When deciding between an FHA loan and a VA loan for your home purchase, understanding their distinct features and benefits is key. Your choice should align with your financial circumstances and requirements.
Let’s analyze FHA versus VA loans, exploring their borrower advantages and specific criteria.
What’s the Differences Between FHA And VA Loans
FHA loans and VA loans fall under the umbrella of government-backed mortgage loans. These mortgages provide an economical option compared to conventional loans, making them a popular choice for first-time homebuyers, individuals with lower incomes, and those with subpar credit scores.
Although government backing does not equate to the government directly lending the money – banks or mortgage lenders handle that part – it does involve the government guaranteeing these loans. This guarantee reduces the risk for lenders, enabling them to offer more favorable terms like competitive rates or more lenient credit requirements to borrowers.
Defining FHA And VA Loan
FHA loans, backed by the Federal Housing Administration under the U.S. Department of Housing and Urban Development, ensure that in case of default, the FHA settles the remaining balance with the lender. These loans aim to assist individuals who may struggle to afford a home, allowing for minimal down payments and catering to borrowers with lower credit ratings.
VA loans, supported by the U.S. Department of Veterans Affairs, serve as a benefit for those who have served our nation. For eligible candidates, VA loans present an attractive choice for home purchasing, delivering competitive interest rates and demanding no down payment.
Eligibility of Applicants
VA loans are exclusive to specific groups, unlike FHA loans. Eligible individuals encompass active duty servicemembers, National Guard and Reserve members, veterans, and some surviving spouses. Visit VA.gov to delve into VA loan eligibility and minimum service criteria.
While meeting service requirements is crucial, aligning with your lender’s credit and financial prerequisites and furnishing a statement of service for VA loan requests are equally imperative.
Mortgage Insurance
A key distinction between FHA and VA loans lies in the requirement for mortgage insurance. While VA loans do not necessitate mortgage insurance, FHA loans do. FHA mortgage insurance, known as a mortgage insurance premium (MIP), is mandatory for all FHA borrowers and is split into upfront and annual components.
The upfront MIP amounts to 1.75% of the loan and can be paid at closing or incorporated into the loan cost. Meanwhile, the annual MIP ranges from 0.15% to 0.75% of the loan amount, dependent on factors like the loan term, borrowed amount, and down payment size. This yearly premium is divided and included in the monthly mortgage payment.
Unlike conventional loan insurance, canceling MIP with FHA loans can pose challenges. For FHA loans obtained before June 3, 2013, MIP can potentially be canceled once 22% equity in the home is reached. For loans originated after this date, MIP elimination is only possible after 11 years with a 10% down payment. Otherwise, MIP payments persist for the loan’s duration. To circumvent this, some FHA borrowers opt to refinance to a conventional loan upon attaining 20% home equity.
Closing Costs and Fees
VA loans don’t require mortgage insurance, but they do come with a VA funding fee. This fee, essential for funding the VA loan program, is mandatory for all borrowers, except those who qualify for an exemption. This group includes individuals with service-connected disabilities, Purple Heart recipients, and eligible surviving spouses. For first-time VA loan users with no down payment, the funding fee stands at 2.15% of the loan amount. Subsequent uses incur a 3.3% fee. However, a larger down payment can reduce this amount. For instance, a 10% down payment lowers the fee to 1.25%. The funding fee can be paid upfront during closing or rolled into the loan.
Requirements For Down Payment
Both FHA loans and VA loans can increase accessibility to homeownership for those facing challenges in saving for a down payment. However, if you qualify for both options, the VA loan emerges as the superior choice in this realm.
FHA loans necessitate a minimum down payment of 3.5%. For instance, on a $200,000 home, this amounts to $7,000. Yet, if your credit score falls below 580, you must put down at least 10% – equating to $20,000 on a $200,000 property.
In contrast, VA loans eliminate the need for any down payment at all. This feature is widely viewed as the primary advantage of a VA loan. Overcoming the financial hurdle of saving substantial amounts for a down payment is a significant relief for many prospective homeowners.
Requirements For Credit Score
To qualify for an FHA loan, a minimum credit score of 580 is typically required. However, if you’re willing to make a down payment of 10% or more, you might find lenders who accept scores below 580. Rocket Mortgage® mandates a minimum credit score of 580 for FHA borrowers. While the VA doesn’t specify a minimum credit score for VA loans, individual lenders may have their own score requirements. At Elevation Mortgage, a credit score of at least 500 is necessary to qualify for a VA loan.
Interest Rates
When considering FHA and VA loans against traditional ones, both FHA and VA loans usually offer more favorable rates. VA loans generally have a slight advantage over FHA loans in terms of the most attractive rates. However, your specific rate will be influenced by your individual financial circumstances. Enhancing your credit score or saving for a larger down payment can assist you in securing a more competitive rate.
FHA Versus VA Refinance
Government-backed loans provide a convenient solution known as a streamline refinance. This option enables borrowers to smoothly transition from one government-backed loan to another of the same type. For instance, you can streamline refinance from an existing FHA loan to a new FHA loan, or from an existing VA loan to a new VA loan.
In the case of FHA mortgages, this process is known as an FHA Streamline Refinance, while for VA loans, it’s termed an Interest Rate Reduction Refinance Loan (IRRRL). These refinancing options empower FHA and VA loan borrowers to lower their interest rates or adjust their loan terms for reduced monthly payments. They are labeled as “streamline” refinances due to their minimal documentation requirements compared to standard refinances, often eliminating the need for a home appraisal.
Choosing Between an FHA Loan and a VA Loan: Determining the Best Option for You
If you qualify, a VA loan often emerges as the preferable choice over an FHA loan. This preference stems from the fact that VA loans enable borrowers to enter homeownership with zero down payment and no need for mortgage insurance. Nonetheless, FHA loans also present a viable option, particularly for individuals with subpar credit scores or limited incomes.
Ultimately, the decision hinges on what aligns best with your circumstances. Hence, it is crucial to explore various loan options and compare them before reaching a conclusion.
Are you prepared to kickstart the home purchase journey? Secure preapproval for an FHA or VA loan today.
Reed Letson
Reed offers two decades of expertise as a mortgage broker, focusing on veterans and first-time home buyers. With a strong grasp of real estate and mortgage markets, he empowers clients with practical insights. Reed's passion is guiding clients to build wealth through real estate investments and financing solutions.