It’s time for you to buy your first house. The process can seem daunting.
As a veteran, you have worked hard for your country and deserve peace of mind that you will be able to manage your new mortgage.
As a veteran first time home buyer, there are many factors you must consider before making a lasting commitment.
One thing you should know, a loan can help you. We are going to give you all of the details you need on the differences between FHA versus VA loans and how they can work for you.
So, let’s get started.
FHA Versus VA Loans for Veterans: What You Should Know
These loans are designed to help you. We are going to look at the pros and cons of each to help you decide which is right for you.
To start things off let’s take a look at exactly what these loans are.
Both VA and FHA loans are backed by the federal government.
FHA loans stand for Federal Housing Administration. These loans help qualified borrowers with lower income and/or lower credit scores. FHA loans are open to anyone.
VA stands for Veterans Affairs within the United States.
Lenders work with the VA to give loans. These loans are only open to members of the military and some spouses. Generally, a credit score of 620 or higher is needed.
Even though you are eligible for a VA loan the FHA loan might be better for you in the long run.
Now that you understand what these loans are let’s break them down. The following is a list of things that make up the FHA and VA loans. Understanding each of these components will help you make the choice that is best for your needs.
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.
The interest rates for both the FHA and VA loans are fairly similar but will vary based on credit score and where you live.
The VA rate for a 30 year fixed mortgage is right around 3.67% and the FHA rate is around 3.93%.
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.
The Different Loan 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: You will only need a credit score of 500 to be approved
CON: If you have a lower credit score your initial down payment will be higher
PRO: Your loan will not be affected by the amount of time spent in the military
CON: you will have a mortgage premium and refinancing is the only way to pay it off
PRO: You will not need a minimum down payment
CON: Generally, you will need a credit score of 620 or higher
PRO: You will not need mortgage insurance
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.
The Final Decision
As you can see there is not one specific loan that fits everyone’s needs. Understand FHA versus VA pros and cons will help 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.
The FHA loan can be the right choice for you as a Veteran if your credit score is on the lower side. That being said it is hard to argue with the benefits of the VA loan if your credit score is sound.
The benefits of having a VA loan are obvious. The choice really depends on where you are at financially when the time comes for you to purchase your home.
For help getting started with your loan today click here.