How to Compare VA Home Loans to FHA Loans

By Shauna Zamarripa

When it comes to home mortgages, the two most common types of financing are FHA and VA loans. While both types are insured by the government to protect financial institutions and investors from losses, there are separate guidelines and qualifying information applicable to each type of loan. The following information will instruct home buyers on how to compare VA home loans to FHA loans in the mortgage market. It also will aid in helping them make a decision on which type of loan would be best when they are eligible for both.

Compare down payment percentages. Using FHA loans, the current required minimum investment on a home loan is 3 percent. VA loans, on the other hand, do not require any minimum investment. While FHA loans do require a minimum amount down, VA loans will charge the applicant a 2 percent funding fee, which will be rolled into the loan from its inception, resulting in a higher loan amount. The major difference will be the equity that is built in the home over time. FHA home loans will build more equity in the first several years due to the minimum investment requirement.

Review premiums for FHA and VA loans. VA loans do not require that the home buyer pay a monthly mortgage insurance premium. FHA loans require home buyers to pay a small percentage each month into an escrow account that will protect the lender in case the home owner defaults on his or her mortgage. The payment difference when required to pay the insurance premium can be as much as $200 per month on FHA home loans, depending on the loan amount.

Compare interest rates and terms for each type of loan. In some states, for VA loans, the interest rate can be one quarter of a point lower than the standard market rate for a mortgage. Conversely, with FHA loans, rates can be bought down to match the same rate of a VA loan. FHA mortgage rates are standard with market conditions, whereas VA rates in some areas can be lower without having to pay extra out of pocket up front.

Compare credit restrictions for VA home loans and FHA loans. Neither of these mortgages will require the home buyer to have a minimum credit score for approval; however, VA loans will deduct the amount of money that a purchaser will qualify for due to monthly expenses for family items such as day care or members in the household. FHA will count the loan amount based only on income and financed debt, meaning that a purchaser might be able to qualify for a larger loan amount.

Compare closing costs and pre-paid items by obtaining a good faith estimate from a mortgage banker. Some closing costs on VA loans are higher because of increased restrictions on a home loan. FHA loans will normally offer some reduced fees on closing cost items due to the minimum investment and different credit requirements. It is advisable to compare the two to find out what the difference will be at closing. Regardless, both loans allow for seller concessions or assistance with closing costs and pre-paid items, which is to the advantage of the home buyer in either scenario.

Use a mortgage banker or broker when applying for a home loan.

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