FHA vs. VA Loans

If you’re interested in buying a home, you should explore what financing options will work best for you. The Federal Housing Administration (FHA) loan is a popular alternative to conventional loans. It offers an easier and more convenient way for first-time homebuyers and individuals with limited financial resources to become homeowners. 

The Veterans Affairs (VA) loan is another government-backed loan option. The mortgage offers an accessible way for veterans, military personnel and eligible spouses to purchase homes. 

Ultimately, the right mortgage for you will depend on your circumstances. Keep reading to find out what you need to know about FHA and VA loan requirements and related factors you should consider, or you can jump ahead to one of these sections:

  • FHA Loan Breakdown
  • VA Loan Essentials
  • Down Payment and Closing Costs
  • Mortgage Insurance Comparisons
  • Interest Rates and Loan Terms
  • Eligibility Criteria and Documentation
  • Choosing the Right Loan for You

FHA Loan Breakdown

FHA loans are commonly called first-time home buyer loans. They’re issued by private lenders such as FHA-approved banks and credit unions. Each mortgage is insured by the FHA, which is a part of the United States Department of Housing and Urban Development.

Typically, the loans are a good fit for first-time home buyers and people with limited savings or lower credit scores. In many cases, you could still qualify for this loan if you’ve experienced bankruptcy or don’t meet a conventional mortgage’s requirements

You can use an FHA loan to buy or refinance many types of residential properties, including single-family homes, two-to-four-unit multifamily houses, condominium units and certain manufactured homes attached to a permanent foundation. You might also be able to use the financing for new construction and renovation projects. 

VA Loan Essentials

VA loans are issued by private lenders such as banks, credit unions and mortgage companies. The U.S. Department of Veterans Affairs guarantees the loans, which means they take responsibility for repaying the debt if a borrower defaults on the payment. Generally, VA loans offer a more accessible way to buy a home because they don’t require a down payment. 

By far, one of the best advantages of a VA loan is not needing a down payment or private mortgage insurance (PMI). Plus, the financing usually comes with competitive interest rates that are lower than conventional mortgages. To make homeownership even more accessible, the Department of Veterans Affairs limits the origination fee to no more than 1% of the loan and prohibits lenders from charging other closing costs. 

To obtain the financing, the home you choose must meet minimum property requirements. After you work with your agent to make an offer, a mortgage lender will evaluate your finances and schedule an appraisal to ensure the home meets standards for cleanliness, safety and structural integrity. Based on these factors, your mortgage lender will let you know how much you may be eligible to borrow. 

Down Payment and Closing Costs

Regarding FHA versus VA loans, the VA loan is a clear winner in the down payment category. The VA loan doesn’t require a down payment at all, which can save you thousands of dollars. 

Meanwhile, FHA loans require a minimum down payment of 3.5% or a higher down payment of at least 10% if you have a credit score below 580. If you’re interested in an FHA loan and don’t have enough saved for your down payment, you could look at some down payment assistance programs. 

FHA loans require borrowers to pay closing costs of around 2% to 6% of the property’s price, similar to conventional mortgages. VA loans have closing costs ranging from 1% to 6% of the property price. 

Mortgage Insurance Comparisons

Mortgage insurance plays another role in the distinction between VA and FHA loans. Typically, VA loans don’t require mortgage insurance — they do, however, require a funding fee. First-time loan borrowers who don’t make a down payment must pay a funding fee of around 2.15% of the loan amount. Any subsequent loans will require you to pay a 3.3% funding fee.

FHA mortgage insurance is called a mortgage insurance premium (MIP). The upfront MIP is around 1.75% of your loan amount and is either paid at closing or rolled into the mortgage amount. The annual MIP is between 0.15% and 0.75% and is based on your loan term, the size of your down payment, and the amount borrowed.

Interest Rates and Loan Terms

When researching FHA loans versus VA loans, you’ll find similar interest rates and loan terms. Both government-backed mortgages are considered less risky for lenders, which may allow you to find lower interest rates than conventional loans. Both mortgages are also available with fixed or adjustable rates. You can choose between 30-year or 15-year terms. 

Some factors influencing your FHA rate include your credit score, the size of your loan, your down payment amount and your loan term. The factors affecting your VA rate include your credit score, loan-to-value ratio, debt-to-income ratio and loan term. Keep in mind that all rates for FHA and VA loans vary by lender. 

Eligibility Criteria and Documentation

To qualify for an FHA loan, you will need to have documents verifying your employment and income. You should typically have a credit score of 580 or higher and have a debt-to-income ratio (DTI) of less than 43%. 

If you want to qualify for a VA loan, you must be an eligible U.S. veteran, military personnel or surviving spouse. You must show your lender a VA Certificate of Eligibility (COE), which you can obtain from the VA online or by mail. 

The VA loans don’t have a credit score requirement, although lenders prefer scores of 620 or higher. Most lenders also prefer that you have a DTI of less than 41% for this mortgage. All lenders are slightly different and may consider compensating factors if you don’t meet these FHA and VA loan requirements. 

Choosing the Right Loan for You

When looking at FHA versus VA loans, consider each option’s advantages. FHA loans are more accessible for a broader range of borrowers and have lower credit score requirements. Meanwhile, VA loans require zero down payment and have competitive interest rates. 

You can meet with professionals at Homesite Mortgage to discuss your financial situation. Our experts can answer your questions about VA loans versus FHA loans, and we’ll show you options that align with your goals. 

To get started, schedule an appointment today!