As any mortgage expert will tell you, the two best options out there for most people looking for a home loan are FHA loans and VA loans.
Whether you’re a first-time buyer, a fourth-time buyer or even if you’ve been through a foreclosure, these two options are most likely the ones you’ll consider. That’s because both work in about the same way and both more or less have the same objective. They want to make the American Dream come true for everyone.
Essentially, neither is a loan at all. They’re both a form of insurance in which the federal government backs the loan in case of default. The loan itself comes from the private sector.
So which one is better – an FHA loan or a VA loan?
First off, FHA loans are for everyone. And that’s probably why more than 37 million borrowers have used the program to buy a home since it began in the 1930s. Simply put, FHA loans are a safe, known commodity without any complicated costs or clauses that could come back to haunt you.
Qualifying standards are relaxed and FHA loans require only a 3.5 percent down payment, compared to the standard, 5 percent down payment on a conventional loan. FHA loans also allow the seller to pay up to 3 percent of closing costs.
VA loans – which obviously are not for everyone – require no down payment. This is a big deal, and one of the finest benefits offered to those who are serving or have served our country. You can become a homeowner with no money down – a big hurdle for many first-time buyers. VA loans also allow the seller to help cover closing costs, in this case up to 4 percent.
Because both loans are forms of insurance, both require an upfront, one-time insurance premium. FHA loans feature the lower of the two upfront premiums, usually about 1.75 percent of the loan balance. VA insurance premiums can vary depending on circumstances, but they are higher and can be near double FHA upfront premiums.
Sounds like the FHA might have the upper hand, right? Not necessarily.
That’s because the VA upfront premium is a one-time deal. With FHA loans, you had to pay the one-time upfront cost, plus a yearly mortgage insurance premium of 1.35 percent. That could really add up. And before January 2015, that was the very thing that gave the VA loan a significant leg up over the FHA loan in terms of overall value.
But, perhaps seeking to level the playing field, the FHA has done something about that significant leg up. As of Jan. 26, 2015, the agency lowered the yearly mortgage insurance premiums it charges on a 30-year fixed rate loan from 1.35 percent to 0.85 percent. That’s a savings of about $1,000 a year on a $200,000 loan – a definite improvement.
However, it’s not quite enough to tip the scales in favor of the FHA loan. If you qualify for the VA loan, take it. It’s a great benefit and can be of help even in some of the most expensive counties in America.
If not, we don’t mean to take any shine off the FHA loan. It’s fantastic too, and far more responsible than anything else for making the American Dream of homeownership come true for millions.