In this article, we will cover and discuss why choose an FHA over a VA home loan on a home purchase.VA Home Loans are the best primary mortgage loan programs in the United States. To be eligible for VA Loans, borrowers need to be active duty and/or retired members of the United States Military with a Certificate of Eligibility. A Certificate of Eligibility is also referred to as a COE. Spouses of deceased eligible veterans may also be eligible. There are instances where borrowers need to choose an FHA over a VA home loan. One of the reasons is for borrowers who cannot get an automated underwriting system approval and cannot qualify for a manual underwrite on VA loans. It is much easier for borrowers to get an approve/eligible per AUS with a large down payment on an FHA loan than a VA home loan. This holds especially true if the borrower had mortgage lates in the past 12 months. A second major reason why choose an FHA over a VA home loan is when the veteran borrower needs a non-married co-borrower and/or non-occupant co-borrower. VA guidelines state only a married spouse of the veteran borrower is the only co-borrower allowed.
About VA Home Loans and How It Works
The Department of Veterans Affairs, also referred to as The VA, sets the minimum lending guidelines for VA Home Loans. Only eligible active and/or retired service members of a branch of the United States Military with a certificate of eligibility can qualify for VA home loans. The U.S. government created and launched VA home loans as a reward for our members of the U.S. Armed Services for their dedication and service serving our country. It is a great priviledge to have a COE to be able to use VA loans for a home purchase. Homebuyers can qualify for a owner-occupant home purchase with 100% financing with no down payment with no mortgage insurance at competitive rates. There is no maximum loan limit on VA home loans. Mortgage rates on VA loans are very competitive.
VA Loans For Bad Credit
The VA has very lenient mortgage guidelines versus other government and/or conventional loan programs. The Veterans Administration realizes that members of the U.S. Military often have less than perfect credit due to their deployment and/or often base transfers. However, there are times for veterans in why choose an FHA over a VA home loan. It is not because of choice but rather necessity. Many wonder why choose an FHA over a VA home loan? It just baffles everyone’s mind why choose an FHA over a VA home loan when VA loans are the best of the best mortgage loan program in the country. In this blog, we will discuss the reason why choose an FHA over a VA home loan by eligible veteran homebuyers with a certificate of eligibility.
How The Automated Underwriting System Works on VA Loans
The Automated Underwriting System also referred to as the AUS, is a sophisticated computer system that analyzes the borrowers’ credit and income profile in a matter of seconds and renders a decision. The AUS has an algorithm where it knows all of the minimum guidelines on all loan programs. All VA, FHA, USDA, and Conventional loan mortgage applications need to be submitted to the Automated Underwriting System. FHA and VA loans have the most lenient credit guidelines. However, the algorithm for FHA loans will approve real bad credit borrowers with more than 10% down payment. If you have multiple late payments in the past 12 months, including mortgage lates, FHA will get you an approve/eligible per AUS with a 10% to 20% down payment where it will deny a VA loan. VA loans will not get an approve/eligible per AUS with multiple late payments in the past 12 months no matter how large of the down payment you put down
VA Loans With 500 FICO AUS Approval
Both FHA and VA loans can get AUS approval with credit scores down to 500 FICO. Old collection and charged-off accounts do not have to be paid on owner-occupant primary residence home loans. However, late payments in the past 12 months is really scrutinized by the automated underwriting system on VA loans. You will not get an approve/eligible per AUS with housing late payments in the past twelve months and/or multiple late payments. You can have older collections, derogatory, late payments that are older than 12 months, but you will not get an AUS approval with recent late payments on VA home loans. This holds true no matter how much of a large down payment you put down on a home purchase.
Results of The Automated Underwriting System on VA and FHA Loans
In this paragraph, we will cover the AUS findings on VA and FHA loans. Both VA and FHA loans have lenient guidelines. In a way, the AUS is more lenient more so on VA loans. However, AUS will not get an automated approval on VA loans with late payments in the past 12 months. FHA loans will get AUS approval with lates in the past 12 months as long as the borrower puts a substantial down payment on a home purchase. HUD, the parent of FHA, loves large down payment on home purchase. With VA, it does not matter how large the down payment is. VA does not like late payments in the past 12 months period. Depending on how many late payments the borrower has, FHA will approve AUS with 10% to 20% down payment.
The AUS will render the following decisions:
- Approve/Eligible per AUS: A/E Per AUS means the borrower meets all loan program guidelines and has an automated underwriting system approval
- Refer/Eligible per AUS: R/E Per AUS means that the automated system seems to find the borrower eligible but cannot render an automated approval and is referring it to a human underwriter to underwrite the file via manual underwriting
- Refer With Caution means the automated underwriting system cannot render an automated underwriting system approval
Manual Underwriting Versus Automated Underwriting System Approval
VA and FHA loans are the only two loan programs that will allow manual underwriting. There are many times when borrowers with not get an approve/eligible for VA loans but the same borrower may get an automated underwriting system approval on FHA loans. This is why would you choose an FHA over a VA home loan. There are instances where the borrower cannot get an AUS approval on a VA loan and cannot qualify for a manual underwrite. However, the borrower can get an approve/eligible per the automated underwriting system on an FHA loan. This is often the case with recent late payments in the past 12 months. Getting a refer/eligible per automated underwriting system is one of the main reasons why choose an FHA over a VA home loan.
