What is the difference between VA loans & FHA Loans?
Lots of differences, so buckle up and pay attention.
Any borrower can qualify for an FHA loan. VA loans are for people who have served (or are now serving) in the U.S. armed services. Veterans must have served “under honorable conditions” (an Honorable Discharge is not required).
The down payment for an FHA loan is 3.5%. There is no down payment for a VA loan.
FHA loans have mortgage insurance: an up-front premium of 1.75% and a monthly “renewal” premium of 0.85% for most loans. VA loans have no mortgage insurance. They do have a Funding Fee which varies according to the down payment and whether the veteran has used his or her entitlement previously. Both the funding fee and the upfront mortgage insurance premium are added to the base loan so it is not an out-of-pocket expense.
Appraisers for FHA loans perform an extended inspection to determine whether there are any issues with the property relating to health and safety. Among these are visual infection or infestation of wood-destroying organisms (termites, etc.). If the appraiser notes such evidence, the property will need a termite inspection and clearance. VA loans will always require a pest control inspection and clearance.
FHA loans can have non-occupant co-borrowers to help the occupant qualify. VA loans can only use income from spouses or other borrowers who also have VA entitlement.
FHA loans have a maximum debt to income ratio (DTI) of about 55%. VA loans have no maximum DTI. Instead, the underwriter looks at the borrower’s residual income after income taxes, house payment, other debt and a certain amount for utilities and maintenance. VA loans regularly get approved at a DTI over 65%.
FHA loans can use appraisals with a license level adequate for FHA appraisals. VA appraisers are assigned by VA to appraisers who are on the regional VA loan center’s panel. The appraisal process and format is the same for both types.
Some loan originators try to push their veteran borrowers into FHA loans because they don’t know how to originate and fund VA loans. This is a grave injustice — and probably constitutes malpractice (IMO).
Sellers and their agents are often afraid of VA loans because they have incorrect information and assumptions. From a lending perspective, they are as easy as any other loan — and in many respects, easier.
