Both FHA and VA loans are popular choices for homebuyers, but which one is right for you? It all comes down to your unique financial circumstances. Each mortgage type has benefits and features unique to the program, so let's take a look at some of the biggest differences between the two.
|Credit Score Requirements||620 or higher, but depends on lender||580 or higher, but depends on lender|
|Funding Fee||Yes, 2.3% to 3.6% of total loan value||No|
|Mortgage Insurance Premium||No||Yes, upfront and yearly fee|
|Interest Rates||Typically more favorable||Typically less favorable|
*VA loan limits are no longer enforced for Veterans with their full VA loan entitlement.
With VA financing there’s no down payment requirement, meaning you don’t have to put any money down. The FHA program requires borrowers to put down at least 3.5 percent.
For a $200,000 mortgage the difference is plain: Zero down at closing versus $7,000. In both cases closing costs are additional.
Both VA loans and FHA loans have loan limits. However, in 2020 VA loan limits were removed for Veterans with their full entitlement. For Veterans with partial entitlement you may be subject to VA loan limits, which is often $670,200 but may be higher and varies on the county you live in.
FHA loan limits are slightly more constricting, with a common maximum borrowing amount of $420,680.
The government doesn’t make VA or FHA loans, they just back them. The actual money for the loans comes from a lender. These government agencies simply provide different forms of insurance for loans that meet their standards.
For purposes of comparison, let's say you put down zero dollars, have not used your entitlement before. Your funding fee would be equal to 2.30 percent of the loan amount. On a $200,000 loan, that comes out to $4,600.
The funding fee with the VA is a one-time deal. You can pay it upfront, but most borrowers ask the seller to cover the cost or choose to roll the fee into the mortgage to lower their cost at closing.
FHA loans come with two mortgage insurance charges – an upfront insurance premium similar to the VA Funding Fee and a yearly mortgage insurance premium based on the remaining loan balance.
The upfront charge on FHA loans is a one-time expense that’s added to your loan balance. But FHA borrowers pay the annual mortgage insurance charge for the life of their loans.
If you look at the numbers you can see that the VA requires a lower down payment -- nothing versus 3.5 percent. The upfront funding fee for VA loans is typically higher than the upfront mortgage insurance premium for FHA loans -- but unlike the FHA the VA has no annual premium, a substantial savings.
Both the VA and the FHA programs represent excellent forms of financing, but VA mortgages are simply a better financial deal for most qualified borrowers.
To learn more about the differences between FHA and VA loans and the overall VA home loan process check out this helpful guide.
A VA loan is a mortgage option issued by private lenders and partially backed, or guaranteed, by the Department of Veterans Affairs. Here we look at how VA loans work and what most borrowers don’t know about the program.
VA loans allow Veterans to have a co-borrower on the loan. Here we break down co-borrower requirements and provide common scenarios around co-borrowing and joint VA loans.