When looking to purchase a home, many people are confronted with the decision of getting a VA or FHA home loan. There is plenty of hearsay about the reasons to choose one loan over the other but in truth; each loan has qualities that could make it the right choice for you. To help you decide between and learn all about the differences of these two loans, we’ve created this comprehensive blog post. In this post you will learn what the requirements for each loan are, how each loan is beneficial and the negative aspects of each loan. In the end, our hope is that you will be able to tell us which loan will work best for you.
What Are VA Loans?
A VA loan is a home loan that is assured by the U.S. Department of Veterans Affairs (the VA) and provided to veterans of the United States military. These types of loans were created to assist veterans in finding and affording homes for themselves and their families. In most cases, the properties purchased with a VA loan were purchased with no down payment and were used to replace private financing.
What Are The Requirements For a VA Loan?
A VA loan has typically only one requirement, for a veteran to be eligible. Of course the loan applicant must be a military veteran and have VA benefit eligibility. Once that has been established, it is important to know just what the benefits or negative aspects of a VA loan are.
The Benefits of a VA Loan
VA loans do not require a down payment on a home that is within conforming loan limits. The current limit on a VA loan is $417,000 for the mainland areas of the United States. Hawaii is the exception to this limit but no matter the price of a home under the $417,000 cap, with a VA loan, no money is required to be put down to get the home loan. This is possible because a veteran with benefits has their home loan assured by the U.S. Department of Veterans Affairs.
Because VA loans are for veterans, there are more relaxed standards for loan qualifiers and better flexibility of closing costs. There are no monthly private mortgage insurance premiums with a VA loan but these loans do require owner occupancy and the funding fee can be between .5 and 3.3 percent with some borrowers being exempt.
What Are FHA Loans?
FHA stands for the Federal Housing Administration and a loan taken through the Federal Housing Administration is insured against a default. This means that banks and other lenders will not have to take a loss on a loan should the borrower default. Instead of writing off that loan as a loss, the FHA will pay the lender and protect them on a home loan. It is because of this guarantee from the FHA, that the FHA loan is one of the most popular home loans on the market today and more lenders are willing to lend money for homes purchased using an FHA loan.
What Are The Requirements For a FHA Loan?
There are quite a few more requirements for an FHA home loan than what is required for a VA loan. Loan recipients and future home owners must provide a minimum 3.5% down payment to purchase a home with an FHA loan and they also must hold an upfront mortgage insurance payment that equals 1.75% of the total home cost. The conforming loan limit on a FHA home is $725,000, which is almost double the amount loaned on a VA home loan. If the cost of your home exceeds that amount, neither loan may be right for you.
The Benefits of a FHA Loan
The benefits of an FHA loan tend to be more for the lender than the borrower. Because the FHA ensures a no loss situation on defaulted homes to lenders, the benefits are more directed to the lender. Those benefits, however, trickle down to the borrower as an FHA loan encourages easier lending with lesser risk for the lender. To cover the cost of a potential default loan, home owners must continually pay a monthly fee and retain mortgage insurance for a minimum of five years. The benefit of these insurances mean that home purchasers are experiencing more relaxed qualifying standards and increased loan opportunities. Similar to the VA loan, the FHA loan requires owner occupancy and there are more flexibly closing costs with up to 3% of home concessions to be paid by the seller.
Which Loan is Better?
As you can see, each type of home loan has elements that can be beneficial to unique situations. The information provided in this post can be discussed in further detail with our trained staff if you have any questions regarding which loan could be best for you.
*Loan subject to credit approval. Restrictions apply. Rates subject to change at any time.