FHA vs VA Loans: Which Mortgage Option Is Right for You?
As a first-time buyer, you may be overwhelmed by your mortgage options. Which will offer the lowest down payment, the best terms overall, and help you minimize how much you spend on your mortgage over the life of the loan? To help you sort through the massive amount of information on home loans and learn more about two of the most popular options, we’ve put together an overview of two of the most popular mortgage options for first-time buyers: FHA vs. VA loans.
What are FHA and VA loans? FHA (Federal Housing Administration) loans are federally insured mortgages and are designed to help low-to-moderate income borrowers buy a home with less money down and lower credit. VA mortgages are government-insured mortgages (guaranteed by the US Department of Veteran Affairs) for active or veteran military service members and their spouses.
There are many benefits of FHA and VA loans that should be carefully weighed before considering a traditional loan—if you qualify for either of these mortgage options, you can set yourself up for a better financial future as a homeowner. Let’s dive into the differences between FHA and VA loans, and how they stack up against conventional loan options.
Benefits of a FHA vs. VA Loans
For many first-time homebuyers, qualifying for a mortgage can be a complicated process, especially if your credit or savings needs some work. However, FHA loans and VA loans both offer a lot of benefits and flexibility for individuals under these circumstances.
While it’s not always a question of FHA vs. VA loans (unless you happen to qualify for both), learning more about these loan options can help you see if you qualify for either, and how they compare to a conventional loan. We’ve broken down the differences between FHA and VA loans so you can evaluate the benefits—among other critical decision factors—and determine if one of these mortgage options is the right choice for you.
The down payment is the amount that you pay up-front in cash when you purchase your home. Traditionally, a 20% down payment has been the standard. However, in recent years, that is less and less the case. In fact, some loans (including FHA and VA loans) offer a lower down payment option as an incentive to purchase a home.
FHA loans can be secured with as low as 3.5% down payment. While you are still required to make a down payment with FHA loans, it is significantly lower than a traditional down payment, making homeownership more accessible to first-time buyers.
One of the most notable benefits of a VA loan is the ability to put 0% down—but keep in mind these loans are only available to active duty service members, veterans, and surviving spouses. Since down payments are one of the biggest challenges to homeownership, this is a major advantage to anyone who qualifies.
Some mortgage programs may be reserved for specific property types. However, both FHA and VA loans are fairly flexible when it comes to the type of property you can purchase.
FHA loans can be used to purchase many types of property including single-family homes, condominiums, mixed-use property, and more. Additionally, FHA loans can be used to build, renovate, or purchase a home—so whether you want to find or create the home of your dreams, you can do it with an FHA loan.
Similarly, VA loans can be used for a diverse range of properties including single-family homes, condominiums, townhouses, modular homes, and more. VA loans can also be used to build, renovate, or purchase a home. If you’re looking to buy land, you’ll need to be planning to start building home on it immediately.
With both of these types of loans, it is required that they will be used as your primary residence.
Credit Score Requirements
Credit score is a major hurdle for many aspiring homeowners. Historically, in order to qualify for a decent interest rate, or even a home loan in general, you need to have a good credit score. However, FHA and VA loans are more forgiving in this respect.
FHA loans were designed for individuals with low-to-moderate income and are supposed to provide a better homeownership opportunity for people who fall into this category. As such, the credit score requirements are considerably lower than your average traditional loan.
With a credit score as low as 580, you can still qualify for the 3.5% down payment on an FHA loan. With a credit score between 500 and 579, you may be able to qualify for 10% down, which is still considerably low for a credit profile in that range.
While the VA does not require a specific credit score, lenders do. At Griffin Funding, you can qualify for a VA home loan with a credit score as low as 550.
The debt-to-income ratio (DTIR) is the comparison between the amount of income you make to the total debts you owe (credit cards, loans, etc.). This ratio is important to lenders because it is one of the ways they determine whether it’s likely you’ll be able to handle your monthly payments. For a traditional qualified mortgage, the generally accepted DTIR is 43%.
When it comes to DTIR for an FHA loan, it’s a little more flexible. For an FHA loan, you may be able to qualify with a DTIR as high as 50%. That said, your housing costs should not exceed 29% of your gross monthly income and your long-term debts should be 41% or less of your monthly gross income in order to qualify.
Typically with a VA home loan, debt-to-income ratios are held to a standard of 41%, but even if your DTIR is a bit higher, you might still be able to qualify.
A loan limit is the maximum amount you can borrow for your mortgage. Loan limits fluctuate annually based on the cost of housing.
Let’s take a closer look at the 2020 loan limits for FHA vs. VA loans:
As with many types of home loans, FHA loans have limits for how much you can borrow for your mortgage. The U.S. Department of Housing and Urban Development has set the limit to 115% of the median home price for the county. While that is the general rule, there are set loan limits for low-cost and high-cost areas, as well as the type of property you’re purchasing. For 2020, the nationwide set FHA home loan limit floor for a one-unit property is $331,760 and the ceiling is $765,600.
