FHA, VA, and Conventional Mortgages

To support home ownership for veterans and low- to moderate-income families, the federal government's Department of Veterans Affairs (VA) and Federal Housing Administration (FHA) have mortgage loan programs. About 20 percent of residential mortgages carry a government guaranty or insurance. In the mortgage industry, they are called government loans. The other 80 percent are called conventional loans. Government loans are described in the following sections.

Government Loans

Advantages. FHA loans and VA loans have several advantages to the consumer over conventional loans:

• Lower interest rates (often 0.5 percent lower)

• Easier qualifying requirements (more lenient qualification formulas than conventional loans)

• Lower down-payment requirements (FHA: 2 percent to 3 percent; VA: no money down to $417,000)

• Assumable loans

Both FHA and VA loan programs include 30-year and 15-year fixed-rate, level-payment loans, one-year ARM loans with 1/5 caps, and graduated-payment mortgages.

Disadvantages. FHA and VA loans carry some restrictions. The loan amounts are capped, and they are not available for all uses.

FHA. The restrictions on FHA loans include:

• In 2006, the maximum loan amount for an FHA-insured single-family loan ranged from $200,160 (in lower-cost areas) to $362,790 (in high-cost areas), and up to $544,185 for Alaska and Hawaii. FHA loan limits are set annually for each county or metropolitan area in the country. They are listed on the FHA Web site.

• In 2001, the FHA mortgage insurance premiums were lowered for all types of loans. The up-front fee paid at closing is 1.5 percent of the loan amount. The annual premium paid as par t of your mortgage payment depends on the LTV and term of your loan. Figure 4.21 details the premium structure as of 2006.

• They are not available for non-owner-occupied investment properties or vacation homes except for certain refinances of existing FHA-insured loans.

FIGURE 4.21 FHA Mortgage Insurance Premiums (MIP) as of Jan. 1,2006

VA. VA restrictions include:

• In 2006, the maximum loan amount for a VA-guaranteed loan was $417,000 (the same as conventional, conforming loans).

• To get a VA loan, you must be a qualifying veteran, the unmarried widow of a veteran, a Public Health Service Officer, or an active-duty serviceman (with 181-day service). Check with the VA for questions on eligibility.

• VA loans are not available for investment properties or vacation homes. The VA Funding Fee can be as much as 3 percent of the loan amount, depending on your down payment, whether you are a veteran of active duty military service or a reservist with at least six years of service, and whether this is a first-time use of the VA-guaranteed loan program. The VA loan guaranty fees as of 2006 are shown in Figure 4.22.

Because of their lower rates and assumability, VA loans are better deals for consumers than conventional loans. (However, if you are making a down payment of 20 percent or more, the VA guarantee fees, which are charged regardless of loan-to-value ratio, may make a VA loan more expensive than a conventional loan. If you are making a down payment of less than 20 percent, a VA loan probably is less expensive.)

Mortgage companies make more than 85 percent of the nation's FHA and VA loans. If you decide to get a government loan, concentrate your shopping effort on mortgage companies.

Conventional Loans

The federal government also affects the market for conventional mortgages. Two federally chartered government agencies, Fannie Mae and Freddie Mac, buy mortgages from lenders. These two agencies supply more than 70 percent of the nation's mortgage money and directly affect mortgage rates for conventional loans.

Congress has set some restrictions on the mortgages that Fannie Mae and Freddie Mac can buy. The most critical restriction is the maximum loan amount. For 2006, it is as follows:

FIGURE 4.22 Purchase and Construction Loans

Conventional loans that Fannie Mae and Freddie Mac are allowed to purchase are called conforming loans. Conventional loans that are too large for these government agencies are called non- conforming loans ox jumbo loans. Jumbo loans have higher interest rates than conforming loans, typically 0.5 percent to 1 percent higher. Jumbo loans often have higher down-payment requirements, especially for loans larger than $700,000.