VA Loan Eligibility Requirements
Below are the minimum VA Eligibility Requirements On VA Mortgages:
- The VA does not have a minimum credit score requirement
- The VA does not have a maximum debt-to-income ratio requirement
- To qualify for a manual underwrite on VA loans, you need to have been timely on all of your payments for the past 12 months
- There is a two-year waiting period requirement after bankruptcy, foreclosure, deed in lieu of foreclosure, and short sale to qualify
- Borrowers can qualify for a VA loan during Chapter 13 Bankruptcy repayment plan after being in the plan for 12 months via VA manual underwriting
- VA manual underwriting guidelines applies
- There is no waiting period after Chapter 13 Bankruptcy waiting period to qualify for VA loans
- If the bankruptcy has not been seasoned for 24 months, it needs to be a manual underwrite
- Outstanding collections and charge-off accounts do not have to be paid to qualify
- Only married spouse of the borrower can be a co-signer on a VA loan
- Non-occupant co-borrowers are not allowed on VA loans
HUD Eligibility Requirements On FHA Loans
HUD is the parent of the Federal Housing Administration (FHA). Below are the HUD Eligibility Requirements to qualify for FHA Home Loans:
- To qualify for a 3.5% down payment FHA loan, the borrower needs a 580 FICO
- Borrowers under 580 credit scores down to 500 FICO can qualify for FHA Loans with a 10% down payment
- There is a three-year waiting period after foreclosure, deed in lieu of foreclosure, short sale
- There is a two-year waiting period after the Chapter 7 Bankruptcy discharged date
- Outstanding collections and charge-off accounts do not have to be paid to qualify for FHA Mortgages
- Borrowers can qualify for an FHA loan during Chapter 13 Bankruptcy after being in the plan for 12 months
- Needs to be manual underwriting
- There is no waiting period after Chapter 13 Bankruptcy discharge on FHA loans
- If the bankruptcy has not been seasoned for 24 months, it needs to be a manual underwrite
- Timely payments in the past 24 months to qualify for FHA manual underwriting.
VA and FHA Manual Underwriting Guidelines
Both VA and FHA allow manual underwriting for borrowers who get a refer/eligible per AUS. Both VA and FHA allow borrowers in a current Chapter 13 Bankruptcy repayment plan to qualify for home loans with Trustee Approval on a manual underwrite. Manual Underwriting Guidelines apply. There is no waiting period after the Chapter 13 Bankruptcy discharge date to qualify for VA and/or FHA loans. However, if the discharge has not been seasoned for 24 months, the file needs to be manually underwritten. VA and FHA manual underwriting guidelines are almost identical. The max front-end DTI is 31% and back-end is 43% with zero compensating factor. With one compensating factor, the max front-end DTI is 37% and back-end DTI is 47%. With two compensating factors, the max front-end DTI is 40% and back-end DTI is 50%. Mortgage underwriters have a lot of underwriter discretion on manual underwrites.
FHA Guidelines on Non-Occupant Co-Borrowers Is Second Reason Why Choose an FHA over a VA Home Loan
As mentioned earlier, you can only have a married spouse as a co-borrower on a VA home loan. Non-occupant co-borrowers are not allowed on VA home loans. Cases where the borrower does not qualify with income and needs a co-borrower, they may need to switch to an FHA loan since VA home loans does not allow non-spouse co-borrowers. You can have as many non-occupant co-borrowers as you want on FHA loans. Non-occupant co-borrowers need to be related to the main borrower by blood, law, or marriage to qualify for a 3.5% down payment home purchase FHA loan. If the non-occupant co-borrower is not related to the main borrower by law, blood, and/or marriage, then HUD requires a 25% down payment. Being able to add non-occupant co-borrowers is the second main reason why choose an FHA over a VA home loan.
The Main Reason Why Choose An FHA Over A VA Home Loan
Why choose an FHA over a VA home loan who is eligible for VA Loans. Why would they go with FHA Mortgages? There are instances where FHA AUS is more lenient than the VA AUS. FHA is more forgiving with higher balances of outstanding collections and charge-off accounts than the VA AUS. A borrower may get an automated underwriting system denial on the VA AUS but an approve/eligible per AUS with FHA. The VA does not allow non-occupant co-borrowers. The FHA does allow non-occupant co-borrowers who are related to the main borrower by law, marriage, and blood. Only married spouses can be co-borrowers on VA loans. For more information on this topic or other mortgage-related topics, please contact us at Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at firstname.lastname@example.org. The Team at Gustan Cho Associates is available 7 days a week, on evenings, weekends, and holidays.
June 11, 2022 - 8 min read