As you prepare to purchase a home, you’ve probably been looking into which mortgage loan options are available to you. VA Home Loans and FHA loans are two of these options, and while they have many similarities, there are a few key differences you should know about before you apply.
Both loan programs are backed by the government and have relaxed credit requirements. They are also available in a variety of fixed-rate and adjustable-rate term options, but that is where the similarities end.
VA Home Loans
VA Home Loans are guaranteed by the U.S. Department of Veterans Affairs (VA) and are only available to veterans, service members, reservists/national guard members and some surviving spouses.
Probably the greatest advantage of a VA Home Loan is that there is no down payment requirement or private mortgage insurance premiums. Removing these barriers makes it easier and more affordable to purchase a home.
However, there is a VA funding fee that ranges from .5 to 3.3 percent, but this fee can be rolled into the amount of the loan. The rate varies based on whether you were in active service or part of the reserves, as well as whether it is your first time using your VA Home Loan benefits.
There are no caps on how much you can borrow to finance your home, however, the VA does set a cap on how much risk they are willing to assume. This may affect the amount of money a lender is willing to extend to you without a downpayment.
FHA loans are guaranteed by the Federal Housing Administration and are available to anybody — there are no income limits or military service requirements.
FHA loans do require a minimum down payment of 3.5 percent. This down payment amount is still less than a conventional loan, but more than the zero down payment benefit VA Home Loans afford.
While there is no funding fee associated with FHA loans, they do require an upfront mortgage insurance premium of 1.75 percent, as well as an annual mortgage insurance premium of 0.85 percent (down from 1.35 percent starting Jan. 26, 2015) of the outstanding loan.
FHA loans do have a cap on how much you can borrow. This cap fluctuates by county, so be sure to check the FHA’s website for the loan limit in the area you’re looking to buy if you decide to explore your FHA loan options in more depth.
Overall, VA Home Loans come out on top of FHA loans. VA Home Loans do not require a down payment, whereas FHA loans require a down payment of 3.5 percent. While the VA’s up-front funding fee is more than the FHA’s initial mortgage insurance premium, FHA loans also have annual premiums, which can increase your monthly mortgage payment higher than that of a VA Home Loan.
For more information about VA Home Loans, read our article on “What Do You Need to Qualify (& Get Approved) for a VA Home Loan?“