FHA Loan vs VA Loan: Key Differences
The FHA loan and the VA loan are popular home financing options for veterans. Both loans have many benefits, but they also have some key differences. In addition to comparing the two types of loans, this article will also help ensure you understand what each one requires and how it differs from other government-backed mortgages offered by the U.S. Department of Veterans Affairs (VA).
Critical Differences Between FHA And VA Loans
Before we dive into the differences between FHA and VA loans, let’s discuss the similarities. FHA and VA loans are both government-backed mortgage loans. Government-backed mortgages are usually more affordable and have different perks than conventional loans. Both FHA and Va loans are great options for first-time home buyers, low-income borrowers, and those with damaged credit.
Government backing means lenders can offer more attractive terms, such as better rates or less stringent credit requirements for borrowers.
FHA And VA Loan Overview
FHA loans are backed by the Federal Housing Administration, a part of the U.S. Department of Housing and Urban Development (HUD). If you default on an FHA loan, the FHA will guarantee the loan.
FHA loans are intended to help people who may struggle to qualify for a conventional mortgage. FHA loans allow for small down payments and lower credit scores.
VA loans are backed by the U.S. Department of Veterans Affairs. These loans are offered to those who have served our country. VA loans come with competitive interest rates and require no down payment.
Applicant Eligibility Requirements
The main difference between FHA and VA loans is that VA loans aren’t available to the general public. To qualify for a VA loan, you must be an active duty service member, National Guard and Reserve member, a veteran, or sometimes a surviving spouse.
VA loan applicants also need to meet a lender’s credit and financial requirements and have access to a statement of service.
Mortgage Insurance Premiums
Another significant difference between FH and VA loans is that VA loans don’t require mortgage insurance.
A mortgage insurance premium (MIP) is required for all FHA borrowers, upfront and annually. It costs 1.75% of the FHA loan amount upfront and can either be paid at closing or rolled into the cost of the loan. Annually, MIP is equal to between 0.45 – 1.05% of the loan amount, depending on the loan.
Closing Costs & Other Fees
VA loans do not have mortgage insurance fees, but they do have VA funding fees. All VA loan borrowers must pay the funding fee, except for:
- Those who qualify for an exemption
- Those receiving compensation for a service-connected disability
- Purple Heart recipients
- Eligible surviving spouses.
For a first-time VA loan, the funding fee is 2.3% of the loan amount. After that, it’s 3.6% for each subsequent use. The fee can either be paid as a closing cost or rolled into the loan.
Down Payment Requirements
One of the most popular benefits of VA loans is the down payment requirements. FHA loans come with a minimum down payment of 3.5%, whereas VA loans don't require a down payment at all.
Saving thousands of dollars on down payment costs can make purchasing a home feasible for those that are struggling to save due to high rent prices.
Credit Score Requirements
For an FHA loan, you’ll most likely need a credit score of at least 580 to qualify.
While the VA doesn’t set a minimum credit score for VA loans, most lenders have a minimum score to finance a VA loan.
Interest Rates
Compared to conventional loans, both FHA and VA loans tend to have attractive rates.
However, your rate will also depend on your financial history, credit score, and debt-to-income ratio.
Conclusion
The FHA loan and the VA loan are popular home financing options for veterans. Both loans have many benefits, but VA loans are the clear winner for those that qualify.
Learn how to apply for a VA loan online with Military Homespot Lending. Click here for the details.