The Difference Between an FHA and a VA Mortgage
FHA stands for Federal Housing Administration. VA is short for Veterans Affairs in the US Department of Veterans Affairs. They are both US government organizations that insure home loans. This article will walk you through the difference between FHA and VA mortgages.
In short, FHA mortgages are federally insured mortgages designed to help qualified borrowers buy a home with less money down and lower credit. VA mortgages are government-insured for active or veteran military service members and their spouses.
FHA Mortgages
The US Government also insures FHA Mortgages by the Federal Housing Administration. The FHA was created by the National Housing Act of 1934. The FHA sets standards for construction and underwriting and insures loans made by banks and other lenders. The FHA aims to improve housing standards and conditions by providing a sound home financing system and stabilizing the mortgage market.
First-time home buyers commonly use FHA loans. To qualify for an FHA loan, borrowers must meet the following qualifications:
The borrower must have a satisfactory credit score, typically 580 and above, to qualify for the 3.5% low down payment advantage.
A credit score of 500 – 579 will require 10% down for an FHA loan.
The lower the credit score, the higher the interest rate.
An FHA-qualified home must be a primary residence.
Also, an FHA mortgage requires the borrower to pay mortgage insurance premiums (MIP) to insure the loan against the borrower’s default on the payments.
The borrower must pay a minimum down payment of 3.5%, which a family member can gift.
Borrowers must have a valid Social Security Number, lawful US residency, and legal age to sign a mortgage.
FHA loans require a property appraisal from an FHA-approved appraiser.
Borrowers must have two years of steady employment history with the same employer for the last two years.
The borrower’s mortgage payments, HOA fees, property taxes, mortgage insurance, and homeowners insurance (the front-end ratio) must be 31% of their gross income. There are exceptions up to 40%, but the lender must provide ample documentation proving the risk acceptable.
The total borrower debt, including mortgage and monthly debt such as credit card payments, car payments, or student loans, must be less than 43%. This is called the back-end ratio.
There are exceptions up to 50%, but the lender must provide ample documentation proving the risk acceptable.
Typically borrowers must be two years out of bankruptcy. Usually, borrowers must be three years out of foreclosure.
More information regarding FHA Loans and Qualifications can be found here.
As you begin thinking about the mortgage process, it’s a good idea to mentally model how it will look. If you are a first-time home buyer, our informative first-time home buyer blog may help you get started.
VA Mortgages
The US Government insures VA mortgages through the US Department of Veterans Affairs. To qualify, a borrower must be a service member or veteran or a spouse of a military service member or veteran.
Borrowers must have a satisfactory credit score, typically 620 and above.
The borrower must also have a Certificate of Eligibility. The Certificate of Eligibility (COE) proves that the applicant officially meets the minimum military service requirements to qualify for a VA loan.
The home must be a primary residence.
The required down payment from the borrower for VA loans is zero percent.
More information on Veterans Affairs guidelines can be found here on the US Department of Veterans Affairs Website.
VA and FHA Loan Limits
The maximum conforming loan limits are the maximum loan amounts on mortgages that the government entities Freddie Mac and Fannie Mae will buy on the secondary market. This means that Freddie Mac and Fannie Mae will buy the mortgage to create bonds and securities backed by millions of US Homeowners’ mortgage payments. The 2018 Conforming Guidelines Loan Limits start at $453,100 and go up to $679,650 for a single-family residence, depending on which county the home is located. As long as your loan value is below the required limit, your loan will meet the conforming limits to qualify for an FHA or VA loan.
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