A lot of military members in California use the VA loan program when buying a home. But the FHA mortgage program is also a popular option, particularly among first-time buyers with limited funds for a down payment.
It begs the question: Which is a better mortgage option for California home buyers, VA or FHA loans?
Here’s a comparison between these two programs that will help you decide whether VA or FHA financing might be best for your situation.
What California FHA and VA Loans Have in Common
While they are different in many ways, FHA and VA loans have one thing in common. They are both government-backed mortgage programs. This means they both receive some form of federal insurance or guarantee.
Here’s what that means:
- California FHA loans are insured by the Federal Housing Administration, which is part of HUD.
- California VA loans are guaranteed, at least in part, by the Department of U.S. Department of Veterans Affairs.
This government backing is what makes VA and FHA loans different from “conventional” mortgage programs, which are not insured or guaranteed by the government. A conventional home loan is originated, and sometimes insured, solely within the private sector.
So that’s what California VA and FHA loans have in common. There are also some important differences between these two mortgage programs that all home buyers should know about. The down payment is perhaps the biggest distinction. So let’s talk about that next.
Down Payment Differences
Which is a better mortgage option for California military members, FHA or VA? In many ways, the VA program is a more attractive option to home buyers. And the down payment — or lack thereof — is a big part of that appeal.
Here’s what you should know about these differences:
California VA loans offers 100% financing to eligible borrowers. That means you could buy a home with no money down whatsoever. It’s one of the only mortgage programs that offers this level of financing. This is the primary advantage of using a VA loan.
California FHA loans, on the other hand, require a minimum investment equaling 3.5% of the purchase price or the appraised value of the home, whichever is less.* With this mortgage program, borrowers can finance up to 96.5% of the home’s purchase price in most cases.
* To qualify for the 3.5% down payment for an FHA loan, the borrower must have a credit score of 580 or higher. This is a requirement from the Department of Housing and Urban Development.
So, which is a better option for California military home buyers, FHA or VA? If you’re trying to minimize your out-of-pocket expense, then the Department of Veterans Affairs home loan program is hard to beat. It offers 100% financing with no down payment from the borrower, compared to the 3.5% down that’s required by FHA.
Other Considerations: Mortgage Insurance and Funding Fees
There are some other considerations when deciding between a California FHA or VA loan. Both of these programs have some other costs associated with them.
California FHA purchase loans require borrowers to pay for mortgage insurance, in most cases. Actually, there are two types of insurance associated with FHA loans — an upfront premium equal to 1.75% of the loan amount, and an annual premium that comes to 0.85% of the amount borrowed (for most borrowers). These premiums are accurate as of 2017. They could change over time.
California VA home loans allow borrowers to avoid paying mortgage insurance. But they usually impose a funding fee. This fee can range from 2.4% to 3.3%, depending on whether or not you’ve used the program in the past and other variables. But even with the funding fee, this program is typically a better deal than FHA.
Is FHA or VA a better option for you? To answer this question, you need to compare your upfront costs in addition to your long-term costs (including mortgage insurance, when applicable). In many cases, California military members find that the Veterans Affairs loan program is a better option on both fronts.
Let’s talk VA: At Bridgepoint Funding, we are passionate about the VA loan program because it rewards our brave men and women in uniform. But we also offer FHA financing, so we can answer any questions you might have about either program. Please contact our knowledgeable staff for assistance.