FHA vs. VA loan: Which One is Right For You?
You found your new home, but now you have to finance it. FHA and VA loans are two viable options, and both offer several advantages over traditional mortgage loans. But what’s the difference between the two? Let’s take a dive into FHA vs. VA loans and find out which one is right for you.
FHA loans defined
The Federal Housing Administration backs FHA loans. While the U.S. government does not hold the loan, they guarantee it. In other words, if you default, the FHA pays the remaining balance to the lender.
FHA loans are ideal for qualified, first-time home buyers with weak credit scores or who might not have the funds to offer a traditional 10-20 percent down payment.
VA loans defined
In the past, VA loans have had a bad reputation. While it’s true that they were once bogged down in red tape, laborious rules, and long closing times, the Department of Veterans Affairs has made changes to ensure that VA loans can now compete with other mortgage offerings.
VA loans are unique because they are only available to those who have served in the U.S. military. As with FHA loans, VA loans are backed by the federal government (U.S. Department of Veterans Affairs). VA loans are appealing because they come with competitive interest rates and zero down-payment options.
Applying for an FHA loan: Are you eligible?
A particular income amount doesn’t determine your eligibility for an FHA loan. However, you must be able to verify your income by providing pay stubs, W2s, federal tax returns, and bank statements.
Additionally, you must have credit. Your lender will also want to know how much credit you’re using, whether you pay bills on time, and how much outstanding debt you have. To qualify for FHA’s low down payment advantage (3.5 percent), applicants must have a minimum credit score of 580. Those with lower scores may still be eligible—they must pay a 10 percent down payment.
Your new home must also meet basic FHA requirements. Buyers must:
- Have their home appraised by an FHA-approved appraiser
- Make the home their primary residence
- Occupy the property 60 days after closing
- Have the home inspected—and the report must meet FHA standards
Applying for a VA loan: Are you eligible?
If you are an active or veteran service member, you may have already passed the first requirement test. The beauty of VA loans is that active military service members attain their eligibility certification after only serving 90 consecutive days of active duty during wartime, 181 days during peace, or six years in the National Guard or Reserves.
If you passed the first test, the next is meeting your lender’s credit and financial requirements. While the VA doesn’t set a minimum credit score, lenders generally require a credit score that falls in the low- to mid-600s. Lenders may also be interested in your payment history, debt, and income.
The VA favors those who have a debt-to-income (DTI) ratio of 40 percent. However, those with higher DTIs may still be eligible if they have enough residual income—that is, enough money left to cover basic living expenses after paying the mortgage and other debts.
Contact us to get started on your FHA or VA loan.
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