It’s time for you to buy your first house. The process can seem daunting. Continue reading to learn the difference between FHA vs. VA Loans.
As a veteran, you have worked hard for your country and deserve the peace of mind that you will be able to manage your new mortgage.
But before making any life-changing decisions about which type of loan is best, it’s important to understand what they are each like so you can make an educated decision on how to proceed with this exciting next step in your future!
We’ll give all the information necessary on FHA versus a VA loan.
FHA Loan vs Va Loan
Eligible borrowers can choose between an FHA loan and a VA Loan. Both FHA and VA are designed to help you but each has its own set of pros and cons for borrowers to consider, so make sure you know which is best for your financial situation before deciding on one over the other! VA loans and FHA loans are backed by the federal government.
FHA stands for Federal Housing Administration.
- FHA loans typically help qualified borrowers with lower income and/or lower credit scores. FHA loans are open to anyone.
- FHA loans are backed by the Federal Housing Administration and VA mortgages are insured by Veterans Affairs.
The FHA is a government agency that can lend money to qualified buyers with low down payment requirements while a VA loan requires no minimum down payment, but does have eligibility guidelines for service members and veterans that must be met before you will qualify for this type of loan.
VA direct and VA-backed loans are made through the Department of Veterans Affairs
- A VA loan is more flexible in terms of how much you’ll need to pay each month since there’s no monthly mortgage insurance or PMI required like there is on an FHA loan.
- VA loans offer a few different benefits to those that qualify.
- A VA home loan usually offers no down payment requirements, making it easier for borrowers with lower incomes or less cash on hand at the time of purchase.
There are also VA funding fees associated with every loan through the Department of Veterans Affairs, which can be paid in closing costs and financed over 30 years. Now that you have a good idea of the difference between an FHA loan and VA loan, lets go over what sets them apart.
Eligibility varies between both loans. To qualify for a VA loan you or your spouse must have been in the military. You will need to receive a certificate of eligibility that will include the amount you are guaranteed to receive.
FHA loans are open to everyone regardless of their income or whether they served in the military. You must be of legal age to sign a mortgage, have a residence, and have a valid social security number in order to obtain an FHA loan.
While VA loans are specifically for people in the military and their spouses FHA loans might still be the better option for you.
FHA loans are very common for people buying their first home. You should understand that is the purpose of these loans.
In both FHA and VA loans, the property that the loan is for must be the primary home.
What does that mean for you? Well if you are looking to get a loan to open a business or to buy a vacation home these are not the loans for you. You should consider a conventional loan, which is not backed by the government.
Take your time in doing research about the home you are considering buying. The house must be structurally sound and meet the requirements of the Department of Housing and Urban Development.
In most cases, VA loans do not require a down payment. FHA loans require a 3.5% down payment.
Although the VA loan doesn’t require a down payment, you will still generally need a higher credit score to be approved which sways many veterans towards the FHA loan.
There are limits for the lending amounts for FHA loans, and depending on where you live it can range from around 330,000 to 750,000. Some more expensive markets will have higher limits.
New VA laws have done away with loan limits in 2020. If you have defaulted on a loan or if you have existing VA loans you will be subject to a limit though. In most places that limit is around 500,000.
Your debt-to-income ratio is the percent of your monthly income spent towards paying off debt.
With VA loans there is no maximum debt-to-income ratio. That being said, if you have a debt-to-income ratio that is higher than 41% you could be subject to a closer review of your finances.
FHA loans do have a maximum, and generally, a debt-to-income over 50% will not be accepted. That being said, things like a higher credit score or previous loan history could make a difference in where or not your debt-to-income ratio will affect your loan.
Your debt-to-income ratio is going to be up for review no matter what loan you choose. Be clear when you are discussing your finances as this will help your loan officer understand your situation.
In the end, it is really about what works best for you.
Just like your debt-to-income ratio is reviewed, so will your credit score. It is important to know going in that your financial state will be scrutinized.
In most cases, VA borrowers tend to have a higher credit score which is what prompts them to go for the VA loan over the FHA loan.
