VA vs. FHA loans, a comparison
Getting a mortgage through the VA and FHA
- The FHA and VA loan-guarantee programs provide government support for home mortgages.
- The VA program is only open to eligible members of the U.S. armed forces, veterans and sometimes their spouses.
- The FHA requires a minimum 3.5 percent down payment.
- Borrowers using the VA program can finance the entire amount of the loan.
The programs are alike in some ways. A government agency is backing the loan, enabling lenders to make these loans widely available to qualifying borrowers, and at a reasonable cost.
The FHA and VA don’t lend out the money directly. You apply for a VA or FHA loan through an approved lender, which funds the loans and ensures that you meet the program’s guidelines.
VA and FHA mortgage loans differ in many ways, however.
The first major difference involves eligibility. Whereas FHA loans are open to all borrowers, VA loans only are only open to members of the U.S. armed forces, qualifying veterans and, in some cases, the spouses of deceased veterans. VA loans are a special perk that was created as part of the GI Bill during World War II.
Before you can be approved for a VA loan, you’ll need a certificate of eligibility from the agency.
VA eligibility typically depends on your length of service, which can vary significantly depending on the era of your service. In most cases, the spouses of deceased veterans must have remained unmarried to qualify for a VA loan.
A VA loan offers has some special advantages. It is one of only two government guarantee programs that offer 100 percent financing. This means you won’t have to pony up a down payment, which is what often proves to be the greatest hurdle for new homebuyers.
By contrast, FHA requires borrowers to put a minimum of 3.5 percent down on the home.
FHA and VA also carry different insurance costs. FHA charges borrowers an upfront mortgage insurance fee when the loan closes, and an annual insurance premium that you typically must pay for the entire duration of the loan. The upfront insurance fee can be added to the loan or paid in its entirely in cash when the loan closes. The annual insurance fee is divided into 12 monthly installments. FHA charges these fees to protect lenders in the event your loan defaults, and also to cover the administrative costs of running the loan program.
By contrast, VA does not require borrowers to carry annual mortgage insurance, but does charge what is known as an upfront funding fee. This funding fee goes to the VA directly to cover the losses on any loans that default in the program.
The VA funding fee amount can vary. The amount you pay depends on a number of factors, such as whether you are in the regular military or in the reserves, the size of your down payment and whether you have used the VA benefit before. The VA funding fee tends to be more than the FHA upfront mortgage insurance fee.
Since you will not have to pay annual mortgage insurance premium, the overall insurance costs of a VA loan will be significantly lower than with an FHA loan. The VA funding fee can be added into the loan. Also, the home seller has the option of paying the funding fee. The fee also can be waived for certain qualifying veterans with disabilities.
One disadvantage to the VA program is that it tends to be a harder loan to obtain than an FHA loan. FHA loans tend to have more flexible guidelines, enabling borrowers with lower credit scores and with a higher debt load to qualify for a loan.