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|
|Category||FHA loan||VA loan|
|Eligibility||For 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 HUD||Federal guarantee|
|Minimum credit score||580 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) requirements||Benchmark 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 required||3.5%-10% depending on creditworthiness||0|
|Private Mortgage Insurance (PMI)||Yes - 1.75% up front, 0.55%-1.2% for a minimum of five years.||None!|
|Average interest rate||Better|
|funding fee||NA (but see PMI up front payment)||1.4%-3.6% 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
|No limit on first time use as of 20200101!
subsequent use - $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.
|Closing costs / concessions||Flexible, 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|
|Category||Limited FHA 203k loan||Standard FHA 203k loan||VA renovation loan|
|Purchase price limit||Same as traditional FHA loan||Same as traditional FHA loan||Same as traditional VA loan|
|Downpayment||Same as traditional FHA loan||Same as traditional FHA loan||Same as traditional VA loan|
|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|
•Carpet and flooring
•Repairing safety and health issues
•And much more
•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
•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 repaired||Nothing structural (move load-bearing walls, add rooms) or change the footprint of the home.||•Non-permanent changes|
•Add a luxury amenity like a tennis court, barbecue area, or swimming pool
•Projects that will take longer than 6 months
|Why choose this option||More lenders offer limited, than full.||If your project is larger than $35,000|
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!
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!