Which Is Better, A Military Loan or FHA Financing?

The VA Mortgage: Military Loan Is A Benefit

For those who have served in the nation’s armed services, there is often some question regarding which is better, a military loan or FHA financing.

Any qualified applicant can choose an FHA home loan, but you must be VA-eligible to apply for a military loan. However, you can also choose an FHA mortgage if you want.

VA Mortgage Offers Most Advantages

The reality is that both programs are government-backed mortgages with little or nothing down, no prepayment penalties, and no hidden fees or charges. These are excellent for first-time purchasers and anyone looking for a mortgage with liberal qualification standards.

Individuals who are VA-qualified can use either program, so why is it that you might want one over the other?

What Is Government Backing?

Both loans are government-backed. The FHA is a mortgage insurance program, while the VA is considered a guarantee. In practice, there isn’t much difference between “insurance” and a “guarantee.”

The basic point is that with the financial power of the federal government behind you, it’s possible to get mortgage financing with little down and other benefits.

Down Payments

The FHA program requires 3.5 percent upfront. For applicants with lower credit scores (below 580), that requirement increases to ten percent.

A military loan has the great benefit of allowing a purchaser to buy with nothing down. Score one for the military loan, it simply requires less down. However, those purchasing with VA home loans can pay a lower funding fee if they put at least five percent down.

Insurance

Next, there is the matter that insurance and guarantees cost money. The FHA program assesses an upfront mortgage insurance premium (MIP) equal to 1.75 percent of the loan amount. In addition, there’s an annual MIP ranging from .45 to 1.05 percent of the outstanding debt.

Funding Fees

In contrast, the funding fee for VA mortgages is 2.3 percent for the first use of the program and 3.6 percent for subsequent uses.

The funding fee declines when individuals chip in down payment money at closing.

However, the discount varies depending if someone is in the regular military or is a member of the National Guard or Reserves.

Also – and importantly – the VA waives the funding fee for veterans with a service-connected disability and for the surviving spouses of veterans who died in service to their country.

Look At Total Cost For Military Loan Vs. FHA

The VA funding fee seems a little stiff when compared with the upfront MIP used for FHA mortgages. However, the VA charges no monthly insurance or guarantee premium of any kind, and that’s a substantial savings.

For example, FHA mortgage insurance on a $200,000 loan costs $1,700 per year. That cost is eliminated if you choose a VA loan.

Credit Scores

The VA doesn’t actually have a minimum credit score requirement, instead it “requires a lender to review the entire loan profile to make a lending decision.” Might a lender look at credit scores? Of course.

While the VA has no minimum credit score requirement, lenders may impose their own stricter guidelines.

In addition, the agency and its lenders recognize that there is a difference between low credit scores and truly bad credit. You won’t get a loan if your credit history looks like a rap sheet.

Underwriting

With both the FHA and the VA, there is a different approach to debts. The FHA allows housing debts to be as much as 31 percent of a borrower’s monthly income (the debt-to-income ratio or DTI), and it allows borrowers to use as much as 43 percent of their monthly income for all debts including housing expenses.

The VA approach is to have only one DTI ratio: 41 percent. It looks at overall debts, and does not separate out housing costs such as mortgage interest, mortgage interest, property taxes, and property insurance.

This way of looking at debts can be advantageous for a borrower who has small or even zero recurring monthly expenses for such things as student loans, credit card bills, and auto payments.

Why Not Use A VA Loan?

Some vets like the idea of using the FHA program so they can preserve their ability to get a VA loan in the future if they want to buy a property with nothing down.

Alternatively, some vets prefer to use the VA program because the zero down requirement and lack of an annual insurance cost makes homeownership so easy.

Whichever mortgage choice qualified VA borrowers prefer is fine. The good news is that you have options, and it can pay to consider the pros and cons of each choice before entering into the mortgage marketplace.

What Are Today’s Mortgage Rates?

You’ll probably notice that annual percentage rates (APRs) for VA home loans are often lower than those conventional (non-government), and substantially lower than those of FHA mortgages.

To get a custom quote and comparison, however, contact several lenders for quotes and choose the best rate for your particular situation.