FHA vs VA Loan | Pros and Cons for First-Time Home Buyers

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FHA or VA Loan: What’s Better?

At the start of your home buying journey, you will find a number of home loan options. Each loan program comes with its own set of advantages and disadvantages.

For first-time home buyers, FHA and VA loans are among the most popular.

But which one is the best? It depends.

Understanding how these two programs work is key to deciding which loan is best for you.

Fortunately, choosing the best program isn’t as daunting as you might think.

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What is the difference between a VA and FHA loan?

The Federal Housing Administration (FHA) and the US Department of Veterans Affairs (VA) are two US government organizations that provide home loans.

Both programs work the same: government agencies (VA and FHA) support home loans while the loans themselves are issued by private lenders. This means that FHA and VA loans are widely available to home buyers and current owners. But they are aimed at different groups of borrowers:

  • FHA Mortgages are government-insured home loans intended to help borrowers obtain financing with lower credit scores and relatively little money. Anyone can apply for an FHA loan
  • VA mortgages are government-insured mortgages for serving members of the military, veterans and their spouses. Only people with an eligible service history can apply for a VA loan

FHA and VA loans can offer significant benefits to first-time home buyers.

Both programs have more flexible requirements for mortgage borrowers compared to conventional loans. For example, the FHA and VA allow lower credit scores and higher debt-to-income ratios than many non-government mortgage programs.

But there are also notable differences between these two federally supported programs.

One difference between a VA loan and an FHA loan is the amount of the down payment. Unlike conventional and FHA loans, VA loans do not require any down payment. They also do not require mortgage insurance.

With no down payment or mortgage insurance, it’s no surprise that VA loans are in high demand. And if you have a history of service, a VA loan will probably be your best bet.

If you are not eligible for the VA, the FHA is a great alternative. But that’s not your only option. We will discuss some alternative loan programs below.

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FHA vs VA Loan Comparison Table

FHA loan VA loan
Minimum credit scores 580 with 3.5% decrease, 500 with 10% decrease 620 *
Minimum deposit 3.5% Nothing
Maximum debt-to-income ratio 45% * 41% *
Typical closing costs 2-4% of the loan amount 2-5% of the loan amount
Maximum loan amount $ No maximum *
Upfront mortgage insurance / financing costs 1.75% of the loan amount 2.3% of the loan amount **
Annual mortgage insurance 0.85% of the loan amount Nothing
Eligible properties 1-4 owner-occupied dwellings 1-4 owner-occupied dwellings
Ideal for Homeowners with less than perfect credit or smaller down payments Members of the military, veterans and their spouses

* May vary from mortgage lender to mortgage lender. The values ​​shown in the table are commonly used for loan approval.

** For the first time home buyer with 0% down payment. VA financing fees vary depending on the borrower and the purpose of the loan

Should you choose a VA loan or an FHA loan?

Whether you are an active military, a veteran, or a veteran’s spouse, choosing a VA loan over an FHA loan is usually an easy decision.

As a veteran, most of the time you will find that VA loans are the best option for a variety of reasons.

The fact that you can buy a home with no down payment and no mortgage insurance makes VA loans hard to beat.

If your credit isn’t perfect, the good news is that VA loans don’t have minimum score requirements. Although it is important to note that even though the VA does not have a minimum credit score requirement, most lenders set their own credit score references.

Many lenders want to see a score of 620 or higher.

VA loans do not have a maximum debt ratio. And, while you can get approval with a 60% ratio, 41% or less is usually better.

Check your VA loan eligibility. Start here (December 21, 2021)

What about conventional loans?

Often referred to as conforming loans, conventional loans are the most common type of mortgage loan for US homeowners.

For those who qualify, conventional mortgages are popular because they generally pose fewer barriers than FHA or VA mortgages.

In addition, conventional mortgage rates are often very low for borrowers with a good credit rating. And if you can put 20% down, you’ll never pay for private mortgage insurance (PMI). The FHA, on the other hand, requires mortgage insurance regardless of how much you put in.

But, while conventional loans are great, not all future homeowners qualify for a conventional mortgage.

Conventional loans are generally better suited to mortgage borrowers with a higher credit rating. FHA and VA loans may be better suited for people with lower scores, as well as lower down payments.

If you feel that you cannot qualify for a conventional loan, it may be worth considering government-backed options, such as a VA loan or an FHA loan.

One final option: USDA loans

Another type of no-down mortgage is the United States Department of Agriculture (USDA) mortgage.

Designed to assist low and modest income families residing in eligible rural areas, these loans are issued by private lenders and supported in part by the USDA.

This government support allows lenders to offer more favorable terms than the homeowner might otherwise be able to claim.

Funds from USDA loans can be used for a variety of purposes, including:

  • Buying a new or existing home
  • Closing costs associated with the purchase
  • Connection charges for utilities
  • Housing repairs and rehabilitation
  • site preparation
  • The purchase of essential household equipment
  • The purchase and installation of energy efficient improvements

In addition to the fact that no down payment is required, the credit requirements for USDA loans are more flexible.

Closing costs can be built into USDA loans or paid out of pocket by the buyer or seller. USDA loans are also assumable.

Some possible drawbacks of USDA loans, however, include:

  • Geographical restrictions – Only properties located in areas considered “rural” by the USDA can be purchased
  • Income Limits – Maximum incomes are set at 115 percent of the median income for the county or region
  • Mortgage insurance Mortgage borrowers using a USDA loan will pay an upfront fee and monthly fee for mortgage insurance

FHA Loans vs. VA: the essential

There are several great mortgage programs available to help people move into a new home, even if their credit isn’t perfect or they don’t have a large down payment.

If you are planning to buy a home soon, but are not sure if you can qualify for a conventional mortgage, you may want to consider a VA loan or an FHA loan.

The VA and FHA loan programs offer exceptional financing options for veterans and non-veterans alike.

For skilled veterans and their spouses, VA loans will almost always be the best.

FHA loans are also a great option and are not limited to a certain type of person or group. If you are a veteran with no VA law available, FHA loans can make a lot of sense.

Before deciding which loan is the best, take a close look at your financial situation. Review your situation and needs with a lender, and do your research to find out if an FHA loan or VA loan is best suited for you and your goals.

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The information on The Mortgage Reports website is provided for informational purposes only and does not constitute an advertisement for any products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, its parent company or its affiliates.

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