FHA and VA loans can be an excellent choice
for borrowers with limited down payment.
FHA and VA loans are most commonly used by borrowers who have very limited down payment funds. The minimum down payment for FHA loans is 3.50% of the purchase price; VA loans require no down payment at all. The interest rate on these loans is generally slightly lower – up to half-point in interest rate lower – than the interest rate for jumbo or conforming loans.
The fees on FHA loans – an upfront mortgage insurance premium (MIP) as well as an additional monthly MIP – have risen sharply in the last year as the government moves to limit its role in real estate finance. The upfront MIP is 1.75% of the loan amount, which can be financed by adding it to the loan amount; this upfront MIP may be tax deductible, depending on a bill pending in Congress, and on your income. There is also monthly MIP; this is based on an annual fee of 1.35% of the loan amount for mortgage at a 95% or greater loan-to-value (1.30% for loans less than 95% LTV) paid monthly. This is expensive: $562.50 per month for a $500,000 loan, for example ($500k X 1.35% = $6750, divided by 12 = $562.50). Unlike all other mortgage insurance premiums, the monthly FHA MIP runs for the life of the loan, no matter how much equity you build over time by paying principal or by home price appreciation.
Veteran’s Administration (VA) loans are an excellent choice for veterans with less than a 20% down payment. The loan limits are quite high and vary by geographic area; in a number of bay area counties a veteran can get over a $1 million 30 year fixed-rate loan with no down payment and a very low interest rate. There is an upfront funding fee, but no monthly MIP. This upfront fee can be added to the loan amount and financed; on a first-time purchase this fee can vary from 1.25% of the loan amount with a 10% down payment up to 2.15% of the loan amount with no down payment. With a VA loan the lender, not the VA, sets the interest rate, origination fees, and closing costs. These rates , and maximum loan amounts and LTVs, may vary from lender to lender.
Here are the 2014 VA loan limits for Bay Area counties:
- Alameda: $1,050,000
- Contra Costa: $1,050,000
- Marin: $1,050,000
- Napa: $575,000
- San Matteo: $1,050,000
- San Francisco: $1,050,000
- Santa Clara: $827,500
- Solano: $417,000
- Sonoma: $500,000
If you are interested in a VA loan, start the process by verifying your eligibility and then request your Certificate of Eligibility (COE).