FHA and VA loans are both popular choices for homebuyers, but which one is right for you? It all comes down to your unique financial circumstances. Each mortgage type has benefits and features unique to the program.
FHA loans, insured by the Federal Housing Administration, are accessible to the general public. In contrast, VA loans are backed by the Department of Veterans Affairs and available to Veterans, active duty service members and some surviving spouses.
Buying a home is an exciting milestone, but securing home financing can be daunting, especially for first-time homebuyers. As you navigate the mortgage maze, FHA and VA loans likely pop up as popular options. But what exactly sets them apart?
I’ve purchased homes with both loan types, so I want to provide an insider’s look at the key differences between FHA and VA home loans. While government-backed, these two mortgage programs have distinct requirements and benefits based on your military service and financial profile.
This comprehensive guide examines FHA vs VA loans in 2023 across critical factors like eligibility, down payment rates and costs. Let’s dive in!
A Quick Intro to FHA and VA Loans
Before dissecting the nitty-gritty details, let’s review what distinguishes these loan types
FHA loans are backed by the Federal Housing Administration (FHA) to help low-to-moderate income buyers and those with lower credit scores purchase homes. These loans are available to the general public.
VA loans are guaranteed by the Department of Veterans Affairs (VA) to help active duty military, veterans, reservists and surviving spouses buy homes with 100% financing and no monthly mortgage insurance.
While similar in many regards, FHA and VA loans have key differences that make each better suited for certain borrowers. Your choice depends on your military background, finances, and goals.
FHA vs VA Loan Eligibility
The most obvious difference between FHA and VA loans is eligibility – who can qualify for each loan type.
FHA loans have flexible credit requirements, making these mortgages accessible to most buyers if they meet income and debt benchmarks.
VA loans are exclusively for those who have served our country. You must be a veteran, active-duty servicemember or qualifying military spouse. National Guard and Reserve members may also qualify under certain conditions.
Before applying for a VA loan, you’ll need a Certificate of Eligibility (COE) as proof of your service. Your COE verifies that you meet the minimum duty requirements to use your VA home loan benefit.
If you served, a VA loan is likely the better option since it offers military-exclusive perks.
Down Payment Differences
Coming up with a down payment is a major hurdle for hopeful homebuyers. This is where VA and FHA loans differentiate.
The minimum down payment is 3.5% for FHA loans. With a credit score below 580, your down payment jumps to 10%. The down payment directly reduces how much you need to borrow.
Conversely, VA loans don’t require any down payment. You can finance 100% of the purchase price with a VA mortgage, provided you have full entitlement. This gives VA buyers a leg up, especially when competing against conventional loan offers with hefty down payments.
No money down is hard to beat. But if you have the funds, both loans let you make a down payment to lower your monthly payment or interest costs.
Comparing Credit Requirements
Credit criteria vary between the two loan programs based on your scores, profile and debt-to-income ratio (DTI).
The minimum FHA credit score is 500 but requires 10% down. With at least a 580 score, the standard 3.5% down FHA loan is accessible. Many lenders require a 620 score or set their own FHA credit benchmarks.
VA loans don’t have a set credit score threshold. However, most lenders look for at least a 620 score. The VA focuses more on your overall credit profile than just the score number.
With a shorter credit history or scores below 620, an FHA loan may offer better approval odds. VA loans provide more leeway once you hit a 620 score.
Interest Rates: VA vs FHA
Government loans feature attractive rates, though VA currently maintains a slight edge. In 2022, the average interest rate for VA loans was 0.226% lower than FHA financing.
This gap varies based on financial markets and your individual qualifications. But in general, VA interest rates are marginally lower than FHA mortgage rates.
Over a 30-year loan term, that 0.226% difference would save roughly $12,000 in interest with a $250,000 loan. Lower rates equal big savings when you’re paying for decades.
Comparing Mortgage Insurance and Fees
Instead of private mortgage insurance (PMI), FHA and VA loans charge upfront and annual fees. But they differ in cost structure.
FHA loans include:
-
Upfront mortgage insurance premium (UFMIP) – 1.75% of the loan amount
-
Annual mortgage insurance premium (MIP) – 0.55% of the loan balance
In 2023, FHA lowered its annual fee from 0.85% to 0.55%, saving borrowers thousands over the life of the loan.
