Buying a Home With an FHA or VA Loan as a Veteran: What You Need to Know

When buying houses, veterans typically use the VA home loan. However, depending on their unique circumstances, the FHA loan can be another great option for veterans. As such, we’ll use this article to cover the benefits of FHA loans for veterans.

As a veteran, you have worked hard serving our country Now that you are transitioning back to civilian life, buying a home may be high on your priority list. Luckily, there are two great mortgage options tailored specifically for veterans – FHA loans and VA loans In this comprehensive guide, we will compare FHA and VA loans to help you determine which one is the better fit.

FHA Loans: An Overview

FHA loans are backed by the Federal Housing Administration and were created in 1934 to help low to moderate income buyers and first-time homebuyers purchase a home. These loans require a very low down payment and have flexible credit requirements. Here are some key features:

Low Down Payment Only 35% is required for down payment. This makes it easier for buyers with limited funds saved up
Low Credit Score Requirement: Minimum credit score is only 580 to qualify. This helps buyers who may have had credit issues in the past.
Low Mortgage Insurance: FHA loans require mortgage insurance. However, the premiums are lower than with conventional loans. This reduces monthly costs.
Gift Funds Allowed: Family or friends can gift you money for the downpayment. This provides another way to come up with the funds needed to buy.
Flexible Guidelines: FHA has flexible standards for debt-to-income ratios and credit history issues compared to conventional loans. This allows more buyers to qualify.

Overall, FHA loans provide an affordable financing option for buyers who may not qualify for other types of mortgages. They open up homeownership to a wider range of buyers.

VA Loans: An Overview

VA loans are backed by the Department of Veterans Affairs and provide mortgage financing options for eligible veterans, active duty military, and surviving spouses. Some key features include:

No Down Payment: VA loans require 0% down. This makes purchase more affordable, especially for first-time buyers.
No Mortgage Insurance: VA loans do not require monthly mortgage insurance, saving buyers hundreds per month.
Relaxed Guidelines: VA loans often have more relaxed debt-to-income and credit score requirements compared to conventional loans.
Reusable Benefit: You can use the VA home loan guarantee multiple times, to purchase different properties over time.
VA Funding Fee: There is an upfront VA funding fee that can be financed into the loan. This ranges from 1.4% – 3.6% of the mortgage amount.

Overall, VA loans provide very affordable financing for eligible borrowers. They require no down payment, no monthly mortgage insurance, and have flexible underwriting standards.

Comparing Loan Eligibility

One key difference between FHA and VA loans is eligibility. FHA loans are open to any qualifying borrower, while VA loans can only be obtained by eligible veterans, surviving spouses, and active duty military.

FHA Loan Eligibility

For an FHA loan, the broad eligibility requirements are:

Have a valid Social Security Number
Meet minimum FHA credit standards
Demonstrate you have steady income to afford mortgage payments
Intend to use the home as your primary residence
Have a debt-to-income ratio under 43%
Meet FHA guideline for downpayment funds

FHA does not have first-time home buyer requirements or homeownership caps. You can be an experienced homeowner and still qualify.

VA Loan Eligibility

For a VA loan, eligibility is tied directly to your military service. Requirements include:

Served minimum active duty term (usually 2 years)
Received honorable or general under honorable conditions discharge
Have valid Certificate of Eligibility

VA loans have no first-time buyer requirement. However, for a subsequent use of your VA entitlement, you may need to pay a funding fee.

Overall, FHA casts a wider eligibility net open to all types of buyers. VA loans are granted only to veterans who meet service requirements.

Downpayment and Cost Differences

When it comes to downpayments and costs, there are some major differences between FHA and VA loans.

FHA Loan Downpayment

FHA requires just 3.5% down on the purchase price. On a $300,000 home, that equals $10,500.

While low, first-time buyers often cite saving for a downpayment as the biggest hurdle. The low 3.5% requirement makes it easier to buy sooner.

