Veterans who have eligible entitlement should almost always use VA over FHA, but there are specific scenarios where FHA wins. MLOs who understand both programs can recommend correctly rather than defaulting to VA in every case.
Cost Comparison: MIP vs. Funding Fee
FHA charges an upfront mortgage insurance premium of 1.75% of the loan amount plus an annual MIP that runs for the life of the loan in most cases (for loans originated with LTV above 90%). VA charges a one-time funding fee that ranges based on down payment and whether it is a first or subsequent use -- no annual premium of any kind.
When VA Wins
- ✦No down payment required and no mortgage insurance ever
- ✦VA limits certain closing costs the lender can charge, providing a cost-to-close advantage
- ✦VA allows higher DTI ratios in some cases when residual income compensates
- ✦Surviving spouses of service members may be eligible for VA entitlement
When FHA May Win
Veterans with service-connected disabilities who qualify for a waiver of the VA funding fee reduce the cost gap. However, the life-of-loan MIP on FHA still makes VA cheaper in most cases for those borrowers. FHA may make sense when the veteran has a very low FICO score that falls below a lender's VA overlay minimums, or when the property type does not meet VA minimum property requirements but does meet FHA standards.
Entitlement and Bonus Entitlement
Veterans with full entitlement can use VA with no loan limit and no down payment required above the conforming limit. Veterans with reduced entitlement (prior use, foreclosure, or short sale) may need to calculate whether bonus entitlement covers the target loan amount. FHA does not have an entitlement concept but does limit loan amounts by county.
Aria can compare FHA and VA costs for a specific loan amount and credit profile, including funding fee waivers and MIP duration. Ask at vicariointel.com.
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