FHA vS. VA Loans

FHA AND VA LOAN DEFINITIONS

FHA loans are backed by the Federal Housing Administration, which is a part of the U.S. Department of Housing and Urban Development. This means that if you default on an FHA loan, the FHA will pay your remaining balance to your lender.

FHA loans are intended to help people who otherwise might not be able to afford homeownership get into homes. They allow small down payments and are open to borrowers with lower credit scores.

VA loans are backed by the U.S. Department of Veterans Affairs. These loans are a benefit available to those who have served our country.

If you’re eligible, VA loans are an excellent option for home buyers, offering competitive interest rates and requiring no down payment.

APPLICANT ELIGIBILITY

Unlike FHA loans, VA loans aren’t available to the general public. Those who are potentially eligible for the different types of VA loans include active duty servicemembers, National Guard and Reserve members, veterans and some surviving spouses.

You can learn more about VA loan eligibility and minimum service requirements at VA.gov.

Keep in mind, however, that in addition to being eligible for a VA loan from a service standpoint, you’ll also need to meet your lender’s credit and financial requirements and provide them with a statement of service for VA loan applications.

MORTGAGE INSURANCE

One big difference between FHA loans and VA loans is that VA loans don’t require mortgage insurance, while FHA loans do. FHA mortgage insurance is referred to as a mortgage insurance premium (MIP). MIP is required for all FHA borrowers and comes in two forms: upfront and annual.

Upfront MIP is equal to 1.75% of your loan amount and can either be paid at closing or rolled into the cost of the loan.

Annual MIP is equal to between 0.45 – 1.05% of the loan amount, depending on the loan term, amount borrowed and the size of your down payment. This annual premium will be split up and included as part of your mortgage payment each month.

Unlike with mortgage insurance on conventional loans, canceling MIP can be tricky. If you currently have an FHA loan that you received before June 3, 2013, you may be able to have your MIP canceled once you reach 22% equity in your home.

If your loan originated after this date, MIP can only be removed after 11 years if you put 10% down on the home. Otherwise, you’ll pay MIP for the life of the loan. Some FHA borrowers avoid this by refinancing to a conventional loan once they reach 20% equity.

FEES AND CLOSING COSTS

While VA loans don’t require mortgage insurance, they do have what’s called a VA funding fee. This fee helps to pay for the VA loan program. All VA loan borrowers must pay the funding fee, except for those who qualify for an exemption – this includes those who are receiving compensation for a service-connected disability, Purple Heart recipients and eligible surviving spouses.

For a borrower who is using a VA loan for the first time and makes no down payment, the funding fee will be 2.3% of the loan amount. After that, you’ll pay 3.6% for each subsequent use of a VA loan. However, you can lower the amount you’ll pay if you make a larger down payment. For example, borrowers who put down at least 10% will only pay a funding fee of 1.4%.

The funding fee can either be paid upfront as a closing cost or rolled into the loan.

DOWN PAYMENT REQUIREMENTS

Both FHA loans and VA loans can make homeownership more achievable for those who are struggling to save for a down payment, but if you’re eligible for both, the VA loan is the clear winner in this category.

FHA loans come with a minimum down payment of 3.5%. On a $200,000 home, this is equal to $7,000. However, if you have a credit score below 580, you’ll need to put at least 10% down – $20,000 on a $200,000 home.

By contrast, VA loans don’t require any down payment at all. This is considered by many to be the biggest benefit of a VA loan. After all, saving thousands of dollars for a down payment is often the biggest hurdle that would-be homeowners encounter.

CREDIT SCORE REQUIREMENTS

For an FHA loan, you’ll typically need a credit score of at least 580 to qualify. However, for borrowers who are willing to put down 10% or more, you may be able to find a lender that accepts applicants with scores below 580. Rocket Mortgage® requires FHA borrowers to have a score of at least 580.

The VA doesn’t set a minimum credit score for VA loans, but many lenders have their own limits on which scores they’ll allow. At Rocket Mortgage, you’ll need a score of at least 580 to be eligible for a VA loan.

INTEREST RATES

Compared to conventional loans, both FHA and VA loans tend to have slightly better rates, with VA loans often having a slight edge over FHA loans in terms of the most attractive rates.

However, your rate will also depend on your own financial situation. Working to improve your credit score or saving for a larger down payment can help you snag a better rate.

Government-backed loans offer something known as a streamline refinance, which allows borrowers to quickly and easily refinance from one government-backed loan into another of the same type. So, you can streamline refinance from an existing FHA loan into a new FHA loan, or from an existing VA loan into a new VA loan.

With FHA mortgages, this is referred to as an FHA Streamline Refinance. With VA loans, it’s called an Interest Rate Reduction Refinance Loan (IRRRL). These loans can be used by FHA and VA loan borrowers to reduce their interest rates or change their loan terms to lower their monthly payment.

They’re referred to as “streamline” refinances because they have fewer documentation requirements than regular refinances and typically don’t require a home appraisal.