VA Home Loan vs. FHA Loan
On This Page
- Eligibility Requirements for Both
- Down Payment: VA Loan vs. FHA Loan
- Credit Score Requirements: VA Loans vs. FHA Loans
- Interest Rates: VA Loan vs. FHA Loan
- Mortgage Insurance for FHA and VA Home Loans
- Debt-to-Income Ratio: VA Loans vs. FHA Loans
- VA Loan vs. FHA Loan: Limits
- Difference in Fees
- Which Loan Is Better for You?
Eligibility Requirements for Both
If you’re looking to buy a home, different home loan options are available to you, even with less-than-perfect credit. VA home loans are mortgages available specifically to help veterans, active-duty service members, and surviving spouses purchase or refinance homes. The Department of Veterans Affairs guarantees a portion of the loans, providing lenders with the security to offer more favorable terms and conditions to veterans and other eligible borrowers. These loans can provide up to 100% financing and do not require insurance.
Meanwhile, FHA loans are available to anyone who meets the financial criteria, including first-time home buyers. These loans provide lower mortgage interest rates and are insured by the Federal Housing Administration. To qualify, applicants must meet specific financial and credit requirements, but FHA loans are available to all and require mortgage insurance.
Down Payment: VA Loan vs. FHA Loan
FHA and VA loans have different down payment requirements. FHA loans typically require a minimum down payment of 3.5% if your credit score is 580 or higher. If your credit score is between 500 and 579, a 10% down payment is required.Â
One of the key advantages of VA home loans is that they typically don’t require a down payment, allowing eligible veterans to finance 100% of their homes. If you are a qualifying service member, a VA loan can save you money when you buy a home with no down payment and allow you to finance the entire home’s value.
Credit Score Requirements: VA Loans vs. FHA Loans
Some FHA loans require borrowers to have a credit score of 580 or higher, but the requirement varies by lender. You may need to make a larger down payment if your credit score is below a certain threshold.Â
The VA does not require any minimum credit score for VA home loan eligibility. Because there is no hard score criterion, it’s easier for people with lower credit scores to secure a VA loan, as applicants have more flexibility. However, individual lenders have their own credit score thresholds, with many using a score of 620 as a benchmark.
Interest Rates: VA Loan vs. FHA Loan
Both loans offer competitive or lower interest rates, largely due to their government backing. VA loans often offer lower interest rates than FHA loans due to the VA’s guarantee. The VA guarantees a portion of the loan, thereby reducing the lender’s risk and enabling them to offer more favorable terms to borrowers.
FHA loans may still have lower rates than private mortgage loans. The rate typically depends on your credit score and the loan terms.
Mortgage Insurance for FHA and VA Home Loans
VA loans do not require borrowers to pay for mortgage insurance. Instead, VA home loan borrowers are charged an initial one-time VA funding fee, but that fee can be rolled into the loan amount. Although the funding fee may be higher upfront, the borrower avoids paying the monthly mortgage insurance premium.Â
On the other hand, FHA loans require the borrower to pay a mortgage insurance premium, or MIP, of 1.75% of the loan amount and an annual premium paid monthly based on the remaining loan balance. This monthly insurance is necessary until you either refinance or pay the mortgage down to 78% of the home’s value.
Debt-to-Income Ratio: VA Loans vs. FHA Loans
Lenders for both types of loans will assess your debt-to-income, or DTI, ratio to determine whether you qualify. Your DTI ratio represents the percentage of your monthly income you spend paying off your debt.
FHA loans have flexible ratios, usually allowing up to a 43-50% ratio, but lenders may approve higher ratios depending on other factors. If your DTI is a serious concern, qualifying for an FHA loan could be easier.Â
VA loans generally allow borrowers to have a DTI ratio of up to 41%, but exceptions are often made for applicants with higher ratios. Borrowers with higher DTI ratios can still qualify for a VA loan if they meet the VA’s residual income requirements, proving they have enough money to cover living expenses after paying their mortgage and other debts.
VA Loan vs. FHA Loan: Limits
FHA loans are subject to loan limits, which can vary depending on the property’s location, as limits are state and county-specific. Often, these limits are lower than VA loan limits.Â
VA loans typically offer more flexibility in loan limits than an FHA loan, especially if you have full entitlement. VA loans do not have a maximum loan limit for eligible borrowers with full VA entitlements. However, for those with partial entitlements, VA home loan limits are calculated based on the county’s loan limits and the amount of entitlement already used.
Difference in Fees
VA loans have a one-time funding fee of between 1.25% and 3.3%, depending on the loan, the down payment, and prior use of your entitlement. The funding fee can be rolled into the loan, and VA loans don’t require payment of monthly mortgage insurance or certain other fees, making them potentially more affordable over time. Some applicants may qualify for a waiver or have the fee included in the loan.Â
FHA loans require mortgage insurance and a monthly MIP payment throughout the loan’s duration, which can be costly over time. In the long run, VA loans tend to be more cost-effective when considering the total costs of the loan’s life.
Which Loan Is Better for You?
If you’re a veteran, active-duty service member, or surviving spouse, a VA loan will likely serve you better than an FHA loan in the long run, despite a higher funding fee. VA loans require no down payment, no mortgage insurance, and offer competitive interest rates. Meanwhile, FHA loans may be a good choice for borrowers who are not eligible for a VA loan but have less-than-perfect credit or a lower income.
If you qualify for either type of loan, consider your specific financial situation and all factors that can impact your loan choice, such as interest rates, mortgage insurance, and DTR, before deciding which home loan is right for you.Â
Veterans Guide is committed to helping veterans and their families fulfill their dreams of homeownership by offering resources, advice, and connections to VA-approved lenders. We understand the VA loan process and can help you navigate it. Learn more about VA home loans by contacting us today.
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