An FHA loan is a good product for people who do not qualify for a conventional mortgage. If you are currently serving in the Armed Forces or are a veteran, you are fortunate to have another avenue in which to purchase or refinance a home. As a service member, you have the option of obtaining a VA loan, but is this your best option? That depends on your specific situation. Positive changes were recently made to the VA home loan program. in January 2020, the elimination of VA loan limits and structural changes were made to the VA loan funding fee. Funding fees are now the same for Active duty, Reserve, and Guards for first-time use.
New VA Funding Fee Table First-Time Use
|
Less than 5% down payment |
2.3% |
|
5% or more down payment |
1.65% |
|
10% or more down payment |
1.4% |
Subsequent Use
|
Less than 5% down payment |
3.6% |
|
5% or more down payment |
1.65% |
|
10% or more down payment |
1.4% |
*These are the general guidelines. Check with your lender to see if your situation allows for exceptions.
On an FHA purchase, you are required to have a 3.5% down payment of the purchase price. On a $200,000 purchase, that’s $7,000. A VA loan requires no down payment, but they include a funding fee (see above). For first time users, it is 2.3%. On the $200,000 home example, the total would be $4,600. This amount gets included in the total loan amount. If you don’t have the savings for a down payment, this could really help to get you into your new home. However, the $4,600 on the VA loan is a fee, while the $7,000 required from FHA is your money. When you close on your loan, you have 3.5% equity in your home, coming out of the gate. A $4,600 fee from the VA may seem steep, but the borrower is not required to pay any mortgage insurance. A VA loan's monthly payment consists of principle, interest, homeowner property taxes, and homeowner insurance. An FHA loan requires a borrower to pay up-front mortgage insurance, totaling 1.75% of the base loan amount. In our example, that amount is $3,377.50 which is added to the base loan amount, for a loan amount of $196,377.50. This amount is used to calculate the monthly insurance premium (MPI). This insurance protects the lender in case the borrower defaults on his/her mortgage. The length of a loan, rate, and credit score has an impact on how much that monthly insurance will be. A good estimate on a $200,000 purchase is about $135 per month. This insurance is paid for the life of the loan. Choosing an FHA or a VA loan has a lot to do with your financial situation.
Thank you for your service!