly payment, or switching from an adjustable rate to a fixed rate.

The “Streamline” refers primarily to the amount of documentation and underwriting required to process and approve your application. It does not necessarily refer to cash at closing or cash out of pocket, and a Streamline refinance will still require up-front mortgage insurance (MIP). If a lender offers a “no-cost” Streamline, you may avoid paying up-front MIP, but instead pay for it with your interest rate being a little higher. You can, however, find a zero closing cost lender, like CapCenter, to avoid the extensive processing costs charged by other lenders.

*Note: The FHA prohibits any cash-out options with Streamline refinance.

VA Loan

They are reserved for primary residence purchase and refinance transactions and can be used on most property types, including single-family homes and condos.

VA loans tend to come with good interest rates — either fixed or adjustable — and do not require a down payment. This means you can fund 100% of the home value. There is also no mortgage insurance requirement on VA loans. However, VA loans do require a one-time funding fee paid to the Department of Veterans Affairs. This up-front fee helps fund the VA Loan Guaranty, which is what the VA uses to insure the loans.

Qualifying

To be considered a veteran by VA loan standards, you must complete the length of service requirement. Generally this is 90 days active duty during wartime or 181 days active duty during peace time. You do not have to be an active duty enlisted service member to qualify. National Guard or Selected Reserve member can qualify for VA loans with at least six years of creditable service. If an event occurs that a Reserve or National Guard member must activate, however, 90 days will meet the active duty requirement.

If you are a veteran wishing to secure a VA loan, you must meet income guidelines based on family size and region. You must also have sufficient entitlement under the VA. Your entitlement is the amount the VA will cover in case you default on the loan. If you are a veteran applying for your first loan, you should have full entitlement available, assuming you otherwise qualify. Full entitlement is 25% of the loan amount.

The VA offers full entitlement of any loan amount up to the loan limit in an area. In 2023, that amount is $726,200 except in high-cost areas, so max entitlement available to most eligible veterans is $726,200(.25) = $181,550. If you don’t use all of your entitlement, you have extra. As an example, if you qualify for a $200,000 loan, you will only require $50,000 in entitlement. This would leave you with $131,550 in available entitlement. Since VA loans are reserved for primary residences, this really only helps if you are moving. Having extra entitlement can help secure a VA loan for your new home before selling your old one.

Entitlement is only limited by active mortgages. If in the same scenario you pay off your first mortgage before getting a loan for your new home, you will again have max entitlement available to you when shopping.

Funding fee

The VA insures loans and offers entitlement with money borrowers pay toward the VA Loan Guaranty. The VA funding fee is a one-time payment equaling a percentage of the total loan amount, typically between 0.5% and 3.6%. There are several factors that determine the funding fee amount, including loan purpose (purchase, refinance, etc.), type of home, down payment amount, and whether you’ve used a VA loan before. Veterans with a service-related disability may be eligible to waive the entire fee.

Lenders underwriting your VA loan application will request a Certificate of Eligibility (COE) from the VA on your behalf. A COE will include your record of using the VA loan benefit and your remaining entitlement. It will also show a lender your level of service-related disability and, therefore, whether you are waived from paying the funding fee.

VA IRRRL

If you have an existing VA-backed home loan that needs a refinance, you may be in the market for an interest rate reduction refinance loan (IRRRL). IRRRLs are reserved for the refinance of an existing VA loan, so you will have to prove you are using the IRRRL on a VA loan-backed home that you currently live in or used to live in. The VA will also require proof that the refinance offers a net tangible benefit.

The net tangible benefit of any IRRRL will depend on the loan being refinanced. Most of the time, this is proven by one or more of three total criteria — mortgage type, interest rate and monthly payment. If you currently have a VA loan with a variable or adjustable interest rate, simply switching to a fixed-rate mortgage can be considered a net tangible benefit. If you already have a fixed-interest rate, you can show a net tangible benefit with an interest rate or monthly payment reduction.

Closing costs on an IRRRL will include a reduced VA funding fee (.5% of the total loan amount). This fee is eligible to be waived depending on disability status. Any closing costs beyond the funding fee will depend on the individual lender. If you can find a zero closing cost lender, like CapCenter, you may be able to avoid all of the extra processing costs charged by other lenders.

One thing to note is that there is no cash-out option with VA IRRRL. Borrowers are not allowed any cash proceeds through an IRRRL.