What are FHA Loans and VA Loans in the United States?

FHA loans and VA loans are mortgage loans insured by the government and available for potential homebuyers. 

FHA loans are available to lower-income borrowers and typically require a very low down payment. Also, borrowers get competitive interest rates and loan costs. 

VA loans are available to veterans and their spouses or widows/widowers. VA Loans require no money down and typically have competitive interest rates and loan costs. They are loans provided and insured by the US government through the US Department of Veterans Affairs.  

If you are looking for a conventional mortgage loan, you might consider reading: How to get a mortgage.

The Differences between FHA loans and VA loans

The main differences between mortgage loans insured by the government versus conventional loans are the property requirements and loan processing and approval times, says Rajeh A. Saadeh from The Law Office of Rajeh A. Saadeh, L.L.C.

FHA and VA loans can only get issued for specific properties. They have more stringent appraisal requirements and require that they be in an appropriate visual condition to appraise. 

On the other hand, conventional loans can be issued on more properties. Also, they do not have as stringent appraisal requirements or require repairs for the appraisal to apply. 

FHA and VA loans take longer to approve. As many people experience, the government has more stringent requirements and does not work as quickly to approve loan applications than conventional lenders, adds Saadeh.

Whether they are conventional or government-insured, the borrower must apply and qualify for the mortgage. The more qualified the borrower, based on income, credit score, and debt to income ratio, the more likely the borrower will qualify and the better the loan terms will be.

Who can apply for FHA and VA loans?

Veterans Administration loans are available only to US Veterans. An advantage of a VA loan is that a down payment is not required. As a result, you can finance 100% of the house’s cost.

FHA loans are open to all credit approved borrowers with a valid social security number. Most FHA applicants are first-time homebuyers.

Both FHA & VA loans can vary in terms. However, most are either 30-year or 15-year fixed-rate products, says Tom Trott from Embrace Home Loans. The products are for applicants who will be occupying the property as their primary residence. Credit qualification is a must, and the credit score requirements are lower than conventional financing.

Credit and Down Payment Requirements

FHA Loans

FHA loans are mortgages obtained with the help of the FHA. With a small down payment, buyers can purchase a home. FHA loans make it easier for people to qualify for a mortgage, but they’re not for everybody.

Moreover, the borrower should have a valid Social Security Number, lawful US residency, and legal age to sign a mortgage. They should also have a steady employment history with the same employer of at least two years, says James Walsh from Billionsinthebank. 

The borrower’s total debt, including the mortgage payment and all other monthly debt such as credit card payments, car payment, student loans, etc. need to be less than 43%, otherwise known as the back-end ratio.

To be eligible for an FHA loan, says Janet Patterson from Highway Title Loans, borrowers must meet the following lending guidelines:

  • FICO score of 500 – 579 with 10 percent down. Or, a FICO score of 580 or higher with 3.5 percent down.
  • Verifiable employment history for the last two years.
  • Income is verifiable through pay stubs, federal tax returns and bank statements.
  • A loan is used for a primary residence.
  • Property is appraised by an FHA-approved appraiser and meets HUD property guidelines.
  • Your front-end debt ratio (monthly mortgage payments) should not exceed 31 percent of your gross monthly income. Lenders may allow a ratio of up to 40 percent in some cases.
  • Your back-end debt ratio (mortgage, plus all monthly debt payments) should not exceed 43 percent of your gross monthly income. Lenders may allow a ratio of up to 50 percent in some cases.
  • If you experienced a bankruptcy, you must wait 12 months to two years to apply. If you experienced foreclosure, you’ll have to wait three years. Lenders may make exceptions on waiting periods for borrowers with extenuating circumstances.

What are VA Loans

A VA loan is a mortgage loan available through a program established by the United States Department of Veterans Affairs, says Patterson. The VA sets the qualifying standards and dictates the terms of the mortgages offered. In exchange, the government guarantees a portion of the loan but doesn’t provide the financing. VA home loans are provided by private lenders, such as banks and mortgage companies, instead.

These loans are fixed-interest rate loans that are competitive with conventional mortgage rates. Most VA loans are assumable. But, anyone buying the home who wants to assume a VA loan must prove their creditworthiness. Indeed, the customer must be able and willing to make the payments on the loan. 

If you are a veteran who permits your VA loan to be assumed, you can’t apply for another VA loan until the first loan gets paid off, says Tino James from Sunrise House Buyer

VA Loans are available to veterans, reservists, and military or National Guard members and come with great benefits, including low-interest rates and no required down payment, adds James. They also forgo monthly mortgage insurance premiums, which can equal big savings.

You may be eligible for a VA loan by meeting one or more of the following requirements:

  • You have served 90 consecutive days of active service during wartime
  • Or, You have served 181 days of active service during peacetime, OR
  • You have 6 years of service in the National Guard or Reserves, OR
  • You’re the spouse of a service member who died in the line of duty or as a result of a service-related disability.

Fees to consider when getting an FHA or VA loan 

VA loans have an upfront funding fee that can get financed into the loan. The cost becomes drastically reduced if you put 5% to 10% or more down. Also, the funding fee gets waived for applicants who have a service-related disability. There is no monthly mortgage insurance.

For FHA loans, there is an upfront fee charged along with a monthly mortgage insurance premium. Unless a borrower puts down 10%, the monthly mortgage insurance will remain a part of the payment for the loan’s life. If a borrower ever wants to remove the monthly mortgage insurance, they must qualify and refinance into a conventional loan.

Also, FHA loan limits vary based on the property’s county.

Are VA and FHA rates different? 

VA and FHA rates are similar, but sometimes VA rates are slightly lower. Credit scores are important and can affect your interest rate, as well as the loan fees or points paid. The additional charges for lower credit scores are less significant than those associated with conventional financing, adds Trott.

Can I get a HELOC as well?

Getting a HELOC is probably not going to be possible with an FHA or VA loan as you’ll need at least 15-20% equity built up in your house. You can look in to HELOC’s after a few years should your property value increase.

Final Thoughts

If you’re a first time home buyer, then an FHA loan may be more suitable for you because of the lesser credit score required and the smaller down payment requirement that you get. On the other hand, a VA loan does not require any down payment, making it easier to get. So, in the end, it seems that if you can take advantage of a VA loan, it will likely be a better choice in the long run.

Rick

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