Homeownership has long been a part of the American dream, and as the National Association of Realtors points out, it offers significant benefits to both individuals and society. Research indicates that owning a home allows individuals to build wealth and status and improves health outcomes. It also tends to spur greater participation in civic activities, increase volunteering, improve the educational performance of children, reduce dependence on welfare, and decrease crime rates. With so many positive effects, it is no wonder that the government works to promote homeownership with government-backed loan products like FHA loans and VA loans. Having trouble deciding between the two? Exploring the difference between FHA and VA loans can help you decide.
The Difference Between FHA and VA Loans
FHA and VA loans have several things in common. As Bright Hub reports, both are government-sponsored enterprise mortgages. While the Federal Housing Administration (FHA) and the U.S. Department of Veterans Affairs (VA) don’t actually make loans, they do provide valuable guarantees to the lenders who make the loans for their respective programs. These guarantees reduce the risk that lenders take when making these loans, allowing them to offer favorable terms and relaxed credit standards for borrowers.
Despite their similarities, these programs also have striking differences, and it’s important to know what they are and how they might impact your financing options. What do you need to know about the difference between FHA and VA loans?
Perhaps the most obvious difference between the two loan programs is who is eligible to use them. VA loans are a benefit earned through service, so eligibility for VA loans is limited to people like service members, veterans, members of the National Guard or Reserves, and their surviving spouses. In contrast, eligibility for FHA loans isn’t restricted to a particular group.
Neither FHA loans nor VA loans require perfect credit, but it’s important to know what lenders are looking for. As Money Crashers explains, the minimum credit score for FHA loans is 500, but borrowers currently need a credit score of 580 or more to keep their down payment requirement at 3.5 percent. How do the credit standards set for VA loans compare? The VA does not require a minimum credit score and instructs lenders to be relaxed when considering credit history.
How do FHA and VA loans compare when it comes to down payment requirements? As Military.com reports, FHA loans require a minimum down payment of 3.5 percent. That’s considered quite low, making these loans popular with homebuyers who don’t have a large down payment set aside. However, VA loans can provide 100 percent financing, so you don’t need a down payment at all with this type of loan.
Mortgage Insurance Premiums
As Money Crashers indicates, mortgage insurance premiums are another factor to weigh. Mortgage insurance protects the lender in the event of a default. With FHA loans, all borrowers are charged a flat fee of 1.75 percent of the loan amount, which can be paid at closing or rolled into the loan. In addition, borrowers who start their mortgage with a loan-to-value ratio of 90 percent or more must pay monthly mortgage insurance premiums for the life of the loan. Borrowers who start their loan with a loan-to-value ratio of less than 90 percent must make monthly mortgage insurance premium payments for 11 years.
What rules do VA loans set out for mortgage insurance? It’s not an issue. VA loans don’t require any mortgage insurance!
According to Nolo, the FHA loan program doesn’t charge a funding fee. The VA loan program does. While some borrowers may qualify for an exemption, if you’re using a VA loan, you should expect to pay a one-time funding fee that is a percentage of the total loan amount.
Concessions and Closing Costs
Sometimes sellers agree to pay certain financing costs for the buyer. Called seller concessions, these payments often go toward closing costs, but they can also be used for other things. As PocketSense reports, the FHA limits these concessions to 6 percent of the sale price, but it does make an exception for a tax service fee. With a VA loan, closing costs are limited, and the seller may pay all of them. In addition, they may chip in up to 4 percent of the sale price toward lowering the buyer’s interest rate or paying off their debt.
Ready to start exploring your options? If you want a lender who offers loans that suit your financial needs, expert advice that allows you to feel confident about your decisions, and a streamlined process that minimizes headaches and delays, turn to PrimeLending of Manhattan, Kansas. Contact us today to get started.