Should You Save Your VA Eligibility and Go FHA?

fha or va loans

The past few years FHA loans have been enormously popular. This is largely a byproduct of the fact that FHA financing is a known quantity; these loans have been used by more than 41 million borrowers since the 1930s compared to 22 million borrowers with VA loans since the 1940s.

No less important, FHA is especially geared toward first-time and low- to middle- income borrowers. Like VA loans, an FHA mortgage allows consumers to purchase homes without the need for great credit and a massive down payment.

The popularity and safety of FHA financing raises a question: Instead of getting a VA mortgage would it make more sense to get an FHA loan?

There are certainly arguments on both sides of the question. Let’s look at four factors that can affect your decision to go FHA or VA: Credit scores, down payments, mortgage insurance and interest rates.

The VA home loan process isn’t nearly as confusing as you might think and can save you money in the short and long run.

FHA v. VA Loans

For credit score benchmarks, the winner is: FHA Loans

Purely looking at credit score minimums, FHA loans generally allow for lower scores than what most VA lenders want to see. FHA lenders may be OK with a 580 FICO score in some cases, while most VA lenders will typically look for a minimum 620.

VA Loans are a Better Bet than FHA

With no down payment and no mortgage insurance, VA loans are a better financial bet than FHA loans.

But VA loans may have more flexible credit guidelines when it comes to things like bankruptcy, foreclosure and short sales.

For down payments, the winner is: VA Loans

With VA financing there’s no down payment requirement. The FHA program requires borrowers to put down at least 3.5 percent.

For a $200,000 mortgage the difference is plain: Zero down at closing versus $7,000. In both cases closing costs are additional.

For mortgage insurance premiums, the winner is: VA Loans

The government doesn’t make VA or FHA loans. The actual money for the loans comes from a lender. These agencies simply provide different forms of insurance for loans that meet their standards.

Where there’s insurance there’s a premium. In the case of the VA, the upfront VA Funding Fee depends on whether you’re Active Duty/Retired or in the Reserves/Guard. Also, the fee varies according to how much you put down and whether you’ve used your entitlement in the past.

For purposes of comparison, let’s say you put down zero dollars, have not used your entitlement before and are on active duty. Your funding fee would be equal to 2.15 percent of the loan amount. On a $200,000 loan, that comes out to $4,300.

The funding fee with the VA is a one-time deal. You can pay it up front, but most borrowers ask the seller to cover the cost or choose to roll the fee into the mortgage to lower their cost at closing.

FHA loans come with two mortgage insurance charges – an upfront insurance premium similar to the VA Funding Fee and a yearly mortgage insurance premium based on the remaining loan balance.

The upfront charge on FHA loans is a one-time expense that’s added to your loan balance. But FHA borrowers pay the annual mortgage insurance charge for the life of their loans.

For average interest rates, the winner is: VA Loans

Average mortgage rates on government-backed loans continue to outperform conventional loans, which surprises many homebuyers. But VA loans consistently lead the industry and have lower average interest rates than both conventional and FHA loans.

VA Loans Come Out on Top

If you look at the numbers you can see that the VA requires a lower down payment — nothing versus 3.5 percent. The upfront funding fee for VA loans is typically higher than the upfront mortgage insurance premium for FHA loans — but unlike the FHA the VA has no annual premium, a substantial savings.

Both the VA and the FHA programs represent excellent forms of financing, but VA mortgages are simply a better financial deal for most qualified borrowers.

To learn more about the differences between FHA and VA loans and the overall VA home loan process check out this helpful guide.