FHA Vs. VA Loan
This article will help you to distinguish between FHA Vs VA. loan. Its eligibility criteria, and which one is better.
FHA and VA Loan Definitions
FHA loan – An FHA loan is a US Federal Housing Administration mortgage insurance backed by mortgage loan, which is a part of the U.S. Department of Housing and Urban Development and is provided by an FHA approved lender. FHA mortgage insurance protects lenders against losses. This means that if you default on an FHA loan, the FHA will pay your remaining balance to your lender.
FHA loans are intended to help people and purchase a home that they would not otherwise be able to afford. They allow small down payments and are open to borrowers with lower credit scores.
FHA loan are available with low down payment and more lenient credit requirements can make FHA loans particularly attractive for first time home buyers, although you don’t need to be a first-time home buyer in order to qualify. Here are some benefits of FHA loans:
- Credit score requirements are lower compared to other loans.
- Your lender can accept a lower down payment
- You could still qualify for an FHA loan if you have a bankruptcy or other financial issues in your history.
- FHA closing costs often be rolled into your loan.
VA loan – VA loan is a mortgage loan in the United States backed by the United States Department of Veteran Affairs. This loan is beneficial for those who have served our country. If you are eligible for VA home loan you can buy and build your own home. VA loans are an excellent option for home buyers which offers competitive interest rates and requires no down payment. With VA loans, veteran, service members, and their surviving spouse can purchase their own homes.
VA loan Vs. FHA loan
|VA Loan||FHA Loan|
|VA loan does not require mortgage insurance||FHA loan requires mortgage insurance Premium (MIP)|
|VA loan requires 0 down payment||FHA requires 3.5% down payment to get an FHA mortgage|
|VA loans are not available to the general public. Those who are active-duty service members, Veterans, National Guards, Reserve members and some surviving spouses are only eligible for VA loan.||Whereas FHA loan are available to the general public. There are no service requirements associated with an FHA loan.|
|There are no loan limits in VA loan||There are loan limits in FHA loan|
|VA insurance rates are typically more favourable||FHA loan limits are typically less favourable|
|A VA mortgage can be used to buy a home with up to four units if you are buying on your own or up to seven units with a joint borrower. Like FHA loan, at least one unit must be owner occupied||An FHA loan can be used to buy a property with up to four units, but at least one unit must be owner-occupied. This means the borrower must use at least one unit of the home as your primary residence|
Applicant Eligibility of FHA Vs VA Loan
Unlike FHA loan, VA loans are not available to the general public. Those who are active duty servicemembers, National Guard and Reserve members, veterans and surviving spouses are eligible for VA loan.
Keep in mind, however, that in addition to being eligible for a VA loan from a service standpoint, you will also need to meet your lender’s credit and financial requirements and provide them with a statement of service for VA loan applicants.
On the other hand, FHA loan eligibility criteria requires the following conditions:
- Credit score of at least 500
- Debt to income ratio of 50% or less
- 3.5% of down payment if your credit score is 580 or higher
- 10% down payment if your credit score is 500-579
- The house must be your primary residence and meet FHA’s property requirements
- Can provide proof of employment and steady income
FHA Loan Requirements
There are certain requirements borrowers must meet to qualify for an FHA loan, they are:
- The home you consider must be appraised by an FHA approved appraiser.
- You can only get a new FHA loan, if the home you consider will be your primary residence, which means that it can’t be an investment property or second home.
- You must occupy the property within 60 days of closing.
- An inspection must occur, and the inspection must report whether the property meets minimum property standards.
There are few more specific conditions to qualify for a FHA loan, including a down payment amount, mortgage insurance, credit score, loan limits and income requirements.
Mortgage Insurance of FHA Vs. VA Loan
One big difference between VA and FHA loan is that VA does not requires mortgage insurance whereas FHA requires mortgage insurance. FHA mortgage insurance is referred to as Mortgage Insurance Premium (MIP). You will have to pay a mortgage insurance premium (MIP) for all FHA loans. Mortgage insurance is put into place to protect the FHA against losses if you default on your loan. MIP is required to all FHA borrowers and comes in two forms: upfront and annual.
Upfront MIP is equal to 1.75% of your loan amount and can either be paid at closing or rolled into the cost of the loan. Annual MIP is equal to between 0.45 – 1.05% of the loan amount, depending on the loan term, amount borrowed and the size of your down payment. This annual premium will be split up and included as part of your mortgage payment each month.
Fees and Closing Costs
While VA loans don’t require any mortgage insurance, they do have to pay a funding fee. This fee helps to pay for the loan program. All VA loan borrowers must pay the funding fee, except for those who qualify for an exemption, this includes those who are receiving compensation for a service-connected disability, purple heart recipients and eligible surviving spouses.