Gift funds can also be used for an FHA downpayment. Family or friends can legally gift you the 3.5% needed.

VA Loan Downpayment

A distinct advantage of VA loans is that they require 0% downpayment. $0 is needed to close on a VA mortgage.

This hands-down makes VA loans more affordable for veterans with limited savings. $0 down opens up homeownership possibilities to many more buyers.

Mortgage Insurance

On an FHA loan, you will pay both an upfront and annual mortgage insurance premium. This is required on all FHA loans to protect the lender from loss in case of default.

On a VA loan, no mortgage insurance is required. This saves buyers hundreds per month compared to an FHA loan.

Income and Credit Score Requirements

FHA and VA loans also have some differences when it comes to minimum credit scores and debt-to-income ratios needed to qualify.

FHA Loan Credit Score and Income

To get approved for an FHA loan, here are the general credit and income requirements:

Minimum Credit Score: 580 minimum. Buyers with scores between 500 to 579 may still qualify with additional downpayment.
Debt-to-Income Ratio: Max total debt-to-income (DTI) is 43%. This includes all monthly debts like car loans and credit cards.

FHA provides more flexible credit and income standards than conventional loans. This helps a wider pool of buyers qualify.

VA Loan Credit Score and Income

VA loans typically have the following minimum credit and income requirements:

Minimum Credit Score: 620 minimum for most lenders. Scores as low as 580 may qualify with additional factors.
Debt-to-Income Ratio: DTI often capped at 41%. VA looks at “residual income” after debts to ensure you can afford mortgage.

VA provides fairly flexible requirements as well. Your lender can review your entire financial picture and credit history when approving.

The VA Funding Fee

A key cost difference of VA loans is the VA funding fee. This is an upfront fee charged on all VA-backed loans, which typically ranges from 1.4% – 3.6% of the mortgage amount.

This fee helps offset costs of the VA home loan program. It can either be paid in cash at closing or rolled into the loan amount. Some buyers are exempt from the fee based on service-connected disability or other factors.

FHA loans do not charge any type of VA funding fee. However, they do require ongoing mortgage insurance premiums, while VA loans do not.

How to Apply

If you feel ready to move forward with an FHA or VA loan, here is a quick overview of the application process:

FHA Loan

Get pre-approved with an FHA approved lender
Have your credit run and provide income/asset documentation
Go through underwriting and get final approval
Make an offer on a property once approved
Your lender will order an FHA appraisal
Finalize loan closing and move in!

VA Loan

Obtain Certificate of Eligibility from VA to prove eligibility
Get pre-approved with a VA approved lender
Allow lender to verify income/assets and run credit check
Make an offer on a home you want to purchase
Your lender will order a VA appraisal
Finalize closing when you get final approval!

Reaching out to lenders who regularly process FHA and VA loans can help guide you through every step.

Weighing FHA vs VA for Your Situation

Deciding between an FHA or VA loan depends on your specific home buying goals and financial position. Here are some key factors to consider:

If you want to…

Put down less than 5% – VA loan (no downpayment required)
Skip monthly mortgage insurance – VA loan
Buy soon with limited savings – FHA loan (only 3.5% down)
Have past credit issues – FHA loan (580 minimum FICO score)
Lower your payment on existing home – VA IRRRL refinance
Buy a multi-unit home to rent out – VA loan (more flexible guidelines)
Use gift funds for downpayment – FHA loan (gifts allowed)
Buy a high-cost luxury home – VA loan (higher loan limits than FHA)

Looking at your specific financial goals, credit history, and home preferences can help determine if an FHA or VA loan

Benefits of FHA Loans for Veterans

While it’s hard to beat the advantages of VA loans, veterans in some circumstances may want to consider using an FHA loan. As a result, it’s important to understand the major benefits FHA loans provide to veterans. In this section, we’ll discuss some of these major benefits.

