03 Oct, 2023

FHA vs VA Loans: Which Offers More Flexibility in Credit Requirements?

FHA vs VA loan - 5 differentiating factors

If you’re someone who is on the lookout for a new home and worried about the credit factors, this blog is for you! Many potential home buyers worry about their credit eligibility, which keeps them from getting the home of their dreams. However, the mortgage options are plenty and some are extremely flexible when it comes to credit requirements.

With the changing trends of economic conditions and job crises, managing your credit history seems to be a great challenge to aspiring homeowners. This is due to the fact that credit scores play a major role in securing the right mortgage loan with proper terms and conditions.

But, the good news is that FHA and VA loans have flexible credit requirements. In this blog, we will learn about the impact of your credit scores, understand how these loan programs differ in terms of credit flexibility, and find out the difference between FHA vs VA loans.

What is an FHA loan?

A Federal Housing Administration loan was established by the National Housing Act on June 27, 1934 to make homeownership more accessible, especially for first-time homebuyers and those with limited financial resources. The loan is provided by FHA-approved lenders. The role of FHA here is to insure these loans. This makes it easier for those individuals who have a lower credit score and it is also less risky for their lenders.

What are the credit score requirements?

Now that we have a sound knowledge of FHA loans, let us move on to understanding their credit score requirements. In general, FHA loans are known for their lenient credit score requirements compared to conventional mortgages. Just like every other mortgage requirement, an FHA loan also has its own share of credit requirements. It is as follows:

A minimum credit score that an individual must hold in order to qualify is 580 and above. This is much better when compared to a conventional loan that often demands a score of 620 or higher.

Although the FHA loan is insured by the federal government, individual lenders will have their own credit score requirements, and the higher the score, the easier to secure the loan as per the best terms.

It is also important to note that the interest rates will also be influenced by the credit score you hold. A lower credit score may result in a higher interest rate, which can be reflected in your monthly mortgage payments and the overall cost of your loan.

How does credit history affect your eligibility?

Your credit scores are just a part of the assessment process, whereas the actual creditworthiness is assessed based on the credit history.

Lenders assess your credit history by reviewing your past payments to understand how you manage your debts and credit payments. While FHA loans have a lenient credit checking process, if you have faced any recent history of financial difficulties; your eligibility would still be affected.

After the assessment, if you want to improve your credit for FHA approval, you can do so by paying down your existing debts, avoiding new openings of credit applications, and considering consulting a counselor to establish healthy financial habits.

What are VA loans?

We hope you got to know the fundamentals of FHA loans, now it is time to understand VA loans and their credit requirements. A VA home loan is offered by the Department of Veteran Affairs and it is a unique program that is designed exclusively for veterans, active-duty service members, and certain eligible spouses. They are in place to recognize the services and sacrifices made by the military personnel by offering favorable terms and conditions for homeownership.

VA loan credit score requirements

Like FHA loans, a VA loan also comes with its credit score requirements and similarly, they are flexible when it comes to credit requirements. They are:

A VA loan aims to accommodate as many veteran applicants as possible. So, there are no stricter credit score requirements set by the VA itself. The lenders establish their own credit guidelines and the VA relies on the lenders to set a minimum credit score.

The lenders expect your credit score to be at least 620 or even lower in some cases. However, those home loans that exceed $1 Million often require borrowers to meet higher credit scores.

One attractive option in VA loans is that they don't penalize borrowers with lower credit scores in the form of higher interest rates or mortgage insurance premiums. This can help you save better over the life of your loan compared to other loan types.

Credit history and your eligibility for a VA loan

As discussed in previous sections, similar to an FHA loan, a VA loan also takes into account your credit history apart from credit scores.

Lenders of VA loans assess your past credit history by tracking your record of debt repayments to determine your financial responsibility. Although they have a more straightforward credit assessment process than conventional loan lenders, having recent financial issues could still impact your ability to secure a VA loan.

If you are exploring ways to improve your creditworthiness to secure a VA loan, consider making timely bill payments, and reducing higher credit card balances. This way, you can easily qualify for a VA loan without any complications.

What are FHA connections?

An FHA connection is a valuable mode of simplifying the mortgage lending process. It helps FHA approved lenders and business partners by providing direct, and secure online access to computer systems of the U.S. Department of Housing and Urban Development (HUD). The FHA connections system facilitates the approval process and management of FHA insured loans.

3 striking Benefits of using FHA connections

Easy application - With FHA connections in place, you can bid farewell to piles of paperwork. The partners and lenders can manage the applications from one place.

Quicker approval - Digital processing of applications helps borrowers process their applications much faster than before.

Access to information - FHA applications and information of the borrowers can be secured and accessed electronically. Borrowers can also access information easily before they make informed decisions.

Facts to consider when choosing between FHA vs VA loan

NAHB analysis of the most recent Quarterly Sales by Price and Financing report reveals that the share of new home sales backed by FHA loans climbed from 12.1% to 14.0% in the second quarter of 2023.

Conventional mortgage comprises 82% of the mortgage market in the U.S., while government-insured VA, FHA, and USDA home loans make up the remaining 18%.

The share of VA-backed sales edged up from 5.2% to 5.4%, a 0.8-point decline over the past year.

FHA vs VA Loan - 5 Differentiating Factors

When it comes to exploring mortgage options, it is important that you utilize available online resources to the fullest in order to make better decisions. Here we have the top 5 factors that differentiate FHA vs VA loans.

FHA	VA
1) FHA loans are available to a wide range of borrowers who find it challenging to receive loans from private lenders. They are not just limited to military personnel.	1) A VA loan is exclusive only to eligible veterans, active-duty service members, and certain members of the National Guard and Reserves. Meeting specific service requirements is essential.
2) They require a minimum downpayment of 3.5% of the home's purchase price. This enables borrowers with limited savings to access the home of their dreams.	2) This particular feature makes a VA loan stand out from the rest. They usually require no down payment. This is a great advantage to eligible veterans and service members.
3) Here, the borrowers are required to pay both an upfront mortgage insurance premium (MIP) and an annual MIP. The size of your premium is determined by the amount you pay as a downpayment.	3) People taking this loan can have a great experience as they don’t require private mortgage insurance (PMI) or MIP. With this in place, they can pave the way for investments in the future.
4) The credit score requirements of FHA are pretty lenient, however, it is advisable to have a credit score of 580 or more to secure affordable interest rates.	4) Here, there are no stricter minimum credit requirements, but individual lenders might have their own standards and unlike any mortgage loan, it is best to have a good credit score to improve your loan terms.
5) The funding fee involved is 1.75% added on top of the base loan amount and a mortgage insurance premium must be paid as both an upfront and an annual payment.	5) The funding fee added can be financed into the loan and waived for certain disabled veterans.

To summarize their differences, both these loan options offer flexible opportunities for homebuyers, and making the choice highly depends on your eligibility, financial situation, and preferences.

Key Takeaways

Becoming a homeowner in 2023 is a challenging task but it is not something that is unattainable. With different mortgage options available, it is possible to seek flexible credit options. Getting a broader perspective on the comparison of FHA vs VA loans is essential and they come with their set of unique features and requirements.

If you are not a military personnel, it is not possible to qualify for a VA loan, but you can get an FHA loan after meeting the necessary criteria. Whereas if you are looking to get a VA loan, your military service status matters more than the credit history as it is the base. If you would like to make a wise decision consider consulting with mortgage professionals. We at Home Loan Rate of Interest help homebuyers come out of their mortgage dilemma and find a way to finance their first home.