For those who are dually qualified for an FHA loan as well as being VA eligible, there’s a choice to be made and it’s maybe not all that obvious. When financing a home when down payment funds are available, comparing the two options is a good idea. FHA and VA loans can be used anywhere although you’ll see an increase in VA loans in areas such as Jacksonville and Pensacola where military bases are located with a greater number of veterans and active duty personnel living in the area. If you have both VA eligibility, and you do have some funds in the bank that can be used for a down payment, should you even look at the FHA program?
FHA Loans
FHA loans aren’t restricted to certain geographical areas nor limit household income as USDA home loans do. As long as the property is used as a primary residence, FHA financing is a good option. FHA loans ask for a small down payment, unlike the VA program, yet the minimum down payment is only 3.5% of the sales price. Standard closing costs with FHA loans apply as well and your loan officer can provide you with a list of estimated charges you can anticipate at your settlement table.
Both FHA and VA loans are backed by the government, which means should the loan ever go into default, the lender is compensated for the loss. FHA loans have two such guarantees as defined in two separate mortgage insurance policies. An upfront insurance policy today is at 1.75% of the sales price and an annual fee of 0.85% (96.5% financing) of the loan amount paid monthly. These two fees combined finance the funds needed to compensate lenders when loans go into default. The upfront policy is rolled into the loan amount and not paid for out of pocket although that’s an option the borrowers have.
There are also loan limits with FHA loans. Although not based upon location, these loan limits by the FHA on a county-by-county basis in relation to existing conforming loan limits for the area as previously established by Fannie Mae and Freddie Mac. These limits are set at 65% of the conforming limit for the area although in metropolitan areas deemed “high cost” these limits can be higher. Speak with your loan officer to get this information if you’re considering an FHA loan.
VA Loans
VA loans only have one mortgage insurance policy, called the VA Funding Fee. This fee is a bit higher than the FHA program and set at 2.15% of the sales price of the home, not 1.75%. This is for a VA loan with no money down. VA loans do accept down payments of any amount, which can affect this initial funding fee percentage. There is no annual funding fee or otherwise an additional mortgage insurance policy paid each year. The only premium is in the form of the funding fee, and disabled Veterans are exempt from paying this. This fee can also be rolled into the loan amount.
VA loan limits are higher than FHA loans and mimic the maximums set by Fannie and Freddie. That means in most parts of the country, the maximum VA loan amount is currently $806,500. Fannie and Freddie review potential changes in the maximum loan amount each year. If the national average home value has increased on a year-over-year basis, the maximum conforming limit is adjusted to reflect the increase. When this occurs, the VA maximum loan limit follows suit.
VA also allows for much higher loan amount up to $2m with the VA High Balance and jumbo option.
Which Loan is Better?
Okay, now that we have the basic information needed to compare, which is better? They both offer the same type of mortgage programs, and terms and interest rates will be similar. But if the borrowers want to come to the closing table with as little cash as possible, the VA home loan gets the nod. Why? Not having a down payment requirement is the most obvious feature but also is the lack of monthly mortgage insurance with VA loans. This keeps overall monthly payments lower on the exact same transaction.
If the borrowers want to make a down payment they can certainly do so which will result in a lower monthly payment. The initial upfront mortgage insurance premium for the FHA loan is lower than the VA upfront premium, but the lack of a monthly mortgage insurance payment with a VA loan more than compensates for the higher VA premium. Finally, allowable VA maximum loan amounts are higher compared to FHA loans.
FHA loans are an excellent choice and a popular option, especially among first-time buyers who want to close with as little of their own funds as possible. If someone is not VA-eligible, the FHA is likely the ideal choice in such a scenario.
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