Which One is Better, FHA or VA?

FHA vs VA :

If you’re in the market for a new home and qualify for both FHA and VA loans, deciding which one to choose can be challenging. Both options come with distinct advantages and cater to different financial situations and preferences.

Let’s explore the differences between FHA and VA loans, including how they can serve borrowers and the criteria required for each.

Distinctive Features of FHA vs. VA Loans 

FHA and VA loans are varieties of government-backed mortgages, providing an affordable route compared to traditional loans, particularly appealing for first-time buyers, individuals with lower incomes, or those with credit issues.

While the government backs these loans, it doesn’t issue them directly. Instead, banks or mortgage lenders provide the financing, but with government insurance, this reduces the lender’s risk. Consequently, lenders can afford to offer more favorable conditions, such as improved interest rates or more lenient credit requirements for borrowers.

Definitions of FHA and VA Loans 

FHA loans are supported by the Federal Housing Administration, under the U.S. Department of Housing and Urban Development umbrella. In case of a default on an FHA loan, the FHA compensates your lender for the outstanding balance.

Designed to make homeownership more accessible, FHA loans require minimal down payments and accept borrowers with lower credit scores.

On the other hand, VA loans, guaranteed by the U.S. Department of Veterans Affairs, are a privilege for those who have served our nation, offering notable benefits like competitive rates and no down payment requirement.

Eligibility for Applicants 

VA loans are exclusive to certain groups and not open to everyone. Eligible individuals include active duty servicemembers, members of the National Guard and Reserve, veterans, and some surviving spouses.

For detailed information on VA loan eligibility and service requirements, visit VA.gov.

It’s important to note that eligibility for a VA loan also hinges on meeting specific credit and financial criteria set by your lender, who will also request a statement of service when you apply for a VA loan.

Mortgage Insurance Differences 

A key distinction between FHA and VA loans is the requirement of mortgage insurance. VA loans do not require it, whereas FHA loans mandate a mortgage insurance premium (MIP), which includes both upfront and annual payments.

The upfront MIP is 1.75% of the loan amount, payable at closing or rolled into the loan, and the annual MIP rate varies between 0.15% and 0.75%, factored into monthly mortgage payments.

Canceling MIP can be complex, with possibilities for cancellation depending on the origination date of your FHA loan. Refinancing to a conventional loan is a common workaround once 20% equity is reached.

Fees and Closing Costs 

While VA loans don’t require mortgage insurance, they come with a VA funding fee, which supports the loan program. This fee is mandatory for all VA loan borrowers, except those exempt due to service-related disabilities, Purple Heart recipients, and certain surviving spouses.

The fee is 2.15% of the loan amount for first-time VA loan users without a down payment, increasing to 3.3% for subsequent uses. Making a down payment of at least 10% reduces the fee to 1.25%. This fee can be paid upfront or included in the loan.

Down Payment Considerations

When it comes to minimizing the initial financial barrier of a down payment for homeownership, VA loans stand out if you qualify for both options.

FHA loans require a minimum down payment of 3.5%—for a $200,000 property, that’s $7,000. If your credit score is under 580, the down payment requirement jumps to 10%, or $20,000 for the same priced home.

In contrast, VA loans eliminate the down payment requirement entirely, a significant advantage for many prospective homeowners struggling to accumulate substantial savings.

Credit Score Criteria

To secure an FHA loan, you need a credit score of at least 580 with 3.5% down. However, with a down payment of 10% or more, some lenders may accommodate scores down to 500. 

While the VA doesn’t specify a minimum credit score for its loans, lender requirements vary, with Elevation Mortgage requiring a minimum of 500 for VA loans.

Interest Rate Insights

Both FHA and VA loans typically offer more favorable interest rates compared to conventional loans, with VA loans frequently providing slightly better terms. Your personal financial situation, including credit score and down payment size, plays a crucial role in determining your rate.

Refinancing Options: FHA vs. VA

Streamline refinancing is available for both FHA and VA loans, enabling borrowers to refinance their existing government-backed mortgage into a new one of the same type with less paperwork and often without a home appraisal. This process is known as an FHA Streamline Refinance for FHA loans and an Interest Rate Reduction Refinance Loan (IRRRL) for VA loans, designed to lower interest rates or monthly payments with minimal hassle.

Choosing Between FHA and VA Loans

If you’re eligible, opting for a VA loan generally offers more benefits, such as no down payment and absence of mortgage insurance. Nonetheless, FHA loans still present a viable pathway to homeownership, especially for those with lower credit scores or incomes. The key is to assess your individual situation, compare loan offerings, and make an informed decision.

Considering taking the next step towards homeownership? Start by getting preapproved for an FHA or VA loan today.