FHA vs. VA Home Loans: The Basics
FHA home loans are some of the most popular kinds of home mortgages in the U.S. They’re available for almost everyone, provided that you live/work legally in the U.S. and have a credit score of at least 500. In contrast, VA loans are only available to current and former U.S. service members and, in some cases, their surviving spouses. If you qualify, a VA loan can offer some substantial advantages over FHA financing, including no down payments and no monthly mortgage insurance. However, even with their benefits, VA loans aren’t the best option for everyone, especially if you want to make major home renovations.
FHA vs. VA Loan Cost Comparison
As we just mentioned, VA loans allow qualifying borrowers to dispense with two of the most expensive loan costs: down payments and mortgage insurance, which, for FHA loans, comes in the form of a one-time, upfront, and annual recurring mortgage insurance premium (MIP). Upfront MIP for FHA loans is currently 1.75% of the loan amount, while annual MIP currently sits at an average of 0.85% (though it can vary based on loan duration and other factors).
Right now, the minimum down payments for FHA loans are 3.5% for borrowers with a credit score of at least 580, and 10% for borrowers with scores between 500 and 580. In reality, however, it’s difficult for borrowers with a score of 580 or less to find a lender who will issue them a loan, so, in practice, most FHA loan borrowers will end up putting around 3.5% down.
In addition, interest rates are also somewhat lower for VA loans when compared to their FHA counterparts. As of December 2018, the interest rate for a 30-year fixed rate VA loan was 4.83%, while the interest rate for a 30-year fixed rate FHA loan was 5.05%.
However, the VA does have one cost that FHA loans simply don’t have: a VA funding fee. A borrower’s VA funding fee varies from .5% and 3.3%, and is currently 2.14% for first-time borrowers. Some individuals, however, including disabled veterans and their spouses, are exempt from the VA funding fee.
FHA vs. VA Loans for Home Renovation
While the FHA 203(k) loan is one of the best known home purchase and renovation loans out there, the VA also has it’s own home purchase and renovation loan option: the VA renovation loan. Unlike the 203(k) loan, the VA renovation loan is technically a second loan, however, in reality, it’s rolled together with a borrower’s initial VA mortgage. Therefore, a borrower will only have one mortgage payment and one interest rate to worry about.
Also unlike the standard 203(k) loan, the VA renovation loan permits a maximum loan amount of only $35,000 for home renovations. So, in essence, it operates more like the limited 203(k) loan than a typical 203(k) loan, which offers an unlimited amount of money for renovations (constrained, however, by 50% of property’s current value and the FHA loan limits in your area). The types of repairs that are allowed under the VA renovation loan program are also somewhat limited. In general, permitted repairs include:
Roof and floor repairs
Lead paint removal and repainting
In contrast, limited 203(k) loans, which were previously referred to as streamlined 203(k) loans, permit the following uses:
Carpeting or flooring replacement
Roof replacement or repair
Door and window replacement
Purchasing new appliances/kitchen upgrades
Interior and exterior painting
Well/septic system installation
Weatherizing the home
Updating electrical wiring
As you can see the repairs and upgrades that can be completed with a limited 203(k) loan and a VA renovation loan are quite similar. However, it’s important to take into account that the repairs mentioned above in regards to VA home renovation loans are not an exhaustive list— other, similar repairs may also be approved.
In conclusion, even if you qualify for a VA loan, if you want to make major home repairs, the standard 203(k) loan is still your best option. However, if you’re VA loan-eligible and considering a limited 203(k) loan for minor repairs, a VA renovation loan could be a better choice, considering the lack of any down payment and mortgage insurance requirement, as well as the lower interest rate that you’ll be able to enjoy.