In 2018, approximately 5.34 million people sold their homes. The majority of the buyers obtained mortgages to close on the deals.
Homebuyers turn to mortgage lenders to get their loans, and one decision they must make is what type of loan program to use.
Two of the most common loan types are FHA loans and VA loans. If you need a loan and don’t know the difference of an FHA loan vs. VA loan, it might help you to learn the differences.
Here is a guide to help you understand the differences between these loans to analyze them and choose the best option for your situation.
The Entity that Backs The Loans
One significant difference between an FHA loan and a VA loan is the entity that backs the loan. Some mortgage loan programs do not have an entity backing the loans, but these two types do.
An FHA loan is one that the Federal Housing Administration backs. The FHA created this loan program to help all families become homeowners, especially people who had trouble meeting the strict guidelines for other loan types.
A VA loan is one that the Department of Veterans Affairs backs. The VA created this loan program to help military workers become homeowners.
These entities do not issue loans to borrowers. Instead, they provide funding to the banks if the borrowers default.
When an entity backs a mortgage loan, it reduces the risk on the lender. As a result, it is often easier to qualify for these types of loan programs than other types.
The Eligibility Requirements of an FHA Loan vs. VA Loan
Each of these loans has eligibility requirements that you will see in the next few sections, but VA loans have one primary condition you must meet.
You must qualify for a Certificate of Eligibility (CEO). This certificate proves that you meet the requirements for the VA loan program.
The main requirement is having military experience. Your military experience must meet specific guidelines, though, and a lender can help you determine if you meet these guidelines.
If you have no military experience and are comparing FHA loans vs. VA loans, you will need to stick with an FHA loan, as you would not qualify for a VA loan.
There is no major requirement like this needed to use the FHA loan program.
The Down Payment Requirements
Now let’s delve into the specific details of each loan type beginning with the down payment requirements.
When borrowing money through a VA loan, you can borrow 100% of the home’s purchase price. You can also roll all the fees into the loan. You won’t need any money down to buy a house if you use a VA loan.
When borrowing money through an FHA loan, you will need a down payment, and most lenders require at least 3.5% down. If you buy a house for $200,000, you will need $7,000 for the down payment.
While these are the minimum requirements, you can always put more money down than what the lender requires. You might have access to a lower interest rate or fewer fees by putting more money down on the purchase.
The Funding Fee and Mortgage Insurance Requirements
The next detail to understand is the differences between funding fees and mortgage insurance requirements.
For a VA loan, you must pay a one-time fee. Lenders call this a funding fee, and the fee goes to the VA to help the organization continue providing VA loans to military workers.
The good news with VA loans is that they do not require paying private mortgage insurance (PMI).
On the other hand, FHA loans do not have funding fees, but they have other fees.
The first is a one-time insurance premium that costs 1.75% of the home’s purchase price. The second is an ongoing payment for mortgage insurance that you must pay every month with your mortgage payments.
You can reduce the PMI costs with an FHA loan by putting more money down when making the purchase.
The Credit Score Requirements
Both loan types have credit score conditions you must meet to qualify. The VA and FHA set up the credit score requirements, but lenders can set their own requirements. Many lenders have stricter standards than the VA and FHA.
The VA does not have a minimum credit score requirement for their loans. Instead, they encourage lenders to base their decisions on a person’s entire financial picture. Most lenders, however, require a score of 580 to 660 for VA loans.
FHA loans require a credit score of 500, but many lenders will not issue loans unless a person’s score is at least 580. With an FHA loan, you might qualify for a loan with a low score, but the lender might require more money down.
The Difference in Interest Rates
The interest rates on these loans also vary, but VA loans tend to have lower rates than FHA loans. The interest rates are not significantly different, though.
Lenders often have a baseline they use for determining the interest rate on the loans they issue, but they also factor in other things. You might have some control over your rate.
For example, if you offer a larger down payment, the lender might lower the interest rate. If you pay your closing costs upfront, the lender might also offer a slightly lower rate.
Your credit score plays a role in your rate, too, as your score indicates how creditworthy you are to repay a loan. Lenders view many things when reviewing loan applications and determining the terms of a loan.
How to Choose the Best Option
Now that you see the main differences between an FHA loan vs. VA loan, you might know which option is the best for your situation.
If you believe you qualify for both, you can talk to a lender to determine which is the best choice.
You can also research FHA loans and VA loans to learn more about them. Check out our blog if you would like more information about both options.