FHA loans require a minimum down payment of 3.5%. While this is greater than the zero-down requirements of VA loans, it offers savings relative to conventional mortgage loans. Conventional loans are ones not backed by the federal government. And, they require a minimum down payment of 5%.

For example, assume a veteran wants to purchase a $300,000 home. With an FHA loan, this will require a down payment of $10,500 ($300,000 x 3.5%). On the other hand, a conventional loan on the same property requires a minimum down payment of $15,000 ($300,000 x 5%). This means the veterans would need to bring $4,500 less in cash to the closing with an FHA loan.

See What You Qualify For

Select a VA Home Loan Option to Continue:

The Federal Housing Administration, or FHA, created the FHA loan program to encourage home ownership among Americans. The loan program began in 1934, and it offers low- to moderate-income homebuyers an opportunity to secure mortgages. But, no income ceiling exists, meaning you won’t be disqualified from an FHA loan for making too much money.

Similar to the VA loan, the FHA does not actually issue loans. Rather, it insures the loans of FHA-approved lenders throughout the country (e.g. banks, credit unions, and mortgage companies). This insurance protects lenders in case of borrower default. If the borrower stops repaying a loan, the FHA will step in and reimburse the lender for the outstanding loan balance. This reduces risk for lenders. And, this lower risk allows lenders to provide the following outstanding terms with FHA loans:

Low down payment requirements
Allowable seller concessions
Low credit score requirements

Of note, this FHA program exists to support homeownership – not real estate investing. FHA loan borrowers need to actually occupy their properties as a primary residence for a year after closing.

VA Loan Vs. FHA Loan: What YOU need to know!

FAQ

Does veterans United offer FHA loans?

In addition to the VA Loan, Veterans United Home Loans is proud to offer several other financing options for homebuyers; including USDA loans, FHA loans, and traditional mortgages.

Can I use FHA if I already used VA loan?

Scenario 2: Already Used Your VA Loan Eligibility and One-time Restoration. Some veterans need to use FHA loans because they’ve already used their VA loan eligibility. While exceptions exist, veterans can generally use the VA loan once then apply for a one-time restoration of eligibility to use it again.

What is the difference between a conventional FHA loan and a VA loan?

FHA loans allow lower credit scores than conventional mortgages do, and are easier to qualify for. Conventional loans allow slightly lower down payments. VA loans are reserved for those with VA eligibility and allow lower credit scores, zero down payment options.

What is the VA funding fee for a FHA loan?

Down Payment	First-Time VA Borrower	Subsequent VA Borrower
Less than 5%	2.15%	3.3%
5%-9.99%	1.5%	1.5%
10% or more	1.25%	1.25%

What are the credit and income guidelines for an FHA Veteran home loan?

Individual lenders will set their own credit requirements. But, in general, lenders will require minimum FICO credit scores of 580 to qualify for an FHA loan. On the other hand, conventional mortgages tend to have stricter credit requirements, with most lenders setting 620 as a minimum qualifying score.

What are the benefits of an FHA Veteran home loan?

The VA and FHA Streamline programs are designed to give the borrower some form of a benefit such as a lower interest rate or monthly mortgage payment. Borrowers who pay VA or FHA mortgages off early cannot be penalized for doing so. Some assume that FHA mortgages have income limits or purchase price caps.

What are the down payment options for an FHA Veteran home loan?

With an FHA loan, this will require a down payment of $10,500 ($300,000 x 3.5%). On the other hand, a conventional loan on the same property requires a minimum down payment of $15,000 ($300,000 x 5%). This means the veterans would need to bring $4,500 less in cash to the closing with an FHA loan.

What are the differences between VA mortgage loans and FHA home loans?

One of the major differences between a VA mortgage and an FHA home loan is the down payment requirement. VA mortgages typically have no down payment–the zero money down home loan option is a rare thing indeed and makes the VA mortgage a very attractive one for most borrowers.