What is Better, A VA Loan or FHA Loan?
FHA loans — backed by the U.S. Federal Housing Administration — have served nearly 41 million homeowners since the 1930s. VA loans, which became available a decade later in the 1940s and are backed by the U.S. Department of Veterans Affairs, also have a considerable track record, with around 22 million borrowers. However, you may be wondering, “What is the difference between FHA and VA loans?”
Eligible veterans and service members who qualify for a VA loan would likely take advantage of the benefits offered by this entitlement program. However, there are some instances when an FHA loan may have more favorable terms for borrowers. Let’s take a look at how these loans compare to each other and whether a VA loan or FHA loan one is the right option for your financial situation.
VA Loan and FHA Loan Commonalities
Both loans offer unique features that benefit homeowners depending on their specific financial situation and needs. The following features are the same for borrowers who choose to purchase their home with either loan option:
- Federal Government Backing. As stated earlier, both loans are backed by the federal government, making them a great option for first-time home buyers, low-income borrowers, and those with less-than-stellar credit.
- Primary Home Property Type. As long as the home meets appraisal requirements, both loans can be used to purchase or refinance a primary residence.
- Closing Costs and Fees. Both loans have closing costs or fees associated with them. These expenses can add up and are definitely an aspect of homebuying that borrowers will want to be aware of. VA loans have closing costs in addition to a VA Funding Fee. The bulk of FHA loan closing costs and fees comes from lending fees and third-party fees. These are usually rolled into the total mortgage.
VA Loan and FHA Loan Differences
While FHA loans are open to anyone, VA loans are only available for eligible veteran or active-duty service members (as well as surviving spouses) as determined by the VA. Here are a few other key differences that may sway your decision regarding whether a VA loan or an FHA loan works best for you:
- Downpayment. VA loans don’t usually require a down payment, whereas FHA loans have a minimum down payment requirement of 3.5%.
- Mortgage Insurance. On a VA loan, no mortgage insurance is required. On an FHA loan, borrowers must prepay an upfront mortgage insurance premium (MIP) and pay for a primary mortgage insurance (PMI) each month. This can increase monthly payments by an additional 2–5%.
- Credit Score. VA loans do not have an official minimum credit score requirement, but lenders typically require a score in the mid 600s and above. This is truly where an FHA loan may have the upperhand for borrowers whose credit scores are not up to par at the desired home purchase time. The lowest qualifying score on an FHA loan is 500. This also will also affect the minimum amount on a downpayment to mitigate lending risks. For a credit score of 580, 3.5% is required for a down payment. For a credit score of 500–579, 10% is required for a down payment.
- Debt-to-Income Ratio. A debt-to-income ratio (DTI) is determined by the percentage of gross monthly income you pay toward debt. Lenders typically calculate this by dividing your monthly debt obligations by your pre-tax, or gross, income. On an FHA loan, most lenders look for a ratio of 50% or less, depending on the credit score and other factors. On a VA loan, there is no official DTI minimum; however, lenders will apply more scrutiny if DTI is over 41%.
- Loan Limits. In this case, both loan types have loan limits, but VA loan limits are more generous. In 2020, loan limits on VA loans underwent legal revision, and a maximum amount for eligible service members was eliminated. However, veteran homeowners who still have active VA loans or who have defaulted on a VA loan are subject to the VA loan limits set in place before the revised 2020 revised legislature. FHA loan limits vary by county and are reset each year. Currently, the maximum amount for an FHA loan on a single-family home in a low-cost county is $356,362, while the upper limit in high-cost counties is $822,375.
Clearly, both loan options offer certain advantages and disadvantages, with VA loans coming out slightly on top for eligible borrowers. However, FHA loans also offer competitive terms for potential homeowners, depending on their financial location.
Hero Loan was intentionally created to provide for veterans and service members. As mortgage lenders, our mission is to help borrowers choose the best loan possible to finance their dream home. Our efficiently streamlined process takes the hassle out of applying for a loan from start to finish. We can even get you approved for a loan in less than five minutes, with closing periods in as little as 14 days.
Our team of friendly lending experts are here to make the decision-making process on a home loan as painless as possible. Give us a call at (866) 222-0219 to speak with a loan representative, or reach out to us through our live chat option and we will be happy to address any inquiries.