Veterans looking to buy their first home have many decisions to make including the type of financing they want. If you served enough time in the military and had an honorable discharge, you are probably eligible for the VA loan. But does it make sense to use your VA benefit or choose the FHA loan?
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Both loans are great for first-time homebuyers. Let’s explore which option might be right for you.
FHA Loans for First-Time Homebuyers
You don’t have to be a first-time homebuyer to use the FHA loan program. Anyone that qualifies can use it. In fact, many people that don’t qualify for a conventional loan turn to FHA financing. In order to qualify you need:
- 580 credit score
- 31% housing ratio
- 41% total debt ratio
- Stable income/employment
- Proof that you’ll live in the home as your primary residence
- 5% down payment
The FHA loan has some of the most flexible guidelines in the industry. For example, if you don’t have 3.5% of your own money to put down on the home, you can obtain a gift from a relative or even your employer and use it to qualify for the FHA program.
VA Loans for First-Time Homebuyers
You also don’t have to be a first-time homebuyer to use the VA home loan benefit. You do, however, have to a be a veteran that served at least 90 days during wartime or 181 days during peacetime. You must also have an honorable discharge. You can prove all of this with your Certificate of Eligibility, which you obtain from the VA in order to get a VA loan.
In order to qualify for a VA loan you need:
- 620 credit score
- 43% total debt ratio
- Adequate disposable income to support your daily cost of living
- Stable income/employment
- Proof that you’ll occupy the home as your primary residence
- No down payment is necessary
The VA has flexible guidelines as well. While their credit score requirements are slightly tougher, their debt ratio requirements are more relaxed. One major difference with the VA loan, though, is the lack of down payment that you need to buy a home. If you want, you can secure 100% financing for a VA loan.
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The Main Difference
You probably wonder which loan is right for you. If you have a 700 credit score and your debt ratios fall in line with the FHA’s requirements, should you go that route? Is it better to use your VA benefit?
It all comes down to one thing – the mortgage insurance.
If you choose the FHA loan, you’ll pay mortgage insurance. In fact, you’ll pay it twice. The first time is at the closing where you’ll pay 1.75% of your loan amount. On a $200,000 loan, that means $3,500. You’ll also pay 0.85% of the outstanding loan amount each month as a part of the annual mortgage insurance requirement. The lender will divide up the total into 12 equal payments to help make the insurance more affordable for you. On your $200,000 loan, you would pay $142 per month.
The VA loan doesn’t require any type of mortgage insurance. You will pay an upfront funding fee, but that’s it. The funding fee helps the VA continue to guarantee loans for veterans. They use the money collected to bail a lender out if a borrower defaults. The VA guarantees lenders 25% of the loan amount if a borrower stops making payments.
The VA loan doesn’t charge any type of mortgage insurance, though. Once you pay the funding fee, which is 2.15% of your loan amount if you were in the regular military, you don’t owe any more fees. Comparing this to the FHA loan, you’d likely come out ahead with the VA loan.
Which loan is right for you though, depends on your circumstances. If you can’t quite meet the 620 credit score requirement of the VA loan, you may opt for the FHA loan. Yes, it will cost you more in insurance, but you’ll get the loan you need. You’ll also have to make a down payment, but like we said above, it can be a gift. If you do have to take an FHA loan, you can always refinance out of it into a VA loan once your credit score improves.
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