What Real Estate Agents Should Know About FHA and VA Loans
Real estate agents need to understand different types of real estate loans and their terms in order to help their clients, including mortgage programs like those available through the FHA or VA.
It’s important to go beyond basic facts like FHA loan credit scores and down payment requirements. In this article, we’ll break down both types of government-backed loans: who qualifies for each, how they’re similar, how they’re different, and how to enter the real estate industry.
What Home Loan Options Do Buyers Have?
When a prospective homebuyer is choosing financing, they have three main choices: conventional loans, Federal Housing Authority (FHA)-insured loans, and Veterans’ Affairs (VA)-guaranteed loans.
In all cases, the real estate loan comes from a private lender, but FHA and VA loans involve the backing of a government agency so that if the borrower defaults, the lender can recoup their money.
FHA Loans: Beyond First-Time Homebuyer Loans
You probably consider FHA loans to be first-time homebuyer loans, and they certainly suit that purpose.
However, FHA loans have a broader target audience than you might think. They’re useful for people who have bad credit or no credit, an income too low to qualify for a conventional loan, bankruptcy or foreclosure in their history, or hold a high debt-to-income ratio.
VA Loans: Who Qualifies?
VA loans are, unsurprisingly, limited to veterans and other members of the military.
This can include current members of the U.S. Armed Forces, veterans, reservists, National Guard members, or eligible spouses. The military member in question has to meet certain minimum service requirements and not have black marks like a dishonorable discharge on their record. The exact details can be quite complicated because eligibility depends on your current status, time of service, and specific circumstances, but you can find all requirements on the VA’s website.
What Do Government-Backed Loans Have In Common?
FHA loans and VA loans have a few things in common due to the similarity of their purpose. It’s useful to understand the overlap.
Eligibility Limitations
First, both FHA and VA loans are only available for the purchase of a borrower’s primary residence. Those buying vacation homes, rental properties, or investment properties will need a conventional loan.
As for borrower eligibility, both types of government-backed loans exist to provide home loan options to people with particular financial challenges, so each allows broader eligibility than conventional mortgage programs through more flexible lending guidelines.
For example, both allow higher debt-to-income (DTI) ratios than conventional mortgages. Both are also more lenient than conventional loans in terms of credit score, though not to the same degree.
Advantageous Terms
Both government-backed loan types allow lenders to offer more advantageous terms than they might with a conventional loan. Not only are more people eligible, but they’ll get perks they wouldn’t have otherwise.
FHA and VA loans both tend to have more competitive interest rates and lower down payments than conventional loans, although VA loans have an edge over FHA loans in both areas – more on this below.
Additionally, both forbid the use of prepayment penalties so that FHA and VA borrowers can pay off their loans early with no downside, thereby saving on the total interest paid.
Limited Concessions in a Seller’s Market
Unfortunately, there are common FHA and VA loan requirements for homebuyers that can affect your negotiating options in a strong seller’s market.
Both put caps on closing costs that can be paid by the buyer. Anything exceeding these caps will have to be assumed by the seller.
Both also require a home appraisal, which means waiving one isn’t possible. In fact, both restrict your appraisal options – you must use a professional that’s approved by the relevant agency. It may not be surprising that, as a result, both FHA and VA appraisals cost more than conventional ones.
Minimum Property Standards
Both FHA loans and VA loans set minimum standards of habitability for newly purchased homes. They set Minimum Property Requirements (MPRs) for various aspects of safety, soundness, and sanitariness that must be met.
As a result of these requirements, borrowers using these loans may not be able to apply them to a fixer-upper or tear-down as they might with a conventional loan.
Extra Up-Front Cost (PIM or Funding Fee)
Both FHA loans and VA loans require certain amounts of money due at closing to cover the cost of potential defaults – a sum that isn’t required for private mortgage insurance (PMI).
FHA loans require borrowers to pay an up-front insurance premium of 1.75% of the loan amount, as well as a yearly mortgage insurance premium (PIM) of 0.55%.
VA loans require a VA funding fee of 1.25-3.3% of the loan amount, depending on the down payment and previous VA loan use. The up-front fee is more than the one for FHA because there’s no ongoing annual payment for the VA funding fee.
Both can be rolled into the total amount of the loan. In other words, they don’t have to be paid up-front, but they do need to be factored into the cost of a house for these borrowers.
How Are FHA and VA Real Estate Loans Different?
There are a few key ways that VA and FHA loans differ.
Eligibility Differences
The biggest and most obvious difference between the two government-backed loans is the pool of eligible individuals. While FHA loans are available to any U.S. citizen or legal resident who meets certain financial requirements, VA loans are obviously restricted to people who have met the minimum service requirements with the U.S. military (or their eligible spouses).
As a result, a real estate agent needs to learn how to help homebuyers with FHA loans than VA loans because they’re more likely to run into one. Of course, it’s important to learn how real estate agents can assist VA homebuyers, as well.
Interest Rate Differences
On average, the available interest rates for VA loans tend to be a quarter-point lower than FHA loans.
Minimum Credit Scores
FHA loans are intended to give opportunities to those with poor credit, so the minimum credit scores are much lower than conventional loans. It’s possible to get an FHA loan with credit scores as low as 500, though borrowers can get more favorable terms if their credit is north of 580.
There is no official minimum credit score for VA loans, but the requirements don’t prohibit lenders from setting their own. Most lenders require credit scores of 620 or more for VA loans, though borrowers may be able to get a VA-backed loan with a lower one.
Minimum Down Payments
VA loans make it possible to finance the entire value of a home as long as the borrower has access to their full entitlement. In other words, they can skip the down payment altogether!
FHA loans, meanwhile, require a down payment of at least 3.5% if your credit score is over 580 (or 10% if your credit score is at least 500). Lower than a conventional loan, but not nothing.
Appraisal Costs
We mentioned that VA and FHA loans can be more expensive than regular appraisals, but they’re not equally costly. FHA appraisals may cost the same as a conventional appraisal, or they may run a couple hundred dollars more.
Meanwhile, VA appraisals can be twice the cost.
Deepen Your Knowledge of Real Estate Loans and More
Real estate agents need a fairly comprehensive understanding of various mortgage programs so they can advise their clients and negotiate within the terms and requirements.
Home loan options are really just the tip of the iceberg, though. There are so many knowledge areas to explore and expand on; it can be the work of a lifetime. You can’t rely solely on what you learned in pre-license courses, which is why every state requires agents to complete a certain amount of continuing education before each license renewal.
We offer state-approved continuing education on real estate financing, regulations, success strategies, and so much more. You’ll take courses online that will allow you to study at your own pace, whenever and wherever it’s convenient for you, so you’ll have your CE credits on time.
Get started today by looking at our catalog!
