The VA loans vs FHA loans debate cost me $10,000

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VA loans vs FHA loans

The VA loans vs FHA loans debate is near and dear to my heart. To date, I have lost $10,000 (and growing) by failing to use the VA loan!

I’ll explain exactly how this happened in a minute, but first I want to do a side-by-side comparison of these two loans!

Primary residence mortgages

Traditional primary residence loans  
CategoryFHA loanVA loan
EligibilityFor primary residences, must meet all below lending criteria.•Having served 90 or more consecutive days of active duty in a time of war.
•Having served 181 or more consecutive days of active duty during peacetime.
•Having served six years or more in the Reserves or the National Guard.
•Being the spouse of someone who died because of a service-related disability or while performing in the line of duty.
Backed by…Insured through HUDFederal guarantee
Minimum credit score580 with 3.5% down; 500 with 10% down.None - Though most lenders will impose their own requirement on this. Generally, you want to be over 620.
Debt-to-income (DTI) requirementsBenchmark is 43% - but your lender has the freedom to make its own decisions. Up to 57%Benchmark is 41% - but your lender has the freedom to make its own decisions.
Down payment required3.5%-10% depending on creditworthiness0
Private Mortgage Insurance (PMI)Yes - 1.75% up front, 0.55%-1.2% for a minimum of five years. None!
Average interest rateBetter
funding feeNA (but see PMI up front payment)1.25%-3.3% or 0.5% for loan assumption
Loan limits•Single family $314,,827 - $726,525
•Duplex $403,125 - $930,300
•Tri-plex $487,250 - $605,525
•Four-plex $605,525 - $1,397,400
$484,350 - $726,525 depending on the cost of living in your county.
Cash reserves• 1-2 - No requirement
• 3-4 - Typically require three months of principle, interest, taxes, and insurance (PITI) in cash reserves.
No requirement - lenders may add their own stipulations.
Intend to live in the property for…A reasonable amount of time (generally assumed to be one year). - must intend to move in within 60 days of closing.A reasonable amount of time (generally assumed to be one year). - must intend to move in within 60 days of closing.
Energy Efficient Mortgage (EEM)Up to the lesser amount of:
•5% of the adjusted home value.
•115% median home price for the area.
•150% of the conventional loan limit. $8,000 limit.
No limit, but three tiers of qualifications:
•0-$3,000 - requires contractor's written bid.
•$3,001-$6,000 - requires above, plus a completed energy analysis proving your utility savings will be more than the loan increase will cost.
•$6,001+ Requires all of the above, PLUS an appraisal that shows the improvements made will increase the value of the home as much, or more, than the cost of improvements.
Suitability inspectionsyesyes
Closing costs / concessionsFlexible, and up to 3% concessions may be paid by seller.Flexible, and up to 4% concessions may be paid by seller.

After weighing these pros and cons it is my opinion that the VA loan is much better than the FHA loan for veteran homebuyers. With the VA loan, the down payment is incredible, there is no private mortgage insurance (PMI), interest rates are typically better, more concessions may be paid by the seller, and so much more!

Home renovation loans

Now, let’s compare the VA renovation loan vs the FHA 203k loan.

Renovation loan variants   
CategoryLimited FHA 203k loanStandard FHA 203k loanVA renovation loan
Purchase price limitSame as traditional FHA loanSame as traditional FHA loanSame as traditional VA loan
DownpaymentSame as traditional FHA loanSame as traditional FHA loanSame as traditional VA loan
Minimum repairsNone5000None
Maximum repars$35,000 minus a buffer of 15% of the total bid.Up to the FHA county loan limit.No limit - lenders may impose their own maximum renovation amount.
Can be repaired•Kitchen and bathroom remodels
•Appliance replacement
•Carpet and flooring
•Roof replacement
•Painting
•Repairing safety and health issues
•Energy-efficient improvements
•And much more
•Structural alterations
•Convert a one-family home into a 2-, 3-, or 4-unit home, or vice versa
•Connect to public sewer or water
•Some larger landscaping projects
•Improve accessibility for disabled persons
•Move the house to a different site
•Energy-efficient upgrades
•Replacement of the furnace, air conditioning, or other major home components
•Roof repair or replacement
•Floor repairs or replacement
•Repairs to the foundation of the home
•Repair or replacement of plumbing or electrical systems
Can't be repairedNothing structural (move load-bearing walls, add rooms) or change the footprint of the home. •Non-permanent changes
•Minor landscaping
•Add a luxury amenity like a tennis court, barbecue area, or swimming pool
•Projects that will take longer than 6 months
Why choose this optionMore lenders offer limited, than full.If your project is larger than $35,000

FHA loans vs VA loans

The limited FHA 203k loan is offered by most lenders, but only covers up to $35,000 in renovations.

The Standard FHA 203k loan has a large maximum renovation budget, but a minimum budget of $5,000 and is recommended for 203k loan projects over $35,000.

The VA renovation loan has no minimum budget and no maximum budget for renovations. Not only that, but the VA renovation loan can approve repairs that the FHA 203k cannot, and still does not require a down payment!

For this reason, I believe the VA renovation loan is better than both of the FHA 203k variants!

Mortgage shopping

As with any mortgage I recommend that you shop around. It doesn’t hurt to get pre-approved for a few VA loans and a few FHA loans at the same time to compare and contrast the terms.

Whatever you do, look at more than one loan pre-approval. Otherwise, you may get the worst rate/terms currently on the market, and not even realize it.

My $10,000 “oopsie”

I bought my first real estate investment in December 2015.

Unfortunately, I didn’t shop lenders, and the lender I used talked me into using the FHA loan, instead of the VA loan.

When you add in the down payment, PMI, and higher interest payments, this has cost me around $10,000 since closing, and that number grows every month.

I’m sick of paying $81/month from private mortgage insurance that I should have never been paying in the first place!

To make matters worse, if I refinanced now that I’ve moved out of the property, the mortgage would be an investment property mortgage. That means my interest rate would increase enough that it isn’t even worth getting rid of the PMI anymore.

What a huge, unnecessary waste of capital this loan choice has been and continues to be, for me. If I had used the VA loan on this property, I may have been able to purchase another home by now!

That is why understanding loan types, and getting pre-approved from multiple lenders, is so important.

Who wins: VA loans vs FHA loans

My vote is with the VA loan.

In my opinion, the FHA loan is generally not a better option than the VA loan. It can be useful if you’ve already maxed out your VA loan in the area you’re planning to purchase.

Bottom line, always shop around, do your research, and make the most informed decision you possibly can!

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David Pere

David Pere

David is an active duty Marine, who devotes his free time to teaching personal finance and real estate investing for service members, and the working class!

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