The federal government rewards veterans of the U.S. military in several ways. Many programs, from education reimbursement to disability compensation, employment services and life insurance are available to active and former members of the armed forces. Another benefit of military service is home loan assistance in the form of the VA loan. However, many veterans have not used or are unaware of the VA loan benefit provided to them.
If you are a veteran, member of the active military or even the surviving or current spouse of a veteran, you may need more information about the two most popular government-backed loans available to you today: the VA loan and the FHA loan.
Buying a home or refinancing is a big decision, so it’s best to be fully informed. Let’s take a look at FHA vs. VA loans to help you make an informed decision on which mortgage is best for you.
The Difference Between FHA And VA Loans
Although FHA and VA loans are both backed by the government and offer significant benefits to first-time or low-credit home buyers, there are major differences between the two mortgage options. It’s important to understand how both loan options work before deciding which one is right for you.
Federal Housing Administration (FHA) loans are a popular government-insured option among many non-veterans. Easy refinancing, more lenient qualifying credit criteria and low down payment requirements attract many people who may not otherwise qualify for a conventional loan. This program through the U.S. Department of Housing and Urban Development helps interested borrowers buy a home without worrying about the stress of not being able to afford homeownership through a conventional mortgage.
VA loans, offered through the Department of Veterans Affairs, are almost identical to most conventional loans, only they offer many extra benefits. With no down payment requirements, lower qualifying credit scores and loan fees that can be packaged into the mortgage, this type of loan is a great option for qualifying borrowers.
FHA Vs. VA Loan Requirements
Unlike other types of loans, FHA and VA loans each have their own set of requirements needed to qualify. Let’s take a look at what you’ll need to qualify for each type of loan.
One of the most attractive benefits of using an FHA loan is that homeownership can still be possible even with a lower credit score. There are no income limits, but there are limits on how much you can borrow. To obtain this loan, you’ll need to meet the following FHA requirements:
- A credit score of 580 or higher
- A minimum 3.5% down payment
- A debt-to-income ratio of no more than 50%
- Enough money to cover the upfront mortgage insurance premium payment (around 1.75% of your loan)
- Enough to cover your closing costs (around 2% – 6% of the purchase price)
VA Loans are available to active duty military members, retired service members and their surviving spouses. VA loans have eligibility requirements that must be met before a veteran or active military member can be approved for the loan. A certificate of eligibility will be issued to qualified persons and will include an entitlement amount (the portion of the mortgage that the VA will guarantee for each service person). The VA can issue the eligibility certificate or your mortgage lender can obtain a certificate for you.
Here is what you should know about the qualifications needed to obtain a VA loan:
- Although the VA doesn’t require a minimum credit score, you’ll need a score of 580 or higher if you’re obtaining a loan through Rocket Mortgage®.
- The VA does not set limits on your DTI, although some individual lenders may. Rocket Mortgage requires a borrower to have a DTI of less than 45%.
- The VA loan limit on a no-down-payment VA loan is $548,250 in most of the country, although in some areas you may qualify for a higher VA Jumbo Loan.
- There is no down payment required.
- Enough money to pay the VA funding fee (around 2.3% – 3.6% of the loan amount).
Private Mortgage Insurance: FHA Vs. VA Loans
One of the biggest differences between FHA and VA loans is private mortgage insurance (PMI). VA loans don’t require you to pay PMI, however FHA loans require you to pay the government equivalent of PMI, called MIP (mortgage insurance premium). This fee is charged as an upfront or annual fee. If paid upfront, you’ll pay this premium at closing; otherwise, it will be folded into your monthly mortgage payment.
An upfront FHA MIP fee is equal to about 1.74% of your loan amount, and an annual MIP fee is equal to about 0.45% – 1.05% of the loan. This charge ranges depending on the size of your down payment.
Although a VA loan allows you to avoid this extra expense, there is still a funding fee which you will need to pay for when taking out a VA loan. This fee is approximately 2.3% – 3.6% of your loan amount. This fee can be lowered by making a larger down payment. All VA loan borrowers must pay this expense; however, there are some exceptions for certain qualified veterans. For example, those who have military related disabilities and receive compensation for their injuries, recipients of the Purple Heart and eligible surviving spouses may be eligible to avoid the funding fee.
What’s The Better Option?
So how do you decide whether to go with an FHA or VA loan? As a veteran, most of the time you’ll find that a VA loan is the better option for a variety of reasons.
No Down Payment
VA loans, in comparison to FHA loans, do not require any down payment. This can be significant in helping make homeownership a reality or saving extra money for home repairs, furnishings or keeping an emergency savings account.
Lower Interest Rates
Due to the low risk that VA loans have for borrowers and lenders, interest rates tend to be lower in comparison to other types of loans. VA loans can even run slightly lower than FHA loans a majority of the time.
No Mortgage Premium Insurance (MPI)
Not having to pay mortgage premium insurance on a VA loan is a major benefit. The additional fees that FHA borrowers incur through MIP can add up over time. These savings can help VA borrowers save thousands of dollars a year.
The Bottom Line: VA Loans Are The Top Choice For Veterans
If you’re a qualifying member of the military, a VA loan is a great way to take advantage of today’s low mortgage rates. Many people aren’t sure if they want to deal with the perceived hassle of a VA loan. With the right Home Loan Experts, getting a VA Loan can be easy and painless. If you are a veteran with no available VA entitlement, FHA loans can make a lot of sense. Whichever option you choose, Rocket Mortgage is here to help.
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