For a borrower who is using a VA loan for the first time and makes no down payment, the funding fee will cost 2.3% of the loan amount. After that, you will pay 3.6% for each subsequent use of a VA loan. However, you can lower the amount you will pay if you make a large down payment. For example, borrowers who put down at least 10% will only pay a funding fee of 1.4%.
The funding fee can either be paid upfront as a closing cost or rolled into the loan.
Down Payment Requirements as well as Loan limits of FHA Vs VA loan
FHA loans comes with a minimum down payment of 3.5%. On a $200,000 home, this is equal to $7,000. However, if you have a credit score below 580, you will need to put at least 10% down payment of $20,000 on a $200,000 home.
On the other hand, VA loan don’t require any down payment at all. This is considered by many to be the biggest benefit of a VA loan. After all, saving thousands of dollars for a down payment is often the biggest hurdle that would be homeowner’s encounter.
VA loan does not have any loan limits, whereas there is a maximum limit to what you can borrow for an FHA loan, and how much you can borrow depends on the country in which your potential home is located.
Credit Score Requirements
There are lot of factors that determines your credit score, including:
- The type of credit you have
- Credit utilization, which is simply how much credit you use
- Whether you pay your bills on time
- The amount you owe on your credit cards
- How much new and recent credit you have taken on etc.
For an FHA loan, you will typically need a credit score of at least 580 to qualify. However, for borrowers who are willing to put down 10% or more, you may be able to find lender that accepts applicants with scores below 580.
The VA does not set a minimum credit score for VA loans, but many lenders have their own limits on which scores they will allow.
Debt to Income Ratio
If you have a higher credit score, you might be able to qualify with a higher debt-to-income ratio, or DTI. DTI refers to the percentage of your monthly gross income that goes towards paying debt. Your DTI is the total monthly debt payments divided by your monthly gross income.
To determine your own DTI ratio, divide your debts such as students’ loan, car loan, home loan, etc. by your monthly gross income. If your debts reach $2,000 per month and your income is $8,000 per month, your DTI is 25%.
The lower your DTI will be the better off you will be. If you have a higher DTI, you could still qualify for an FHA loan, if you have a higher credit score. The FHA loan states that your monthly mortgage payment should be no more than 31% of your monthly gross income, and that your DTI should not exceed 43% of monthly gross income in certain circumstances. If you have a higher credit score, you will be able to qualify with a higher DTI.
Both FHA and VA loans tend to have better rates, with VA loans often having a slight edge over FHA loans in terms of the most attractive rates. FHA interest rates can be competitive compared to conventional mortgages. This is because the government backing allows lenders to offer you a lower rate. The rate depends on several factors, including the prevailing interest rates, your income, credit score, the amount you plan to borrow, your down payment amount, DTI ration and more.
FHA Vs. VA Refinance
Government backed loans offer something known as a streamline refinance, which allows borrowers to quickly and easily refinance from one government backed loan into another of the same type. So, you can streamline refinance from an existing FHA loan into a new FHA loan, or from an existing VA loan into a new VA loan.
|FHA streamline refinance is good for current FHA loans||VA streamline refinance is good for current VA loans|
|FHA lets you refinance fast into a lower rate with mortgage insurance||VA lets you refinance fast into a lower rate with no mortgage insurance required|
|With FHA mortgages, this is referred to as an FHA Streamline Refinance||With VA loans, it is called an Interest Rate Reduction Refinance Loan (IRRRL)|
FHA Or VA Loan: Deciding Which Loan Is Right for You
Both FHA and VA loans are a great option, but a VA loan can often be the better choice between FHA and VA loan, this is because VA loans allows the borrowers to own their home with zero down payment and without any mortgage insurance.
However, an FHA loan can also be a great option especially for borrowers with poor credit or low incomes. It always up to you what makes the most sense for you.
1. What do you mean by FHA Loan?
Ans: An FHA loan is a US Federal Housing Administration mortgage insurance backed by mortgage loan, which is a part of the U.S. Department of Housing and Urban Development and is provided by an FHA approved lender.
2. What do you mean by VA Loan?
Ans: VA loan is a mortgage loan in the United States backed by the United States Department of Veteran Affairs. This loan is beneficial for those who have served our country. If you are eligible for VA home loan you can buy and build your own home.
3. Are FHA Loans Assumable?
Ans: No, only government backed loan options allow assumable mortgages. Buyers will still need to meet all of the lender and FHA’s requirement before assumption is permitted.
4. Are VA Loans Assumable?
Ans: Yes, VA loans are assumable.
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