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FHA vs VA Loans: Differences, Benefits and Requirements

FHA and VA loans are both popular choices among first-time homebuyers. These government-backed loans offer borrowers a chance to own a home on more flexible terms than other loan types.

While they have much in common, borrowers should understand the differences between FHA and VA loans when determining which loan is best for them.

Differences Between FHA and VA Loans

The clearest distinction between FHA and VA loans lies in the organizations that support them and the borrowers they serve.

FHA loans are backed by the Federal Housing Administration. They cater to homebuyers who may not qualify for conventional loans, offering a lower minimum credit score and down payment options.

VA loans, on the other hand, are guaranteed by the Department of Veterans Affairs and are available to service members, Veterans and some surviving spouses who meet eligibility requirements. These loans require no down payment and generally offer lower interest rates.

FHA Loans vs. VA Loans

Category FHA Loans VA Loans
Eligibility All borrowers, based on credit and debt-to-income ratio Service members, Veterans and surviving spouses
Property Type Primary residences Primary residences
Credit Score Requirements Minimum 500 No minimum requirement, but typically 620
DTI Ratio Up to 50% 41% or less
Loan Limits $498,257 in low-cost areas and $1,149,825 in high-cost None if borrower has full entitlement
Down Payment 3.5% minimum but dependent on credit score None required
Mortgage Insurance Required (upfront and ongoing) None required, but must pay VA Funding Fee
Cash-Out Refinance Up to 85%-95% LTV None required, but must pay VA Funding Fee

Property Type

Both FHA and VA loans are designed for primary residences, ensuring the borrower intends to live in the property. Borrowers cannot purchase rental or vacation properties with either of these loans.

The homes also must meet specific property requirements to ensure they're safe and livable. FHA loans have minimum property standards required by the Federal Housing Administration, and VA loans have minimum property requirements (MPRs) managed by the Department of Veterans Affairs.

Credit Score Requirements

While FHA loans cater to those with lower credit scores, a minimum of 500 is necessary to qualify. A score of 580 or higher allows for a down payment of just 3.5%, but anything less requires a 10% down payment.

Conversely, VA loans don't have an official minimum, but most lenders look for scores around 620. So, it’s probably best to have a score around this benchmark.

Maximum Debt-to-Income Ratio

Your debt-to-income (DTI) ratio plays a crucial role in any loan approval. For FHA loans, the maximum DTI sits around 50%, though this can vary between lenders.

The VA doesn't enforce a specific DTI cap, but applicants with ratios over 41% face closer scrutiny among lenders. Regardless of loan type, a lower DTI may result in more favorable rates.

Loan Limits

FHA loan limits vary by county, ranging from $498,257 in low-cost areas to $1,149,825 in pricier locations.

For those with full entitlement, VA loans have no such cap. However, those with partial entitlement might encounter VA loan limits, often hovering around $766,550. This can vary based on area, so make sure to check out the VA loan limit in your area.

Down Payment

FHA loans require a down payment depending on the credit score. The standard down payment required is 3.5% of the loan amount, but you must have a credit score of at least 580. Anything less usually requires 10% of the loan amount.

VA loans excel here, usually requiring zero-down. However, if a borrower doesn’t have full entitlement, a down payment may be required. Borrowers do have the option to pay a down payment if they have funds saved up to lower the funding fee.

Mortgage Insurance

FHA loans come with the added cost of both an upfront and annual mortgage insurance premiums (MIP). If the borrower defaults, these premiums ensure the lender gets reimbursed. The MIP upfront payment typically equals 1.75% of the total value of your loan and can be added to the balance of the loan. Annual mortgage insurance costs depend on multiple factors including your loan-to-value ratio (LTV), the size of your down payment and the length of your mortgage term.

VA loans don't require mortgage insurance. Instead, they include an upfront VA Funding Fee, which varies based on several factors, including down payment and military service. Typically, the funding fee is 2.15% for first-time VA loan users and 3.3% for subsequent use.

Cash-Out Refinance

FHA and VA loans allow borrowers to refinance for various reasons, and both offer streamlined options for a smoother process. However, they differ when it comes to LTV ratios.

While conventional loans often cap at 80% LTV, FHA loans can reach 85%-95% and VA loans can extend to 100%. Remember, high LTV ratios are riskier and might come with higher interest rates.

FHA vs VA Loans: Which is better?

In conclusion, the choice between FHA and VA loans comes down to individual circumstances. Evaluating personal financial situations and understanding the nuances of each loan type can help borrowers make an informed decision.

If you're eligible, enjoying your VA loan benefits will likely be your best choice. But if that's not the case, an FHA loan is usually cheaper than a conventional loan.