November 18th, 2019 8:50 AM by Jackie A. Graves, President
An FHA loan might be an option for a veteran or service member
with a lower credit score.
With no down payment or mortgage insurance requirements, VA loans
are hard to beat.
But even if
you’re eligible for a VA loan,
an FHA loan might be worth a look, especially if you have a lower credit score.
mortgages are backed by the federal government and are popular with first-time home buyers.
VA loans are open only to those who have served or are serving in the military
and for some surviving spouses. FHA loans are open to anyone. Beyond that,
specific features and requirements of the two loans differ as well. The
mortgage that’s right for you will depend on your circumstances.
Here’s a look at the basics.
if the home price is under VA loan limits.
and home price must be under FHA loan limits.
insurance and fees
mortgage insurance. Borrowers must pay a one-time VA funding fee.
must pay an upfront mortgage insurance premium and a monthly mortgage
credit score requirement
minimum set by VA, but 620 is a common lender requirement.
579 to qualify with minimum 10% down payment; 580 or higher to qualify for
3.5% down payment.
will apply more scrutiny if DTI is over 41%.
less, depending on credit score and other factors.
and FHA loans can be used to purchase or refinance a primary residence, as long
as the home is safe and structurally sound. The property must meet minimum
requirements set by the Department of Housing and Urban Development for an FHA
loan and the Department of Veterans Affairs for a VA loan.
The take-away: If you want to buy a vacation home or investment property,
shop for a conventional mortgage, which isn’t backed by the federal government.
usually don’t require a down payment. Qualified borrowers can buy a
single-family home for up to $484,350 in most U.S. counties in 2019. VA loan limits are higher in expensive
markets, such as San Francisco County, where the limit in 2019 is $726,525.
borrow above the loan limit, but you’ll have to make a down payment. The
precise amount will be subject to a formula based on the home price and your VA
home loan entitlement.
there will be no VA loan limits for zero-down payment
loans for many borrowers, although you’ll still have to meet a lender’s
requirements for the loan amount.
down payment for FHA loans is 3.5%. FHA loans also have limits, which vary by
county and may reset annually. The most you can borrow with an FHA loan in 2019
ranges from from $314,827 in low-cost counties to $726,525 in high-cost
counties. See the FHA loan limit in your area at the HUD website.
The take-away: VA loans win for the lowest down payment requirement, but
both VA and FHA loans currently have loan limits.
doesn’t specify a minimum credit score for VA home loans, but lenders can
set their own thresholds. A minimum credit score of 620 is a common
borrower’s situation is different, but eligible veterans are typically better
served by VA loans compared to FHA loans,” says Chris Birk, director of
education at Veterans United Home Loans. However, he adds, “it’s possible
that a veteran or service member who can’t meet lenders’ credit score
guidelines for a VA-guaranteed loan might have better luck with FHA financing.”
United, which currently requires a 620 or higher credit score for almost all VA
loans, offers free financial consulting for borrowers who aren’t able to
meet minimum credit guidelines, Birk says.
score you can have and still qualify for an FHA loan is 500. But a score of 580
is required for a down payment of 3.5%. A 10% down payment is required for a
credit score of 500 to 579.
borrowers tend to have higher average credit scores than FHA borrowers overall.
In 2019, the average FICO score among borrowers of VA purchase mortgages has
ranged from 707 to 712, depending on the month, according to mortgage data
provider Ellie Mae. For FHA purchase mortgages, the average FICO score has
ranged from 672 to 677.
The take-away: An FHA loan might be an alternative if you can’t qualify for
a VA loan.
Your debt-to-income ratio is the percentage of
gross monthly income you pay toward debt.
The VA does
not set a maximum DTI. But it requires that loan applicants with a DTI of more
than 41% undergo a closer review to make sure they will have enough money to
cover living expenses after making mortgage and other debt payments.
borrower’s debt-to-income ratio is just one factor Navy Federal considers in
the review of all mortgage loan applications — VA, FHA or otherwise,” says
Kevin Parker, vice president of field mortgage originations at Navy Federal Credit Union.
“We do not have an explicitly stated requirement due to differences in
financial situations for each borrower, but always recommend potential
applicants pay down debt in order to get approved and also secure the best
interest rate possible.”
debt-to-income ratio for FHA loans is generally 50%, although the threshold may
be lower, depending on your credit score or other factors.
of VA purchase mortgages in 2019 have had average DTIs of 42% and 43%,
depending on the month, according to Ellie Mae. Borrowers’ average DTIs for FHA
purchase mortgages have been 43% or 44%.
The take-away: Regardless of the mortgage type, lenders will consider your
debt-to-income ratio to weigh your ability to make mortgage payments.
insurance reimburses the lender if you default on the loan. It’s an expense to
calculate when getting a mortgage.
don’t require mortgage insurance. Instead you pay a one-time VA funding fee,
which ranges from 1.25% to 3.3% of the loan amount. The fee amount depends on
your military service, down payment and whether you’ve had a VA-backed loan
before. You can pay it upfront or roll it into the loan.
loans require mortgage insurance. You pay an upfront insurance premium, or fee,
and a monthly premium that’s added to your mortgage payment. Like the VA
funding fee, you can roll the upfront cost into your FHA loan. The monthly
premium depends on the loan and down payment amounts, and the length of the
The take-away: Include the cost
of the VA funding fee and FHA mortgage insurance when comparing loans.
VA loans have lower mortgage interest rates than other loan products. The
average 30-year fixed rate for VA loans was 3.69% in September 2019, compared
to 3.96% for FHA loans, for example.
The take-away: Remember that mortgage rates also depend on your financial
characteristics. With any type of mortgage, you generally can get a better rate
with a higher credit score, lower debt-to-income ratio and higher down payment.
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