With an FHA loan, borrowers with a credit score of 580 or higher will be required to put down 3.5%. For anyone with a credit score between 500-579 a down payment of 10% is generally needed. In most cases, anyone with a credit score below 500 is not eligible for an FHA loan.
The VA itself does not set a minimum requirement for a credit score, however, the lenders generally set a minimum of 620.
If your credit score is on the lower end an FHA loan might be the best option for you.
Mortgage Interest Rates
The interest rates for both the FHA and VA loans are fairly similar but will vary based on credit score, location, and a range of other factors.
The purpose of having mortgage insurance is to make sure the lender is reimbursed in the event that you default on your loan.
This an expense you don’t want to overlook.
FHA loans require you to have mortgage insurance. Going this route means that you will pay an upfront fee and then a monthly premium. The monthly premium gets added to your mortgage payment.
VA loans do not require you to have insurance.
There is a fee though. You will pay a one-time fee ranging from 1.4% to 3.6%. There are several factors that will go into the percentage.
Your time spent in the military, whether or not you have received a VA loan before, and your initial down payment will all affect your percentage.
When comparing loans be sure to include the fact that your FHA loan will have insurance premiums.
FHA and VA Loans – Pros and Cons
There is a lot to think about when you choose between the FHA and VA loans. There is no one right or wrong loan for everyone. These are a few of the pros and cons that might help you in your decision.
PRO: Lower credit scores are allowed with an FHA mortgage
CON: If you have a lower credit score your initial down payment or interest rate may be higher
PRO: Your loan will not be affected by the amount of time spent in the military
CON: you will have private mortgage insurance (PMI)
PRO: You will not need a minimum down payment with VA Loans
CON: Generally, you will need a credit score of 620 or higher with VA home loans
PRO: You will not need mortgage insurance with VA home loans
CON: Your time spent in the military can affect the amount you will receive
There are many aspects you must consider when choosing the loan that will best fit your needs.
VA Funding Fee
What is the VA Funding Fee?
The VA funding fee is a one-time payment that either veterans, service members, or survivors might pay on a VA home loan.
This helps to lower costs for taxpayers by making the program more affordable without any down payments and monthly mortgage insurance fees!
Will I have to pay the VA funding fee?
If you’re using a VA home loan to buy, build, improve or repair your home then it is likely that you will need to pay the funding fees as long as certain requirements are met.
VA Funding Fee – Purchase and Construction Loans
|If your down payment is…||Your VA funding fee will be…|
|First use||Less than 5%||2.3%|
|5% or more||1.65%|
|10% or more||1.4%|
|After first use||Less than 5%||3.6%|
|5% or more||1.65%|
|10% or more||1.4%|
VA Funding Fee – Cash-Out Refinancing
|First use||After first use|
VA Funding Fee – IRRLs and Other VA Home Loans
|Loan type||VA funding fee|
|Interest Rate Reduction Refinancing Loans (IRRRLs)||0.5%|
|Manufactured home loans (not permanently affixed)||1%|
|Vendee loan, for purchasing VA-acquired property||2.25%|
Refinance Loan – VA IRRL and VA Streamline Refinance
What is a VA IRRRL
The VA IRRRL, which stands for “Interest Rate Reduction Refinance Loan,” provides qualified veterans the ability to quickly and easily refinance their mortgage into a lower interest rate and payment. The IRRRL is also known as the VA streamline refinance.
The VA IRRRL provides qualified veterans the ability to quickly and easily refinance their mortgage into a lower interest rate and payment. The program is also known as the “VA streamline refinancing.”
The Final Decision
As you can see there is not one specific loan that fits everyone’s needs. We always recommend contacting a mortgage professional to review if a VA home loan or an FHA home loan is right for you.
As a Veteran, you are likely drawn to the VA loan but it does not necessarily mean that it is the right choice for you.
Many people struggle with low credit scores and a high debt-to-income ratio. These factors can make it difficult when applying for a loan.
For those who have a low credit score, an FHA loan may be the best option. However, for veterans with good to excellent scores, it is hard not to argue in favor of VA loans
For help getting started with your VA Loan or FHA loan click here.