FHA vs. VA Loan: Which One is Right For You
April 5, 2023
You found your dream home. Now it's time to find a mortgage you like as much as your new property! Two popular options are FHA and VA loans. Both loans have unique features and benefits, but which one is right for you? In this article, we'll explore the differences between FHA and VA loans and help you determine which one may be the best fit.
FHA vs. VA Loans: A Quick Overview
Both FHA and VA loans are backed by the federal government. However, these loans have different benefits and eligibility requirements, which we’ll delve into below.
FHA loans are backed by the Federal Housing Administration and are designed to give people with lower incomes and credit scores a clear pathway to homeownership. Unlike conventional loans, FHA loans have more flexible eligibility requirements and allow for smaller down payments. Additionally, they offer lower interest rates, making them attractive for first-time homebuyers.
VA loans are offered through private lenders and backed by the U.S. Department of Veterans Affairs. One key difference between VA and FHA loans is that only eligible military service members, veterans, and their families can benefit from VA loan benefits. These benefits include zero down-payment options, competitive interest rates, and more.
FHA Eligibility Requirements
When applying for an FHA loan, you’ll need to show proof of income by providing documents like pay stubs, W2s, tax returns, and bank statements.
Lenders will also take a look at your credit history, including how much credit you're currently using, your payment history, and outstanding debt. To qualify for the FHA's low down payment option (3.5 percent), you'll typically need a minimum credit score of 580. If your score is lower, you may still be eligible, but you'll need to produce a 10 percent down payment.
Lastly, your new home must meet a few requirements set by the FHA. For example, you'll need to have the property appraised by an FHA-approved appraiser, use it as your primary residence, and occupy the property within 60 days of closing. Lastly, you'll need to have the property inspected to ensure it meets FHA standards.
VA Eligibility Requirements
Are you an active or veteran service member? Excellent. You’ve passed the first eligibility requirement. The VA offers a simple eligibility test based on your service record, with a certification granted after 90 consecutive days of active duty during wartime, 181 days during peace, or six years in the National Guard or Reserves. But even if you've passed the first test, there are still financial requirements you'll need to meet with your lender.
While the VA doesn't set a minimum credit score, most lenders prefer to see scores in the low to mid-600s and will consider your payment history, debt, and income. Lenders may also evaluate your debt-to-income (DTI) ratio (the VA favors a DTI of 40 percent). If your DTI is higher, you may still be eligible if you can show residual income that will cover your basic expenses and mortgage payments.
Which Loan is Right for You?
Ultimately, that depends on your situation. When it comes to FHA loans, you'll need to show proof of income and have a decent credit score (a minimum of 580 for the low down payment option). Your new home must also meet FHA requirements, including an appraisal and inspection. To qualify for an FHA loan, you must also be a first-time home buyer.
If you're interested in VA loans, you'll need to pass the eligibility test based on your service record and financial requirements set by your lender. As we mentioned, most lenders prefer credit scores in the low to mid-600s and a DTI of no more than 40 percent. Lenders will also evaluate your income and credit history.
Let Us Help You Find the Right Mortgage that Fits You!
JustChoice Lending (JCL) is a socially responsible mortgage lender providing competitive rates and personalized service. We assist clients of all income levels, including those from lower-income backgrounds, achieve their homeownership goals by improving their credit scores. Contact us today to speak with one of our mortgage experts!
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