VA - Department of Veterans Affairs: a federal agency which guarantees loans made to veterans; similar to mortgage insurance, a loan guarantee protects lenders against loss that may result from a borrower default.

The VA home loan benefit is called an entitlement.

VA guaranteed loans are made by lenders and brokers to veterans for the purchase of a personal home. The guaranty means the lender is protected against loss if you fail to repay the loan. The guaranty replaces the protection the lender normally receives by requiring a down payment allowing you to obtain favorable terms.

With a VA loan you finance 100% of the purchase price as well as the funding fee.

A note to the borrower:

There is usually quite a bit more paper work involved in processing a VA loan. There are extra disclosures that need to be signed along with stricter underwriting guidelines. They may require letters of explantions for various items on credit reports etc...

The guarantee is called the VA Funding Fee. It's a percentage of the loan amount and can either be paid at closing or added to the loan amount.

Although you are paying for the funding fee you are getting a lower rate in exchange. This means over the life of your loan you could save thousands of dollars over other conventional loan programs.

FHA - Federal Housing Administration; established in 1934 to advance homeownership opportunities for all Americans; assists homebuyers by providing mortgage insurance to lenders to cover most losses that may occur when a borrower defaults; this encourages lenders to make loans to borrowers who might not qualify for conventional mortgages.

FHA loans also have no prepayment penalty.

Qualifying guidlines assist the average buyer in each particular marketplace. Some underwriting guidelines are less restrictive than those of conventional fixed-rate loans, and can vary based on the marketplace.

The lender is insured against loss for the life of the FHA loan.

It is possible to place subsequent mortgages after an FHA first mortage.

The seller or other third party is allowed to pay part of, or all of the closing costs associated with the loan.

FHA loans are assumable, but the assuming party must qualify. Any FHA loan originated prior to December 1, 1986, are simply assumable. Meaning the purchaser does not need to formally qualify for the loan.

Loans are assumed at the note rate under which they were originally originated. The exception being on ARMs, in which case are assumed at the loan's current interest rate.

Now lookinng at the down side of the FHA loan. This type of loan can cost the seller more money in the form of non-allowables. Non-allowables are fees FHA will not allow the borrower to pay such as a processing fee etc... This may not be a deal killer by any means but it is something to take into consideration when writing the offer on the home you intend to purchase.

A FHA mortgage is when the government guarantees Federal Housing Authority loans. You can put down a smaller down payment on a FHA loan, but you will also be required to pay mortgage insurance.

What are the advantages to using FHA financing?

There is a low down payment requirement. The down payment is 3 percent, up to the maximum loan amount allowoable in your particular region.

The entire down payment can be gifted or borrowed from a relative (on most other loans the down payment must be sourced and seasoned).

Unlike conventional loans, there are no reserve requirements of two months' PITI payments at closing.

The interest rates are typically lower on FHA loans, than what they are on conventional fixed-rate loans.

FHA loans have lower maximum loan limits compared to that of conventional mortgages. The maximum loan limits vary county by county and are adjusted every year to reflect increasing home prices.

FHA loans are not for every one in that the loan limits are too low for higher price properties and that the application process takes longer than conventional mortgages, so in a hot real estate market where houses receive multiple offers, buyers using government loan often lose out to those using convention mortgages.

For an FHA loan, your monthly housing costs should not exceed 29% of your gross monthly income. Total housing costs include mortgage principal and interest, property taxes, and insurance. Those four terms are often lumped together, and referred to as PITI.

Your total monthly costs, adding PITI and long term debt, should be no more than 41% of your gross monthly income. Long term debt includes such things as car loans and credit card balances.

Your FHA loan will also carry Private Mortgage Insurance (PMI). The PMI payment is lower than what it would be if you had a similar conventional loan scenario. Unlike conventional loans, the PMI will remain with the FHA loan for the life of the loan.