There is an important distinction to make when it comes to VA loan limits—the VA does not limit how much you can borrow for your mortgage, but instead limits how much you can borrow without making a down payment. Here is a full list of the 2020 VA loan limits.
However, if you still have your full VA entitlement, which is often the case for first-time buyers, loan limits no longer apply to you as of 2020.
In addition to the down payment and actual cost of your mortgage, there are other fees associated with home loans that you may have to pay. Some of these fees include:
- Application fees
- Origination fees
- Attorney fees
- Prepaid interest
These are typically considered part of the closing costs of purchasing a home and some of these fees can be negotiated between you and the seller. However, there are also lender fees and third party fees (notary, recording, etc.).
FHA loans are no different than other types of loans when it comes to a buyer’s obligation to pay numerous fees. Unfortunately, fees are often an unavoidable part of purchasing a home.
While VA loans offer many benefits for veterans and active duty service members, there are still many of the standard fees that need to be paid, with the addition of the VA funding fee. That said, the VA funding fee can typically be financed with the loan or, in some cases, waived completely.
Mortgage insurance is often required for home loans as a way to lower the lender’s risk in the case that you default on the loan, especially for borrowers with smaller down payments. There are several types of mortgage insurance that may be required depending on the type of mortgage you go with.
Generally, mortgage insurance is only required if you put less than 20% down on your home, however, for FHA loans, mortgage insurance is always required. Not only that, but FHA loans require two mortgage insurance payments: up-front and annual.
One of the advantages of VA loans is that you do not need private mortgage insurance (PMI). This is because the loan is guaranteed by the Department of Veteran Affairs.
However, you may have to pay a funding fee in place of mortgage insurance. The VA funding fee is a percentage of the overall loan total and is made as a one-time payment. There are certain borrowers who will not have to pay the funding fee, including those who are receiving VA compensation for a service-connected disability or have received a purple heart.
Mortgage rates are highly variable for several reasons, from the state of the economy to your personal credit history. Mortgage rates can also vary from lender to lender. They can even change day to day.
FHA loans are not held to market standards and the Federal Housing Association can set their own rates. That said, while FHA interest rates may be slightly lower in general, lenders have the ability to require higher rates. So, as with a conventional loan, mortgage rates for FHA loans, rely on a variety of factors.
Typically, mortgage rates for VA loans are slightly lower than FHA interest rates. Not only that, but at Griffin Funding, we pride ourselves on offering our customers competitive interest rates.
VA Loan vs. FHA Loan vs. Conventional Loan
Now that you have a better understanding of how FHA vs. VA loans stack up against one another, and why you may want to consider each option before making any decisions, let’s look closer at VA loans vs. FHA loans vs. conventional loans.
To help you compare your options, here’s a generalized rundown of how conventional loans stack up:
- Down payment: The widely accepted standard for a conventional loan has traditionally been 20%, however, nowadays, much lower down payments (sometimes as low as 3%) are often accepted to compete with other types of loans.
- Property types: Depending on the loan type, you can buy virtually any type of property.
- Credit score requirements: Typically, a credit score of 620 or higher is required.
- Debt-to-income ratio: The general standard is a DTIR of 43% or lower.
- Loan limits: The 2020 conforming loan limit is $510,400 for most counties.
- Mortgage insurance: Mortgage insurance is often required for conventional loans, especially those with a down payment under 20%.
- Loan fees: Borrowers are required to pay fees, like origination fees, appraisal fees, and more.
- Mortgage rates: Interest rates vary from borrower-to-borrower, lender-to-lender, and day-to-day. That said, since conventional loans don’t favor those with less-than-ideal credit situations, you can generally expect a higher mortgage rate.
Another major difference to keep in mind is eligibility. While virtually anyone can apply for a conventional loan, VA loan eligibility is restricted to veterans, active duty service members, and surviving spouses, while FHA loans are strictly for low-to-moderate income buyers (making them a popular option for younger first-time homebuyers).
Generally speaking, conventional home loans have stricter requirements, including higher credit score minimums, larger down payments, and higher interest rates. This is because conventional loans are not backed by any guarantee or government organization, meaning there is a higher level of risk involved for the lender. So, if you can qualify for a VA or FHA loan, it’ll typically be in your favor to do so.
Make Your Dream of Homeownership a Reality
Whether you’re a military member or an ordinary citizen, an FHA or VA loan could be the ticket you need to purchase your own home without being bogged down by a high interest rate and monthly payment. If you’re unsure of whether you’ll qualify, request a quote online today or speak with one of our knowledgeable loan specialists who can help you through the application process.