Military Loan Or FHA?
FHA And VA Government Loans
Both options are government-backed mortgages requiring little or nothing down, no prepayment penalties, and no hidden fees or charges. These are excellent loans for first-time purchasers and individuals who need liberal underwriting standards.
The US Department of Housing and Urban Development (HUD) oversees the FHA program, and the Department of Veterans Affairs (VA) administers the VA mortgage program.
The FHA is a mortgage insurance program, while the VA considers its program a guarantee. In practice, there isn’t much difference between “insurance” and a “guarantee.”
The basic point is that with the financial power of the federal government behind you, it’s possible to get mortgage financing with little down and other benefits.
The FHA requires 3.5 percent down for borrowers who have a credit score of at least 580. For individuals with a credit score between 500 and 579 the FHA requires 10 percent down.
The VA mortgage, on the other hand, can finance 100 percent of the property value.
Score one for the military loan. It simply requires less down.
However, the FHA program may come with fewer closing costs for the buyer. FHA loans allow sellers to pay your closing costs, up to six percent of the purchase price. The VA only allows four percent.
Insurance / Guarantee Costs
Insurance and / or guarantees cost money. The FHA program imposes an upfront mortgage insurance premium (upfront MIP) of 1.75 percent of the loan amount. In addition, there is an annual mortgage insurance premium (annual MIP) equal to 0.85 percent of the outstanding debt for most borrowers.
In contrast, the funding fee for VA mortgages is 2.3 percent for the first use of the program, and 3.6 percent for subsequent uses. Although the funding fee declines if you put at least five percent down.
Also, the VA waives the funding fee for veterans with a service-connected disability. It also waives the fee for the surviving spouses of veterans who died serving their country.
While the VA funding fee seems a little high, the VA has no annual insurance or guarantee premium, and that’s a substantial savings. For example, with a $200,000 outstanding balance, you’d save $1,700 a year.
While both loans are government-backed, VA and FHA lenders underwriter with completely different guidelines.
For instance, the VA doesn’t actually have a minimum credit score requirement, while FHA does: 500 for a 90 percent loan, and 580 for a 96.5 percent loan. Instead, the VA “requires a lender to review the entire loan profile to make a lending decision.”
Might a lender look at credit scores? Of course.
Debts And Income
The FHA and VA approach debt differently. The FHA allows housing debts to be as much as 31 percent of a borrower’s monthly income, and it allows borrowers to use as much as 43 percent of their monthly income for all debts including housing expenses.
FHA Lenders may approved DTI up to 50 percent with enough compensating factors. Compensating factors include high credit scores, emergency savings of at least two months of payments, and conservative use of credit.
The VA approach is to have only one DTI ratio: 41 percent. It looks at overall debts and does not separate out housing costs such as mortgage interest, mortgage interest, property taxes, and property insurance.
This way of looking at debts can be advantageous for a borrower who has few recurring monthly expenses for such things as student loans, credit card bills, and auto payments. It would allow him or her to spend more for a home.
However, if a borrower’s DTI exceeds 41 percent, but meets residual income guidelines, the lender can approve the loan. “Residual income” means VA lenders must consider how much cash an applicant has for the household size and geographic location.
This is a less-restrictive criterion than the DTI numbers most programs require.
Take Your Pick
For most, the VA program is less costly and easier to navigate. However, you’d choose an FHA if:
- You have a down payment, and want to save your VA eligibility for another purchase
- You have few debts and want to spend more than 31 percent of your gross income on your mortgage
- If you have a seller willing to pay closing costs up to six percent of your purchase price
It doesn’t matter which loan you prefer. The good news is that you have options, and it can pay to consider the pros and cons of each choice before entering into the mortgage marketplace.
What Are Today’s Mortgage Rates?
Current mortgage rates are low for both VA and FHA home loans. if you’re looking at both programs, get quotes for each loan from several mortgage companies and brokers.
Compare them all, including the upfront and ongoing mortgage insurance / guarantee premiums. The APR for each loan should incorporate these costs, and it can be helpful to look at these numbers.