Unless you recently won the lottery, received an inheritance, or scrimped and saved every penny for a decade you will likely need to take out a loan to buy your first home. Securing a home loan is attainable for anyone with decent credit, a steady income, and a manageable debt-to-income ratio. But the process of securing a home loan is quite involved and requires some research and decision-making on your part as the buyer.
The first major decision you must make concerning funding for your new home is discovering which home loans you qualify for and deciding which type of home loan you will use. You have several options and all candidates are not equal. For instance, all first-time home buyers who meet specific income requirements have the special option of securing a government-backed FHA loan, but members of the United States Military have an additional loan option through the VA loan program.
Both FHA and VA Home Loans are affordable options but do you know which is the best loan option for you? Here is a breakdown of the similarities and differences between a VA Loan vs FHA Loan to help you make your choice.
Not everyone qualifies for an FHA Loan or a VA Loan. The Federal Housing Administration (FHA) loan program is designed for those who may not have a 20 percent down payment saved. This government-insured program loans mortgages to home buyers who have a minimum 500 credit score, lower than 43% DTI ratio, steady provable income, and who are looking to buy a primary residence. FHA loans are popular with first-time home buyers but it is not a requirement.
Home loans through the Department of Veterans Affairs are reserved for persons who have served in the United States Military and their surviving spouses. Service members must meet a minimum active-duty service requirement, which is dependent upon when they served, or must have an eligible discharge. Service is provable with a Certificate of Eligibility obtained online through VA.gov, by mail, or requested through your lender.
The down payment requirement for an FHA loan is mainly determined by your credit score. For borrowers with a credit score of 580 or higher, you may only be required to present a down payment of 3.5% of the home purchase. Though if you have a lower credit score between 500-579, you may still qualify for an FHA loan with a down payment of at least 10%.
The most significant perk of using a VA Loan is that there is no required down payment. As long as your home loan amount is not higher than the home’s appraised value, you should not be required to submit a down payment when using a VA-backed purchase loan.
To qualify for an FHA loan, you must have a minimum credit score of 500 with a 10% down payment or 580 with a 3.5% down payment and these limits are not flexible. These scores are typically a lower requirement than what is required for a VA loan.
The VA loan program itself does not have a set credit score requirement, though qualified lenders will set their own policies. Typically, most lenders require that a home buyer seeking a VA Loan must have a minimum score of 620, though this number may be flexible to some small degree, especially in cases that involve bankruptcy or foreclosures.
Loan limits apply to both FHA and VA Loans depending on circumstances. The FHA loan limit is typically $472,030 in low to mid-cost counties. Though, this limit can be increased in high-cost counties, up to $1,089,300 in certain areas. Limits are based on location and are determined by median house prices in a specified area. These limits are adjusted annually before the beginning of each new year.
VA loans do not typically have a set limit if a borrower does not have other active VA loans or previous defaults. Limits are set based on income, credit scores, and other debts. In most cases, you may be eligible to borrow more than your approved limit if you opt to pay a down payment.
Insurance and Fees
Mortgage insurance is typically required by lenders for borrowers who put down less than 20% as a down payment. This insurance lowers the risk of the lender if a borrower defaults on their loan. FHA loans have strict mortgage insurance requirements. Mortgage insurance involves an upfront premium and an annual premium while paying on the loan. The upfront premium amounts to 1.75% of the home loan. This amount does not necessarily have to be paid upfront though, it can typically be rolled into the loan and paid in installments with the mortgage. The annual premium is typically somewhere between 0.15% and 0.75% of the loan amount and is divided by 12 months and paid with your monthly mortgage payments.
VA loans are not subject to mortgage insurance premiums as other home loans are. But VA loans do have a required VA funding fee that operates similarly to the upfront premium of an FHA and other loans. This funding fee is a one-time fee that ranges from 1.25% to 3.3% of the home loan. This is paid to the VA home loan program with the purpose of assisting the VA loan program to keep funding other service member loans. This fee can be paid in one lump sum upfront or can be rolled into mortgage payments.
Your debt-to-income ratio is used to determine many factors of your home loan including your eligibility for certain programs, your mortgage insurance rates, your loan limits, and your credit score minimums. Your DTI ratio gives insight into your ability to pay back the money you borrow for your home purchase. FHA loans typically require a DTI ratio of less than 50% though this can be varied based on other factors such as your credit score and debt type.
VA loans do not have a set DTI ratio requirement. But applicants whose DTI ratio is higher than 41% must undergo a closer scrutinized review to determine that they will indeed be able to pay the required loan payments.
Deciding Between VA Loan vs. FHA Loan
Are you ready to buy a home but unsure which loan is best for you and your situation? If you are eligible for a VA Loan, many would advise that it is your best option but this is not always the case 100% of the time.
Our team at Desert Heroes understands the unique circumstances of military families and has worked together to find homes and connect with financing for hundreds of military families. If you need assistance deciding between a VA Loan and an FHA loan for your mortgage, we can help you.
Call our team today to begin a conversation about finding a home and the best home loan for you.