VA vs FHA Loans
Government-backed loans are designed to make housing more affordable and attainable to more people. But not all government-backed loans are created equal.
While VA and FHA home loans are both government-backed loans, there are some pretty important differences between the two, and understanding the advantages and disadvantages of each type of home loan is important. If you have the option of qualifying for a VA loan and an FHA loan and are not sure which type of loan is best for you, this article breaks down all of the main important differences.
VA vs FHA Loans At-a-Glance
Before comparing the differences between these two types of loans, let’s get an overview of what these two types of loans look like. A VA loan is a government-backed loan guaranteed by the Department of Veterans Affairs as part of the VA loan benefit.
A guaranteed home loan means that in the event a borrower defaults on their mortgage loan, the VA will reimburse the mortgage lender a percentage of the original mortgage amount. This significantly reduces financial risk for private VA-approved mortgage lenders and allows the VA loan to offer exclusive benefits to qualifying borrowers, like the 0% down payment requirement for qualified borrowers.
The VA loan is designed to be used by qualifying U.S. military veterans, service members, and their surviving spouses and comes with a set of advantages to make homeownership more accessible for U.S. veterans.
The FHA loan is also a government-backed home loan. However, you do not need to be a qualifying U.S. military veteran or servicemember to qualify for an FHA home loan. While VA loans are designed for a very specific market – veterans and servicemembers – FHA loans are available to a much broader market.
FHA loans are backed by the Federal Housing Administration and are designed for individuals who can afford a mortgage but might not otherwise be able to qualify for a home loan due to their credit or a lack of available funds for a large down payment and closing costs.
FHA loans are guaranteed by the Federal Housing Administration. However, FHA loans do require a down payment.
VA vs FHA Loan Requirements
To qualify for a VA loan, you must be a qualifying U.S. military veteran, service member, or their surviving spouse.
Credit requirements for a VA loan can vary from lender to lender, but typically a minimum credit score of 620 to 640 and a debt-to-income ratio of 41% are required to qualify.
It’s important to remember that the mortgage of the home you are purchasing will be factored into your qualifying DTI. It is also important to note that the VA looks at residual income and child care expenses, including paid child support and daycare, which are factored into residual income requirements.
The VA loan does not require mortgage insurance, but it does require a funding fee. The VA funding fee can be paid upfront or rolled into your mortgage. The money you pay toward the VA funding fee goes directly to the VA, not the lender, and is used to fund the VA loan benefit program.
To qualify for an FHA loan, you can have a credit score as low as 500. However, a 10% down payment is required for borrowers with a credit score between 500 and 579. A 3.5% down payment is required for borrowers with a credit score of 580 or higher.
Your debt-to-income ratio must be 43% or lower to qualify for an FHA loan. FHA loans also require a Mortgage Insurance Premium (MIP). This upfront MIP payment is 1.75% of the entire FHA loan amount and is required to be paid at closing.
To apply for a VA or FHA loan, you will need to demonstrate proof of income by submitting your previous month’s pay stubs and your W-2s from the previous two years. You will also need to submit the most recent 30 days’ bank statement to demonstrate you have the funds necessary to cover the down payment and closing costs for your home purchase.
VA vs FHA Loan Limits
There are no VA loan limits for qualifying borrowers with full VA entitlement. This is one of the many benefits of the VA loan. It is important to note that VA loan limits do apply to qualifying borrowers using their remaining entitlement if a portion of that entitlement has already been utilized.
The FHA nationwide forward mortgage limit “floor” and “ceiling” for a one-unit property in 2022 are $420,680 and $970,800. Loan limits will vary depending on what county the home is in and what the cost of living is for that county. There is no instance when FHA loan limits do not apply.
VA and FHA Loan Appraisals and Inspections
The VA loan appraisal is designed to ensure that all homes purchased with a VA loan meet the VA’s Minimum Property Requirements (MPRs). This means the home will need to be safe, sanitary, and secure. A VA appraisal is required for all VA loans. All VA appraisals are conducted by VA-approved appraisers who are contracted by the VA.
The VA appraisal can take anywhere from 7 to 21 days to complete.
The VA does not require a home inspection, but it does require a pest inspection for wood-destroying insects in certain states.
An FHA appraisal is conducted similarly to a VA appraisal in that it is contracted out to an appraiser approved and delegated by the FHA. FHA appraisers ensure your home meets the Department of Housing and Urban Development’s (HUD) guidelines for Minimum Property Standards.
The timeline for an FHA appraisal varies, but it typically takes several business days to complete. The average time an appraisal takes is 10 business days.
VA and FHA loan appraisals are similar in that if the selling price of the home is higher than the appraised value, the mortgage lender can only fund the appraised amount. This can be disappointing news for borrowers who do not have the funds to make up the difference between a low appraisal and the selling price. In many cases, sellers are willing to negotiate down, but this is not always the case.
Ready to Get Pre-Approved?
Are you ready to take the next step to get pre-approved for a home loan? VeteransLoans.com is a VA-approved lender that specializes in VA loans and offers conventional and FHA products as well. Call 1 (888) 232-1428 to speak with a loan specialist today to get started!