Home buyers who are interested in purchasing a home but don’t have the necessary funds for a down payment may be able to finance their home through either a Federal Housing Administration (FHA) loan or a Veterans Affairs (VA) loan.
Mortgage lenders can offer these types of loans because the federal government backs them. But what exactly are these loans, and how do they differ from each other?
Potential home buyers should be aware of a few key differences between FHA and VA loans. Let’s see which mortgage is right for you depending on your situation.
What Is a VA Loan?
A VA loan is a home loan that is guaranteed by the U.S. Department of Veterans Affairs (VA). Eligible veterans, active-duty service members, reservists, and surviving spouses may apply for the loan. Under the VA loan program, qualified borrowers can purchase a home with no down payment and without the need for private mortgage insurance.
You should have good credit, enough income, and a valid Certificate of Eligibility (COE) to be eligible for a VA loan. The COE proves that you are eligible for a VA-backed loan from the lender.
What Is an FHA Loan?
An FHA loan is a home loan that is insured by the Federal Housing Administration (FHA). It is designed for low- to moderate-income borrowers who may have less than perfect credit. Everybody can apply for an FHA loan, but it is typically geared towards first-time home buyers or borrowers with challenged credit.
FHA loans need a minimum down payment of 3.5% and both an up-front mortgage insurance premium and monthly mortgage insurance payments. Borrowers should have a minimal credit score of 580 to qualify.
Key Differences Between FHA And VA Loans
FHA and VA loans are both government-backed loans. It doesn’t mean that the government does the lending; banks and mortgage lenders lend the money. The government only provides protection to lenders in case of a borrower default.
It is a great choice to conventional loans for eligible veterans, as there is no down payment required and the credit score requirements are more flexible.
Applicant Eligibility
The first key difference between FHA and VA loans is the fact that VA loans are only available to eligible veterans, active-duty service members, reservists, and surviving spouses. On the other hand, FHA loans are available to anyone who qualifies.
Being eligible for a VA loan requires you to either be currently serving in the military, have served before, or be an eligible spouse of a service member who died in duty.
Mortgage Insurance
FHA loans require both an up-front mortgage insurance premium (UFMIP) and monthly mortgage insurance payments. The monthly payments are often added to the borrower’s mortgage payment, and the UFMIP is typically financed into the loan.
Upfront MIP equals 1.75% of your loan size and is added to your mortgage balance at closing. Annual MIP is equal to 0.45% to 1.05% of your loan size and is added to your monthly mortgage payment.
A one-time funding fee is often rolled into the loan with a VA loan, but there is no monthly mortgage insurance premium. The size of the funding fee depends on a variety of factors, including whether you are a first-time borrower, the type of service you have rendered, and whether you make a down payment.
Down Payment Requirements
A downpayment is the biggest hurdle for home buyers, especially first-time buyers. Both FHA and VA loans make homeownership more accessible to borrowers by offering low down payment options.
You can put as little as 3.5% down with an FHA loan. And if you’re a first-time homebuyer, you may be able to put down even less with a special FHA program. Know about the detailed FHA loan requirements for 2022.
You can pay out as little as 0% down with a VA loan. If you’re a qualified Veteran, you may be eligible for 100% financing, which means you wouldn’t need to make a down payment.
Fees And Closing Costs
In Missouri mortgage loans, both FHA and VA loans allow the seller to contribute towards your closing costs, which can help you save money on out-of-pocket expenses. FHA loans also have lower average closing costs than conventional loans.
VA loans don’t need mortgage insurance, but they do have a one-time funding fee that can be rolled into the loan. The fee will be 2.3% of the purchase price on an adjustable-rate VA loan and 3.6% on a fixed-rate loan for first-time buyers.
You can lower the funding fee by making a down payment of at least 10% and will pay a funding fee of only 1.4% if you’re a repeat buyer with a service-related disability.
Credit Score Requirements
For an FHA loan, you need a credit score of 580 or higher to qualify. Borrowers willing to make a 10% down payment need to find mortgage companies in Missouri that can qualify them with a credit score of only 500.
For VA loans, the minimum credit score is not set in stone, but most lenders require a score of at least 620. However, lender credit score requirements may vary, and some lenders are willing to work with borrowers with lower credit scores.
Interest Rates
Interest rates for both FHA and VA loans are generally lower than those of conventional loans. That’s because the government backs these loans, and lenders are willing to offer lower rates because they know the loans have a lower risk of default.
FHA loans usually have slightly higher interest rates than VA loans, but the difference is minimal.
Streamline Refinance Options
It allows borrowers to quickly and easily refinance their FHA loan to a lower interest rate or change their loan term. The streamlined process eliminates the need for a new appraisal. With FHA mortgages, FHA streamlines refinance, the most popular type of FHA loan.
There is an IRRRL program for VA loans, also known as a VA streamline refinance. This program makes it easy for Veterans who already have a VA loan to refinance to a lower interest rate. The procedure is easy and can be done without appraisal or credit check.
Bottom Line
Whatever you choose, FHA or VA, both have pros and cons. The credit history, employment history, and other factors are considered to help you decide the best option for your needs. Before you present your loan application, make sure to compare offers from multiple mortgage lenders so you can get the best deal possible. They will help you determine and find the right loan for you.
