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 one of the most exciting financial milestones in life. But as a first-time homebuyer, deciding how to finance your dream home can feel overwhelming with so many options to choose from. Two popular government-backed mortgage programs to consider are VA home loans and FHA loans.
VA home loans are insured by the Department of Veterans Affairs and are exclusively for eligible military members and veterans. FHA loans are backed by the Federal Housing Administration and are available to all qualified homebuyers who meet credit and income requirements. While both offer flexible qualification guidelines they each have unique pros and cons.
So how do you decide if a VA loan or FHA loan is better for your situation? In this comprehensive guide, we’ll compare VA vs FHA loans on all the key factors to consider so you can determine which mortgage best fits your needs and financial goals
VA Home Loan Overview
VA home loans help active duty service members veterans reservists, National Guard members and surviving spouses finance home purchases with little to no down payment.
These mortgages are provided by private lenders but insured by the VA, so they offer competitive rates and flexible terms. The main highlights of VA loans include:
- No down payment required – VA loans offer 100% financing
- No monthly mortgage insurance – Saving you money each month
- Competitive interest rates – VA loans often have lower rates than conventional loans
- No prepayment penalties – Giving you flexibility if you want to refinance or move
- Can be used for new construction – In addition to existing homes
- Assumable – Loans can be transferred to new owner if home is sold
- Streamline refinancing available – Quickly lower your rate by refinancing into a new VA loan
To qualify for a VA home loan, you must have sufficient income and credit. However, guidelines are more lenient than conventional loans. The VA also doesn’t set a minimum credit score requirement, but most lenders require a score of at least 580-620.
FHA Loan Overview
FHA loans are government-insured mortgages that help make homeownership accessible for low-to-moderate income buyers and those with lower credit scores. Some key features include:
- Low down payments – Minimum of 3.5% down
- Lenient credit guidelines – Minimum 580 FICO score
- Low closing costs – Limit on upfront fees
- Assumable financing – New owners can take over mortgage
- Streamline refinancing available
While FHA loans offer flexible borrowing options, there are some drawbacks to be aware of. FHA loans require you to pay mortgage insurance premiums (MIP) for the life of the loan. Conventional loans allow you stop paying MI once you reach 20% equity, but FHA loans require MIP regardless of your equity stake.
FHA loans also charge an upfront MIP of 1.75% of the total loan amount on top of your down payment at closing. This increases your upfront costs.
Now let’s take a detailed look at how VA and FHA loans compare across some of the most important homebuyer considerations.
VA vs FHA Loans: Down Payment
One of the biggest advantages of VA loans is that they require zero down payment. This benefit allows eligible borrowers to get into a home without any money down.
FHA has more lenient down payment requirements than conventional loans, but still requires at least 3.5% down. On a $300,000 home purchase, that would equate to a minimum of $10,500 upfront.
Winner: VA loan – Being able to buy with no down payment dramatically improves affordability.
Mortgage Insurance
An important difference between VA and FHA loans is how they handle mortgage insurance.
FHA loans require upfront and annual mortgage insurance premiums. The upfront MIP is 1.75% of the total loan amount. Ongoing annual mortgage insurance ranges from 0.45% – 1.05% of the loan amount per year.
VA loans have a funding fee rather than MI. For first time users, the VA funding fee is 2.3% of the loan amount. On subsequent use of a VA loan, the fee is 3.6%. However, unlike FHA MI, the VA funding fee can be rolled into the loan balance.
Perhaps most importantly, VA loans do not have any monthly mortgage insurance premiums. FHA borrowers have to pay the annual MI for the entire loan term.
Winner: VA loan – No monthly MI provides savings over the life of the loan.
Interest Rates
Government-backed loans like VA and FHA mortgages tend to offer lower interest rates than conventional loans. VA loans in particular are prized for having some of the best rates.
The reason VA loans boast ultra competitive rates is their zero risk nature for lenders. With no down payment or monthly MI, the VA guarantees the loan against any loss if the borrower defaults.
FHA loans enable affordable low down payment options, but still represent slightly higher risk due to lower credit scores. The required mortgage insurance helps offset this risk, but not to the same level as VA loans.
Winner: VA loan – VA loans consistently offer the most rock bottom interest rates.
Loan Limits
The maximum conforming loan limit for 2023 is $749,000 for most areas. In high cost counties, limits are higher. Both VA and FHA loans follow these limits.
If you need to borrow higher than conforming limits, you would need a jumbo loan which has stricter requirements. But for most borrowers, VA and FHA limits align.
One difference is that VA entitlement is based on the specific county you are buying in. So your exact maximum loan amount will vary.
Winner: Tie – VA and FHA generally have comparable loan limits.
Credit Score Requirements
VA loans have no specific minimum credit score set by the VA. But lenders usually require a score of 580-620. With strong compensating factors like a low debt-to-income ratio, you may be able to qualify with a score in the 500s.
FHA allows scores starting at 580, and will go potentially lower. But below 580, you are required to put down at least 10%. FHA also limits your total debt-to-income ratio to 50%. VA does not set a DTI cap, giving lenders more leeway.
Winner: VA loan – Slightly more flexibility for lower credit borrowers.
Debt-to-Income Ratio
Your debt-to-income ratio compares your total monthly debt payments to your gross monthly income. This ratio gives lenders an idea of your ability to manage monthly mortgage payments.
Conventional loans generally require a DTI of 43% or less. FHA sets a hard cap at 50% DTI. VA guidelines are more flexible with no defined DTI limit.
Borrowers with higher ratios may still qualify by demonstrating strong assets, cash reserves or non-traditional credit history. VA offers more discretion for lenders to make judgment calls based on your full financial picture.
