FHA loans and VA Loans are both home loans that are backed by a federal agency.
- The Federal Housing Administration (FHA) back FHA loans
- The Department of Veteran Affairs (VA) back VA loans.
While both loans are backed by a federal agency, neither agency actually provides the loans. Instead, they insure a large portion of the loans, paying the lenders if the borrower defaults. The insurance of the federal government helps make both types of loans more advantageous for the borrower than conventional loans. However, the distributions of these advantages are not the same between the two types of loans.
Down Payment Requirements
The quality that most often gets people to choose government-backed loans is the lower down payments. While the down payments for FHA loans are smaller than conventional loans (3.5% for FHA loans as opposed to being as much as 20% for conventional loans), VA loans have no down payment at all, so long as they are under $417 000. A loan with no down payment is ideal for a first-time homeowner since they do not have the sale of a previous home to pay for a down payment.
Since individual lenders set rates, there is a significant variance between lenders in the rates for both types of loans. However, when a lender offers both VA loans and FHA loans the tendency is for the Annual Percentage Rate (APR) of the VA loan to be about 0.5% lower, which represents significant savings over the course of a loan.
What to Consider
In most cases, borrowers elect to FHA loans because they do not qualify for VA loans. While FHA loans are available to any legal US resident, to qualify for a VA loan, you must either be a veteran, serviceperson, or surviving spouse. Even for those with veteran entitlement, an FHA loan may be easier to qualify for, as the credit requirements are lower. VA loans are rarely given to borrowers with credit ratings below 620, whereas it is not at all uncommon for a borrower to qualify for an FHA loan with a credit rating of 580.