Marcus Marion, CMA™ Home buyers who are thinking about using the VA loan program often consider FHA loans as
well. After all, both are government-backed mortgage programs with flexible qualification
criteria. So it’s only natural to explore your options and look at both FHA and VA loans.
But which one is right for you? What are the similarities between FHA and VA loans? And what
are their key differences?
The main differences between these two types of loans have to do with down payments,
mortgage insurance, and general eligibility. We will explore all of these differences in detail
throughout the rest of this article.
FHA Loans: A Low Down Payment Mortgage Option
FHA stands for the Federal Housing Administration. This is the federal agency that manages the FHA loan program. They fall under the Department of Housing and Urban Development, or HUD.
This is one type of government-backed mortgage loan. The loan itself comes from a mortgage lender in the private sector, as with other types of home loan options. The difference here is that the federal government insures the lender against losses relating to borrower default.
Because of this insurance, lenders can offer more flexible qualification criteria for borrowers who use FHA loans. We will talk more about those criteria in a moment.
VA Loans: A Program for Military Members and Veterans
A VA loan is a mortgage loan guaranteed by the United States Department of Veterans Affairs (VA). This program is designed to help eligible veterans, service members, and their families purchase a home. VA loans offer a number of benefits, including the ability to purchase a home with no down payment whatsoever.
The Similarities Between Them
We covered some of the similarities between FHA and VA loans already, just by defining these two mortgage programs. Here’s a closer look at those and other similarities:
1. Government backing
FHA and VA loans both receive some form of government insurance or guarantee that protects the mortgage lender. The Federal Housing Administration provides mortgage insurance, while the Department of Veterans Affairs gives lenders a partial guarantee.
This added layer of protection allows lenders to be more flexible when reviewing and qualifying mortgage applicants. And that paves the way for similarity #2…
2. Flexible qualifications
Another similarity is that FHA and VA loans are typically easier to obtain, when compared to conventional mortgage financing.
In this context, a “conventional” loan is one that does not receive any form of government insurance or backing. Because of this, conventional home loans tend to have stricter requirements for credit scores, debt ratios, and other criteria.
3. Home appraisals and property standards
Both FHA and VA loans require a home appraisal to determine the market value of the property being purchased. The appraisal also has a basic inspection component built into it.
FHA and VA loans have specific property requirements that must be met in order for the loan to be approved. These requirements are designed to ensure the health and safety of the home buyer (who will become the new occupant).
Note: We have a separate article that covers the minimum property requirements for VA loans, if you’d like to learn more about them.
The Differences Between These Programs
Despite the similarities listed above, FHA and VA loans also have some key distinctions that set them apart. It’s important to understand these distinctions because they bring certain pros and cons into the picture.
Here are some of the most important differences between FHA and VA loans, from a borrower’s perspective:
1. Down payment requirements
The VA loan program allows borrowers to finance up to 100% of the purchase price, eliminating the need for a down payment. The FHA loan program, on the other hand, requires borrowers to put down at least 3.5% of the purchase price or appraised value.
So you might think of the FHA program as a “low down payment” financing option, while the VA loan is a “no down payment” financing strategy.
Some borrowers who use VA loans make a down payment, in order to reduce the loan amount and pay less interest over time. But that’s an option rather than a requirement. With an FHA loan, all borrowers must invest at least 3.5%.
2. Credit scores
The Department of Veterans Affairs does not require a minimum credit score for VA loans. They leave that up to the mortgage lender, encouraging them to consider the big picture when reviewing applicants.
The FHA program has two specific credit-score requirements you should know about. You have to have a score of at least 500 to qualify for the program, and a score of 580 or higher to get that 3.5% down payment mentioned above.
3. Mortgage insurance
This is another important difference between FHA and VA loans.
The FHA program requires borrowers to pay two kinds of mortgage insurance, an upfront and annual premium. The upfront premium comes to 1.75% of the base loan amount. The annual premium for most borrowers equals 0.55% of the loan amount.
The VA loan program does not require mortgage insurance, but it does require something known as a funding fee. This is a one-time payment that can be paid upfront or financed into the loan.
The funding fee for a VA loan typically costs less than the ongoing mortgage insurance premiums for FHA loans, and it only has to be paid once.
4. Minimum property requirements
This one is both a difference and a similarity between FHA and VA loans. As mentioned above, both of these loan programs require a home appraisal to ensure that it meets the minimum property requirements.
But the specific property requirements are different for FHA and VA loans. The Federal Housing Administration has their own unique set of property requirements, as does the Department of Veterans Affairs.
5. Program eligibility
One of the biggest differences between FHA and VA loans has to do with the types of borrowers who can qualify. VA loans are limited to military members, veterans and certain qualifying spouses. This program is designed to reward military members for their service and to help them achieve homeownership.
The FHA loan program, on the other hand, is open to all borrowers who meet the minimum requirements. That includes both military and non-military individuals.
For most military members, the VA loan is hands-down the best financing option available. There’s really no other type of mortgage loan that offers such a compelling combination of benefits.
Even so, you would be wise to continue your research and explore all of your financing options before making a final decision!
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