August 27, 2024
Some borrowers qualify for VA loans. Others qualify for FHA mortgages. Some may have the option to apply for both.
What do you need to know about FHA and VA home loans besides the fact that they are both government programs designed to help borrowers find affordable houses? We examine the differences and similarities below.
What To Know About VA Loans
VA loans, guaranteed by the U.S. Department of Veterans Affairs, are exclusively for those with uniformed service, including veterans, active-duty service members, and certain surviving spouses.
These loans are popular among the military community for the no down payment option, competitive interest rates, and more forgiving credit requirements.
- No Down Payment: VA loans allow eligible borrowers to purchase a home without a down payment, reducing the upfront costs of the mortgage.
- No Private Mortgage Insurance: VA loans have no VA-required private mortgage insurance (PMI), even with no down payment. This results in lower monthly payments.
- Credit Requirements: The VA does not impose a minimum FICO score. Lender standards will apply.
- Funding Fee: VA loans include a funding fee, which varies. This fee can be financed or paid upfront.
Eligibility for VA loans is based on military service. Individuals must meet specific service requirements outlined by the VA.
Generally, veterans, active-duty service members, and certain surviving spouses are eligible but must apply for a VA CVertificate of Eligibility before applying for the loan.
VA.gov offers an eligibility tool to help individuals determine their eligibility. Your lender can also help you get the certificate.
What To Know About FHA Mortgages
FHA loans, insured by the Federal Housing Administration, aim to expand access to homeownership by offering loans with lower down payment requirements and credit guidelines.
They are available to a wider range of borrowers, including first-time homebuyers and those with credit histories.
- Low Down Payment: FHA loans allow for down payments as low as 3.5% for borrowers with credit scores of 580 or higher. Additional lender standards may apply.
- Credit Requirements: The FHA considers borrowers with lower credit scores. As stated on HUD.gov, “FHA loans are designed for borrowers who may not qualify for a conventional loan.”
- Mortgage Insurance Premium (MIP): FHA loans require borrowers to pay an upfront and annual MIP. This insurance protects the lender.
- Assumable Mortgages: Under certain conditions, future buyers can assume FHA loans.
FHA loans have broader eligibility criteria than VA loans. While they are open to more borrowers, they still require specific credit, income, and debt-to-income ratio requirements to be met. HUD.gov provides information on FHA loan eligibility.
Which Loan Is Better?
- Without considering eligibility for each program, VA loans offer the possibility of 0% down. FHA loans require a minimum of 3.5% down and a credit score of 580 or higher. While this is “better,” the VA loan option isn’t open to all.
- Regarding mortgage insurance, VA loans have no VA-required private mortgage insurance, while FHA loans require both upfront and annual mortgage insurance premiums (MIP).
- Interest rates for VA loans are typically competitive, and FHA loan rates can also be competitive.
- Credit requirements are more lenient for FHA and VA loans. FHA loans have more flexible requirements than conventional loans.
- VA loans have a one-time funding fee that can be financed or paid upfront, whereas FHA loans have a lender’s fee but not a funding fee.
- Both VA and FHA loan limits vary by county. However, VA loans have no limit for borrowers with 100% VA loan entitlement. The same is not true of FHA mortgages.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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