The Key Differences Between VA Loans and FHA Loans

As a prospective homebuyer deciding between a VA loan and an FHA loan can be confusing. Both are government-backed mortgage loans that offer more flexible qualifying criteria than conventional loans. This makes them great options for first-time homebuyers and those with less-than-perfect credit.

But VA and FHA loans have some notable differences Understanding these key distinctions can help you determine which type of mortgage is the better fit for your situation

VA Loans Are For Military Members and Veterans

The biggest difference between FHA and VA loans is who is eligible. VA loans are only available to active and former military members as well as eligible surviving spouses. You must meet the VA’s minimum service requirements to qualify.

FHA loans on the other hand are open to any borrower who meets the credit score and debt-to-income requirements. You don’t need military service to be eligible.

VA Loans Require No Down Payment

One of the biggest perks of a VA loan is that you can get one for zero down. This makes VA loans extremely attractive to eligible borrowers, especially first-time homebuyers who haven’t built up savings for a down payment yet.

With an FHA loan, you’ll need to make a minimum down payment of 3.5% of the purchase price. On a $200,000 home, that equals $7,000.

So if you can get a VA loan, you can skip coming up with thousands of dollars upfront to buy your home.

VA Loans Don’t Require Mortgage Insurance

FHA loans require borrowers to pay mortgage insurance premiums. This added cost is baked into your monthly payments.

VA loans don’t have monthly mortgage insurance premiums. But most borrowers will pay a one-time VA funding fee. This helps fund the VA loan program.

For first-time VA loan borrowers, the funding fee is 2.15% of the loan amount if no down payment is made. The fee can be rolled into the loan or paid upfront.

So VA borrowers avoid monthly mortgage insurance but pay a one-time funding fee instead.

FHA Loans Allow Lower Credit Scores

The VA doesn’t set minimum credit score requirements for its loans. But lenders usually require a score of at least 580 to 620.

With an FHA loan, you may be able to qualify with a score as low as 500 with a 10% down payment. The minimum score is 580 with 3.5% down.

So borrowers with poor credit have a better chance of approval with an FHA loan than a VA loan.

Interest Rates Are Similar

Government-backed VA and FHA loans often have lower interest rates than conventional loans. VA rates are sometimes marginally better than FHA rates.

But your individual financial profile has more impact on your rate than whether you choose FHA or VA. Improving your credit or making a larger down payment can help you qualify for the lowest rates.

Both Offer Streamline Refinancing

If you currently have an FHA or VA loan, you may be eligible for streamline refinancing. This allows you to refinance into a new FHA or VA loan with limited documentation and no appraisal.

Streamline refinancing can help FHA and VA borrowers lower their interest rate or monthly payment quickly and easily.

How to Choose Between FHA and VA

When deciding between an FHA and VA loan, consider your eligibility, finances and goals:

• If you lack military service, your only option is an FHA loan.

• If you want to buy with no down payment, the VA loan is the clear choice.

• If you have very poor credit, you may have better odds with an FHA loan.

• If you want to avoid monthly mortgage insurance, lean toward a VA loan.

I recommend getting pre-approved for both loans. Comparing loan estimates side-by-side lets you see how much you’d pay over the life of each loan.

Picking the right loan for your situation can save you thousands over your mortgage term. With pre-approvals from multiple lenders, you’ll be able to choose the most affordable option with confidence.