VA loans do not normally require any down payment” width=”300″ height=”200″ />A VA loan is a great way for military service members and veterans to buy a home. These loans can be very attractive because there is no down payment or mortgage insurance requirement. However, in some cases, an FHA loan may turn out to be the better choice, particularly if your credit score is low.
What Is An FHA Loan?
An FHA loan is backed by the Federal Housing Administration and is designed for borrowers with a low to moderate income. The required minimum down payment is lower than it would be on a conventional loan, and the credit score requirements are also lower.
What Is A VA Loan?
A VA loan is backed by the U.S. Department of Veterans Affairs and is considered a benefit for active duty military service members and veterans as well as some surviving spouses. There are some specific requirements pertaining to the number of days of service, but some people may still qualify if, for example, they were discharged for a service-connected disability.
FHA Vs VA Loan
Here is a look at what you need to know about these two types of loans so you can make an informed decision.
With both VA loans and FHA loans, the property involved must be the borrower’s primary home. The home must be considered safe and structurally sound. Homes being purchased with FHA loans need to meet minimum requirements established by the Department of Housing and Urban Development, while homes being purchased using a VA loan must meet Department of Veterans Affairs requirements.
The minimum down payment for FHA loans is currently 3.5%. These loans have limits that can vary depending on where you live and are sometimes reset. For example, in 2020, the most a person could borrow using an FHA loan was set at $331,760 in low-cost counties and $765,600 in high-cost counties.
VA loans do not normally require any down payment. For borrowers who have full entitlement to VA loans, a new law has put an end to limits on the maximum amount that can be borrowed without making a down payment. However, borrowers who currently have other active VA loans or who have defaulted on VA loans in the past will be subject to certain limits that mirror the guidelines set by the Federal Housing Finance Agency for conforming loans. In a typical U.S. county, the limit is $510,400; it will be higher in areas that have a higher cost of living.
Mortgage Insurance And Fees
One important expense that must be calculated when getting a mortgage is the cost of mortgage insurance, which reimburses the lender should you default on your loan.
With an FHA loan, borrowers must pay mortgage insurance in the form of both an upfront insurance premium fee and a monthly fee that is added to the mortgage payment. The upfront cost can be rolled into the loan. The monthly premium will depend on the amount of the loan and your down payment as well as the length of the loan.
Although VA loans do not require mortgage insurance, borrowers must pay a one-time VA funding fee. This can be anywhere from 1.4 to 3.6 percent of the amount of the loan. This fee varies depending on your down payment, your military service and whether you have taken out a VA loan in the past. This fee can be paid up front or rolled into the loan.
Minimum Credit Score Required
These loans also vary in terms of their credit score requirements. The lowest credit score a borrower can have and still qualify for an FHA loan is 500. However, a score of 580 is required to be eligible for making a down payment of 3.5 percent. Those with credit scores between 500 and 579 need to make a down payment of 10 percent.
Although the VA has not set a minimum credit score for VA loans, lenders are free to set their own limits. Many require a minimum credit score of 620. Some lenders offer financial consulting to VA borrowers who are struggling to meet the minimum credit guidelines. Those with lower credit scores may find an FHA loan to be a better option than a VA loan.
Borrowers who get VA loans tend to have higher average credit scores than those who get FHA loans. Mortgage data provider Ellie Mae reports that the average FICO score for VA loan borrowers ranged from 707 to 712 in 2019; the average for those getting FHA mortgages was 672 to 677.
A borrower’s debt-to-income ratio should also be considered. This is the percentage of gross monthly income the borrower must pay toward their debts. Although there is no maximum DTI for VA loans, those applicants whose DTI exceeds 41 percent are given a closer review to ensure they will be able to cover their living expenses after making their mortgage and other debt payments.
For an FHA loan, the maximum debt-to-income ratio is generally 50 percent, although some people may be held to a lower threshold based on their credit score and other factors.
According to Ellie Mae, the average DTI for FHA mortgages in 2019 was 43 to 44 percent, while the average DTI for VA loans was 42 to 43 percent.
Work With My Lending Pal On FHA Vs VA Loan
If you are interested in getting a mortgage to purchase a home, get in touch with the experts at My Lending Pal to discuss the options that are available to you and determine which one will serve you best.