Winner: VA loan – Potential for higher DTI ratio if you have offsetting factors.
Streamline Refinancing
If rates drop in the future, VA and FHA borrowers can take advantage of streamline refinancing. This allows you to refinance into a new VA or FHA loan with minimal documents or underwriting.
Streamline refis let you lower your rate and payment without the typical hassle of a standard refinance. Both VA (IRRRL) and FHA (Streamline) offer streamline programs to their borrowers.
Winner: Tie – Both offer excellent streamline refi options.
Prepayment Penalties
Prepayment penalties charge a fee if you pay off your mortgage early, either through refinancing or selling your home. These fees are common with subprime mortgages but not permitted on VA or FHA loans.
VA and FHA borrowers have the flexibility to refinance or move without facing any penalties from their lender for paying off the loan early.
Winner: Tie – Neither FHA or VA loans have prepayment penalties.
Assumable Financing
Both FHA and VA loans are assumable, allowing the new homebuyer to take over your existing mortgage when you sell. This can help increase demand from buyers and make your home easier to sell.
Assumable financing remains in place even if mortgage rates rise in the future. The new homeowner can assume the lower rate you secured.
Winner: Tie – Assumability is available with both loan types.
Eligibility and Requirements
The biggest distinction between VA and FHA loans is eligibility. Only military members, vets and their spouses can qualify for a VA home loan. FHA loans are available to all borrowers who meet qualifying guidelines.
VA has service requirements based on your military tenure and discharge status. FHA simply reviews your income, credit, down payment source and property. Documentation is typically easier for FHA
Difference Between FHA and VA Loans
Government-backed mortgages are generally more affordable compared to conventional loans and offer appealing terms for first-time homebuyers, low-income borrowers and those with lower credit. While mortgage lenders and banks do the lending, the government insures these loans, lowering the lenders risk and allowing for more flexible requirements.
Below is a table outlining the essential factors when comparing VA loans to conventional loans.
| Comparison Factor | FHA Loan | VA Loan |
|---|---|---|
| Eligibility | Available to the general public | Only available to active-duty service members, Veterans, members of the National Guard or Reserves and surviving spouses |
| Down Payment | At least 3.5%, but depends on credit score | $0 |
| Credit Score Minimum | 500 to 579 with a minimum down payment of 10% or at least 580 with a 3.5% down payment | None set by VA, but lenders often require at least 620 |
| Interest Rates | Slightly higher than VA | Slightly lower than FHA |
| Property Requirements | Must be primary residence and meet FHA Minimum Property Standards | Must be primary residence and meet VA Minimum Property Requirements |
| Debt-to-Income Ratio | Up to 50% | Up to 41% |
| Loan Limits | $498,257 in low-cost counties to $1,149,825 in high-cost counties. | None if the borrower has full entitlement |
| Mortgage Insurance and Fees | An upfront premium and annual premium | VA funding fee |
A major difference between FHA and VA loans is who is eligible for the loan. FHA loans are accessible to all qualified borrowers, which is particularly beneficial for first-time homebuyers or those with lower credit scores.
On the other hand, VA loans are specifically designed for military service members, Veterans and eligible surviving spouses. Eligibility criteria for VA loans are centered around service requirements, while FHA loans focus on financial and creditworthiness benchmarks.
If you are a Veteran or active-duty service member, it’s probably best to use your VA home loan benefit.
FHA loans are available to the broader public and typically require a minimum down payment of 3.5% if the borrower has a credit score of 580 or higher. Those with credit scores between 500 and 579 are required to make a 10% down payment.
There’s no down payment requirement with a VA loan, meaning you don’t have to put any money down if you have your full VA entitlement. This is a huge benefit of the program and enables individuals to finance 100% of the homes value.
Choose a VA loan if you don’t have enough saved for a down payment.
FHA loans typically have a minimum credit score requirement of around 580, but that can vary by lender. Borrowers with a score below this threshold may still qualify but might be required to make a larger down payment.
VA loans are more lenient in terms of credit score and don’t have a strict minimum credit score requirement. The loan approval is more dependent on the lender’s discretion. VA lenders often look at the overall credit profile rather than focusing solely on the credit score. A common benchmark is a credit score of 620, but this may vary by lender.
If your credit score is below 620 and you can afford a down payment, a FHA loan is probably the best bet.
Since VA and FHA loans are both government-backed, they can offer more favorable interest rates. According to Optimal Blue, VA loan rates remained .226 percent lower on average than FHA in 2023.
Let’s break down the monthly payments and total interest paid for both types of loans, assuming a loan amount of $200,000 over a 30-year period with a .226 difference interest rate.
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
Is a VA loan or an FHA loan better?
Why would a seller not accept a VA loan?
Can I use an FHA and VA loan together?
Is it harder to buy a house with a VA loan?
What is the difference between a VA loan and FHA loan?
But there are notable differences between these two federally-backed programs, too. One difference between a VA loan and an FHA loan is the size of the down payment. Unlike conventional and FHA loans, VA loans require no down payment. They also require no mortgage insurance.
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.
Which is better FHA or VA?
For first-time home buyers, FHA loans and VA loans are among the most popular. One key difference between FHA and VA is that only veterans, service members, and their surviving spouses can use a VA loan. So that will narrow the playing field for many borrowers. But, which one is better? That depends.
What is the difference between FHA and VA interest rates?
While FHA interest rates are usually low, a .226 percent difference in rate when compared to VA loan interest rates can equal thousands in interest savings over the life of the mortgage. Over the last year, VA interest rates were slightly lower than FHA. However, interest rates largely depend on your financial situation.