How Do FHA and VA Loans Work?
For borrowers who qualify for these loans, there is very little difference that directly effects the borrower either during the application phase or after the loan disbursement. The significant difference is that both organizations, the Veterans Administration (VA) and the Federal Housing Administration (FHA), will provide insurance on these loans to protect the lender in the event that the borrower defaults.
Veterans Adminstration (VA) Loans
The VA loan programs are only made available to qualified veterans of the United States armed forces. The VA will work with the borrower to obtain a mortgage that requires a lower down payment than most other traditional lenders will require, as well as a lower interest rate than they would normally be quoted. This is especially important in the event that the borrower, or veteran, is not the most shining example of financial stability. Under normal circumstances, this would result in a offer of a loan with a significantly higher interest rate, and a down-payment requirement that was extremely difficult to produce. The VA will provide the lender with insurance to cover the balance of the loan in the event that the borrower does not pay, and this is why some lenders are willing to make better programs available to those individuals who would otherwise be rejected.
Federal Housing Authority (FHA) Loans
The FHA loan programs work in a nearly identical manner, except for the fact that they are made available to people who are not veterans. The FHA will insure the full balance of the loan, thereby making the lender more open to offering a loan to someone with less than perfect credit or limited resources for down payment.
Limits on FHA and VA Loans
The assistance is not in itself a loan from the respective organization, but rather a manner of sponsorship and protection for both the borrower and lender. Since these government organizations are offering low-cost protection for these loans, it is not surprising that they have placed limitations on the types of loans that they are willing to sponsor and insure. There is no all-inclusive list of such loan types, nor is there any definitive method of determining how the government will change, as it has in recent years, to begin sponsoring and insuring other types of loans than the standard traditional 15 or 30-year fixed.
