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Mortgage Differences: VA Loan vs FHA Loan vs Conventional Loan


Meeting your needs is what AAFMAA Mortgage Services LLC (AMS) is all about. It’s no secret that we love VA Home Loans available to active-duty servicemembers, Veterans of the U.S. military, National Guard, or military reserves. You can also qualify for a VA Home Loan if you are the surviving spouse of a military member.

In fact, VA Home Loans are our bread and butter. More than half of our borrowers choose a VA Home Loan to purchase or refinance, mainly because they may qualify with no down payment and they won’t have to pay for private mortgage insurance.

However, with VA Home Loans, most borrowers will have to pay a funding fee, which is a one-time payment paid at closing. If you use your VA entitlement, you need to pay a VA funding fee. There are a few exceptions, however, such as if you are a Veteran receiving VA service-related disability benefits, have at least a 10% disability rating from the VA, are a Purple Heart recipient, or a surviving spouse of a servicemember who died in the line of duty. You also may be eligible for a refund of the VA funding fee if you are awarded VA compensation for a service-connected disability.

“For Veterans specifically, there's really no better option than a VA Home Loan,” says Charles Skinner, Sales Manager in AMS’s Morrisville, North Carolina office. But that doesn’t mean a VA Home Loan is the right choice every time. Plus, there is a limit on how much entitlement you can use at one time on multiple properties. As VA Home Loans are paid off, the entitlement is restored for future use.

“When the borrower has maxed out their VA entitlement, that's when it's best to look at FHA or conventional financing,” Skinner says.

Related: Funding Fee Reduced for Certain VA Loans

Advantages and Drawbacks with Other Loan Types

For borrowers with FICO® credit scores of 580 or higher, conventional loans (which meet Fannie Mae and Freddie Mac guidelines and are often sold to those agencies by lenders) and FHA loans are good options. They require down payments of just 3% and 3.5% of a home's purchase price, respectively, depending on the borrower’s income and other qualifications.

However, if your credit score is below 580, you may have more difficulty qualifying for an FHA loan and will need to put more money down (at least 10%) if you’re approved. It’s important to remember, though, that a higher credit score will help you get a better interest rate on every loan type.

Even borrowers who have low or bad credit, have undergone bankruptcy, or have been foreclosed upon may be able to qualify for an FHA loan, notes Skinner. FHA-qualified lenders will use a case-by-case basis to determine an applicants’ credit worthiness. FHA loans are only for primary residences, but they aren’t just for first-time homebuyers — you can be approved regardless of whether you currently own a home or have previously owned a home. Unlike many low-down-payment conventional loan programs, there are no low- to moderate-income restrictions.

“FHA is a lot more lenient on credit, as well as debt-to-income ratios. So that will be kind of a deciding factor for some buyers,” says Skinner. Plus, an FHA loan is an assumable mortgage, which means that if you want to sell your home, the buyer may be able to “assume” (take over) your loan.

However, FHA loans will require that you pay both an upfront mortgage insurance premium (MIP) and an annual mortgage insurance fee that never goes away. Also, the property must meet certain minimum standards at appraisal. If the home you are purchasing does not meet these standards and a seller does not agree to the required repairs, your only option is to pay for the required repairs at closing (to be held in escrow until the repairs are completed).

“If your credit is good, or you have good credit and you have the money to put down, conventional financing is definitely a better option,” says Skinner. “You'll get better interest rates.”

With conventional loans, though, you will have to pay for private mortgage insurance (PMI) until your equity is 20% or higher. PMI is paid as part of your monthly mortgage payment on a conventional loan.

For borrowers with good credit, PMI on conventional loans might cost less than FHA mortgage insurance. This is because PMI is risk-based insurance, meaning that the better your credit history, the lower your premium, explains Skinner. Plus, you may be able to get the PMI canceled when your mortgage reaches less than 80% of the home value.

Related: What Type of FHA Loan Is Right for You?

Finding the Right Loan for You

Those who are eligible for a VA Home Loan should investigate the product, Skinner says. If your biggest challenge is coming up with the cash for a down payment, rolling the funding fee into the loan and going with the VA's no-down-payment option might be the best choice for you.

"It is always worth the time to see how a VA Home Loan compares with the other options," Skinner says. "It’s often the right product for AAFMAA Members, but we will explore other options with you and match you with the best loan product for your needs."

We’re Here to Help

Whether you’re thinking about buying, ready to start home-shopping in earnest, or considering a refinance, an AMS Military Mortgage Advisor will be happy to provide you with an honest and fair comparison of your mortgage options, including a wide range of affordable mortgages designed to meet your needs.

Ensuring AAFMAA Members obtain the best mortgage possible is our mission. Get your free mortgage assessment today or give us a call at 844-422-3622!