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VA Loans vs. FHA Loans: Should You Save Your VA Eligibility and Go FHA?

Both FHA and VA loans are popular choices for homebuyers, but which one is right for you? It all comes down to your unique financial circumstances. Each mortgage type has benefits and features unique to the program, so let's take a look at some of the biggest differences between the two.

FHA vs. VA Loans Key Differences

  • The VA loan is a $0 down mortgage while FHA loans require a minimum downpayment of 3.5%
  • Credit benchmarks for FHA loans are typically more flexible than VA loans
  • VA loan limits no longer apply to Veterans with their full entitlement, but FHA loan limits apply to everyone
  • VA loans require a VA funding fee that is typically 2.3% to 3.6% of the total loan value, while FHA loans charge two mortgage insurance premiums - an upfront fee, and a yearly fee
  • VA loans may have more favorable interest rates than FHA loans

Deciding to save your VA loan entitlement eligibility could be a better financial move for you, but at the end of the day, taking advantage of the VA loan benefits could be the right choice for you.

FHA vs. VA Loans: Five Main Factors to Consider

  1. Credit Score Requirements
  2. Down Payments
  3. Loan Limits
  4. Mortgage Insurance
  5. 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.

VA vs. FHA Credit Score Requirements

Purely looking at credit score minimums, FHA loans generally allow for lower scores than what most VA lenders want to see. FHA lenders may accept a 580 FICO score in some cases, while a 620 FICO is common for some VA lenders.But VA loans may have more flexible credit guidelines when it comes to things like bankruptcy, foreclosure and short sales.

VA vs. FHA Down Payments

With VA financing there’s no down payment requirement, meaning you don’t have to put any money down. 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.

VA vs. FHA Loan Limits

Both VA loans and FHA loans have loan limits. However, in 2020 VA loan limits were removed for Veterans with their full entitlement. For Veterans with partial entitlement you may be subject to VA loan limits, which is often $670,200 but may be higher and varies on the county you live in.

Calculate your VA loan limit here.

FHA loan limits are slightly more constricting, with a common maximum borrowing amount of $420,680.

FHA vs. VA Loan Mortgage Insurance Premiums

The government doesn’t make VA or FHA loans, they just back them. The actual money for the loans comes from a lender. These government 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 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. Your funding fee would be equal to 2.30 percent of the loan amount. On a $200,000 loan, that comes out to $4,600.

The funding fee with the VA is a one-time deal. You can pay it upfront, 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.

VA vs. FHA Loan Average Interest Rates

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.

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