Updated: Dec 28, 2020
Navigating the home loan mortgage maze can be confusing during military relocation, especially if you are PCS'ing to a new duty station. There are generally three kinds of home financing for you to consider: Conventional, FHA, and VA home loans.
Conventional home loans usually offer great interest rates, but have larger down payment requirements. For this reason, most active-duty personnel and veterans opt for either FHA Insured or Best VA home loans lender .
So, which one is right for you? To answer that question, let's explore the differences.
FHA Home Loans
During the great depression of the 1930s, the federal government decided to spur on the economy by making homeownership more affordable for average working families.
To accomplish this ambitious goal, the Federal Housing Administration (FHA) created a program that insured private banks if borrowers defaulted on their loans. In effect, it created a backup system that allowed the banks to loosen restrictions on first-time homeowners.
How do FHA loans work?
The FHA is not in the business of making home loans. Instead, it authorizes, through the department of housing and urban development (HUD), private banks to offer these insured loans to the general public.
Just like with any other type of loan, there is an application process.
You will be required to fill out an application and allow the bank to run a credit check on you.
Although the down payment requirement can be as low as 3.5%, you must have a credit score of at least 580. In some cases, you can have a score of as little as 500 if you can afford a larger down payment.
You will also be required to show proof of income in the form of W-2 forms and typically check stubs from the previous two months. The current minimum requirement is that your total housing expenses cannot exceed 43% of your income.
Also, you may be denied if you have previously defaulted on another government-backed loan.
Other FHA loan considerations
Help with the down payment. In some states, you may be able to get help if you come up short on your down payment. Check with your local HUD office to see what may be available in your area.
Co-signer. Unlike conventional loans, FHA loans allow for a non-occupying co-signer, meaning you can have a family member who does not live with you use their higher credit score to help you qualify for the loan.
Adjustable-rate mortgages. FHA currently insures adjustable rate mortgages, which help the borrower qualify for lower interest rates. The rate automatically adjusts, typically in three to five years, following the current prime rate. It is best to check with your lender to get the full details and determine if it is right for you.
Mortgage insurance. There is a cost to you for having an FHA-backed loan. It is in the form of a mortgage insurance premium (MIP), which defrays the government's expense if you default on your loan. You pay for it initially as a 1.75% fee based on the loan amount at closing. You then pay a smaller monthly premium until you establish 22% equity in your home, at which time the premium payments can be removed.
VA Home Loans
The Department of Veteran's Affairs home loan guarantee program helps active-duty military and veterans purchase their homes with little or no down payment. VA loans provide guarantees to the banks in a similar way as FHA loans.
The application process is similar to that of an FHA loan, with a few requirements added. In addition to showing credit history and proof of income, you will be required to submit two other forms:
Form DD-214. You only need this form if you are no longer on active duty. It primarily shows the branch of service you were in and the dates you served. It is used to determine if you had enough time in service to be eligible for benefits.
Certificate of Eligibility (COE). The CEO shows whether or not you are still entitled to use the VA home loan guarantee benefit.
VA loan origination fee
Similar to an FHA loan, the federal government requires a fee to help offset the cost of a possible default on your part. It is charged upfront at the time of closing in the form of a loan origination fee, which can usually be rolled into the loan as part of the total amount financed.
VA Home Loan versus FHA: weighing the comparisons
Now that we understand the features and benefits of each loan, it is crucial to look at how each loan stacks up against the other.
It is clear that both have robust features and benefits, but which one should you go with to finance your home purchase?
FHA loans appear to be easier to qualify in some respects. However, it would help if you considered the total cost of borrowing under this program. The back-end fees and upfront costs may outweigh the inclusiveness of the program.
You will almost always pay a little more interest with a VA loan than any other type. But keep in mind that it is always at a fixed rate, meaning it can never go up.
You have the peace of mind that your principal payments stay the same throughout the life of the loan. When you have built up enough equity in your home, you then may want to try and secure a refinancing at a lower interest rate.
Down payment requirements
This is where the VA loans have all others beat by a long shot. No other loan program offers you the ability to borrow up to 103% of your loan value.
This can be especially important for active duty during military relocation. If you are PCS'ing to a new duty station, you will certainly need cash on hand for a whole host of personal expenses.
If you have already put all your cash into your new home purchase, nothing will be left for emergencies, such as receiving new orders!
Let's face it; there are no government-backed loans that are particularly convenient for anyone. In fact, with both FHA and VA loans, it could take as much as 60 days to close on your house.
With this reality in mind, most active-duty personnel and veterans usually opt for a VA loan. There is a very good reason for this.
Simply put, you have the backing and support of not only the entire VA, but if you are currently on active duty, you have those in your chain of command who have already been through the process of utilizing their VA benefits.
These people can advise and help you navigate what may seem like a very complicated process. On the flip side, if you decide to venture outside the military community for an FHA loan, you may feel somewhat alone in the process.