Buying a home involves a long term financial commitment, so it is important to know the difference between a Veteran Affairs mortgage loan and a Federal Housing Administration mortgage loan. Both types of loans are insured by the government, and have a few similarities, but knowing the differences can save you a lot of money and headaches. While both types of loans follow guidelines written by government agencies, the final lending decision will still be made by lenders, such as banks and credit unions. Their requirements could be a lot stricter than the ones made by the government agency.
One of the similarities between a VA loan and an FHA loan is that they both are designed to provide people with lower incomes the opportunity to become home owners. Because VA and FHA loans are insured by the government, they will pay in the event of a default. Another factor that makes these two types of loans similar is the low credit score requirement. Compared to conventional loans where an almost perfect credit score is required, these loans are much more lenient. Statistically, most people that choose a VA or an FHA loan would not be approved for a conventional loan.
Differences between VA Loans and FHA Loans
While VA loans and FHA loans have a couple of similarities, there are some differences that you should be aware of before deciding which type of mortgage loan to go with. Here is what you should keep in mind before deciding between a VA loan and an FHA loan:
- Eligibility. In order to qualify for a VA loan, you will have to be a veteran, an active-duty military member, or the surviving spouse, in some cases. Some requirements regarding time served in the military also apply. Also, if the retirement was dishonorable, you will have to pass a review before being eligible for a VA loan. FHA loans do not carry these types of restrictions.
- Income. Because FHA loans are designed to help people with low or moderate incomes, there are only a few restrictions regarding your income. VA loans do not have such restrictions.
- Down payment. FHA loans require a minimum of 3.5 percent as a down payment, while VA loans do not have a minimum down payment requirement.
- Loan limits. Both VA and FHA loans have limits. Based on the cost of living in a certain area, the FHA limit can exceed $700,000. Limits are also determined by the type of home that you are buying. VA loans don’t have limits on the home value, but they are determined by eligibility criteria.
- Fees and closing costs. While both types of loans feature lower fees and closing costs than conventional loans, FHA loans come with specific closing costs, and VA loans with more flexible closing costs and fees.
- Mortgage insurance. Mortgage insurance must be paid for a minimum of 5 years on an FHA loan. This can drive the overall cost of the loan up by a large amount. VA loans are not required to have insurance.
VA loans and FHA loans are designed to make buying a home more affordable, but there are some big differences between them. If you qualify for both types of loans, you should take into consideration all these differences, whether they regard the qualification requirements or each program’s advantages.