VA loans charge:
- Funding fee – Ranges from 1.4% to 3.6% of the loan amount
The VA funding fee is a one-time charge paid at closing. On a $250,000 mortgage, the VA fee runs $3,500 to $9,000 depending on your down payment and other factors.
The FHA UFMIP would add $4,375 upfront. But you’ll also owe the 0.55% annual MIP, costing over $30,000 extra over the loan term.
In most cases, VA loans are more cost-effective long-term than FHA mortgages. Crunch the numbers to see which option provides the lowest total fees based on your specifics.
Key Differences in Loan Limits
All mortgages have maximum conforming loan limits dictating the highest amount you can borrow. FHA and VA limits contain stark contrasts.
The FHA maximum loan limit in 2023 is $970,800, but can drop to $435,600 in some counties. High-cost areas see higher caps, but FHA loans are geared for lower-priced homes.
VA mortgages do not have a set loan limit if you have full entitlement. With prior VA loan use, your remaining entitlement becomes your limit. This provides more flexibility for pricier houses, especially in competitive markets.
Choosing Between FHA and VA Loans
Now that we’ve broken down the core differences, how do you decide what’s best for your home buying needs?
Go with a VA loan if you:
- Are eligible based on military service
- Have limited savings for a down payment
- Want a loan with no monthly mortgage insurance
Choose an FHA loan if you:
- Don’t qualify for a VA loan
- Need flexible credit requirements
- Are purchasing a lower-priced home
Either mortgage option offers a solid path to homeownership. I’d encourage you to get pre-approved to see personalized rates and programs for your financial situation.
This head-to-head guide should provide a great foundation to make an informed decision between FHA and VA loans. Your dream home is within reach!
Frequency of Entities:
fha: 36
va: 36
home: 25
loan: 69
loans: 31
mortgage: 15
fha loans: 16
va loans: 21
down payment: 6
credit: 7
interest rates: 3
mortgage insurance: 5
loan limits: 3
Are FHA loans better than VA loans?
Deciding if a FHA or VA home loan is better depends on your situation and needs.
A VA loan might be the best option if you want to avoid loan limits or don’t have funds saved for a down payment. Although there is a one-time VA funding fee, you may qualify for an exemption, which isn’t possible for FHA program fees.
A FHA loan may be a better option if you have a lower credit score or a higher DTI ratio. These loans have lower credit requirements, making them ideal for first-time homebuyers.
No matter what your homebuying goals are, Veterans United is here to help. Talk with a home loan expert to get a complete comparison for your unique homebuying journey.
About Our Editorial Process
Veterans United is recognized as the leading VA lender in the nation, unmatched in our specialization and expertise in VA loans. Our strict adherence to accuracy and the highest editorial standards guarantees our information is based on thoroughly vetted, unbiased research. Committed to excellence, we offer guidance to our nations Veterans, ensuring their homebuying experience is informed, seamless and secured with integrity.
FHA vs VA Loan Volume
For 2023, over 753,000 FHA loans were originated compared to slightly over 377,000 VA loans.
VA Loan Vs. FHA Loan: What YOU need to know!
FAQ
Can I get an FHA loan with a VA loan?
What is the downside of an FHA loan?
What is the difference between a FHA VA loan and a conventional loan?
Why would a seller not accept an FHA or VA loan?
What are FHA & VA loans?
FHA and VA loans are intended for primary residences, requiring borrowers to occupy the home. FHA loans have specific property standards to ensure the safety, security and soundness of the property. This includes requirements related to the home’s structural integrity and electrical, heating or plumbing systems.
Should I get a VA or FHA loan?
With no down payment or mortgage insurance requirements, VA loans are hard to beat. But even if you’re eligible for a VA loan, an FHA loan might be worth a look, especially if you have a lower credit score and are able to put down at least 3.5% of the purchase price. Both mortgages are popular with first-time home buyers.
What is the difference between FHA & VA mortgage insurance?
FHA mortgage insurance requires an upfront premium payment of 1.75% of the loan amount, and then yearly payments of 0.45% to 1.05% of the loan amount, depending on certain factors. VA loan: Unlike conventional and FHA loans, VA loans require no down payment.
What is the difference between FHA and VA loans?
FHA loans are intended to help people who otherwise might not be able to afford homeownership get into homes. They allow small down payments and are open to borrowers with lower credit scores. VA loans are backed by the U.S. Department of Veterans Affairs. These loans are a benefit available to those who have served our country.