FHA Loans are mortgages that are insured by the Federal Housing Authority (FHA). There are many advantages to FHA loans. However, there are many more disadvantages when compared to VA loans and if you are a veteran and not working with certified VA lenders, you could get stuck with a significantly inferior loan and thus pay the price.
Homebuyers who use FHA Loans pay mortgage insurance which essentially protects the lender should the buyer default on the loan. Because of this added protection the interest rates on FHA loans are typically lower and have slightly lower requirements for qualification than conventional loans, which makes these loans more appealing to prospective buyers, but not veteran buyers.
FHA to VA comparison
While FHA loans sound like a great option, there are some things to consider when pursuing this option.
Credit Score: Although the FHA doesn't mandate a specific credit score, lenders can choose to enforce on on their own. Generally this minimum credit score requirement is 640. For VA loans, the minimum is 620. Neither means that the situation is hopeless for those with poor credit or who have filed for bankruptcy. Either would be better than the conventional option.
Down Payment: A 3.5% down payment on the price of a home is much lower than the 5-15% or more than banks may require for conventional loans. Assistance from home buying programs or family gifts are allowed to be used for the down payment. Yet, there are no hoops to jump through for VA loans as there are no down payment requirements.
Closing Costs: This is a huge concern for most home buyers. Closing costs can be very expensive. In the case of FHA loans they may be covered, however, if they are completely covered it is not uncommon for the lender to charge a higher interest rate. Veterans have the chance to get a No Cost VA loan with no interest rate penalty.
Finding a Lender: Whether you may need a an FHA loan or a VA loan, you need to select the right lender to work with. Neither VA or FHA are lenders. Instead a homebuyer needs to find a VA or FHA approved lender. Keep in mind not all lenders offer the exact same interest rates or costs! You may end up seeing a very different number on your paperwork from each offer.
Mortgage Insurance: With FHA loans, there are two insurance premiums which need to be paid by the buyer. There is an upfront premium and an annual premium (divided into 12ths). This sounds expensive and rightly so. Although VA does have an upfront funding fee similar to the FHA upfront Mortgage Insurance Premium (MIP) VA does not charge monthly mortgage insurance payments. This combined with no down payment requirements will save you thousands, if not tens of thousands of dollars.
Financing for repairs: FHA Loans offer the ability to finance for extra cash for home repairs. Many times new home owners face an unexpected repair that costs a lot of money they may not have. This helps them with this problem. This is where FHA can be a better option than VA. The only option VA offers is money for Energy Efficient improvements.
In some cases an FHA loan is the right choice for a new buyer. However, if you are a veteran, it is in your best interest to research and investigate VA loan options. Don't be afraid to ask questions and to look at the bigger picture. Just because an approved lender may seem like a good fit, be careful. If you are a veteran and are not being offered a VA loan as an option, they may not be a certified VA Lender. Going with this type of lender could be extremely costly mistake.
Explore your options. Get a VA loan quote and be sure to do your research.
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