VA Loans vs FHA Loans: How To Choose The Best Mortgage For You

Buying a home is an exciting milestone in life, but it also involves a lot of big financial decisions. Two popular mortgage options for homebuyers are VA loans and FHA loans. If you’re eligible for both loan types, how do you choose between them?

I’ve helped many clients navigate this decision over my 10 years as a mortgage broker In this article, I’ll compare VA and FHA loans in depth so you can determine the best type of mortgage for your situation

A Quick Intro To VA and FHA Loans

First, let’s go over the basics of what makes these loans unique:

VA loans are backed by the U.S. Department of Veterans Affairs. They are available to active duty military, veterans, reservists, and certain surviving spouses. Some key perks are that VA loans don’t require a down payment or mortgage insurance.

FHA loans are insured by the Federal Housing Administration. They are open to all qualified homebuyers, not just military families. FHA loans allow down payments as low as 3.5% and are more flexible for borrowers with lower credit scores.

Now let’s take a deeper dive into how VA and FHA loans compare across several key categories

VA Loan vs FHA Loan Eligibility

The first major difference between VA and FHA loans is eligibility.

VA loans have strict requirements related to military service. You must be:

• An active duty service member
• A veteran who served at least 90 days of active duty during wartime
• A reservist or National Guard member with at least 6 years of service
• The surviving spouse of a veteran who died in service or from a service-related disability

FHA loans have much broader eligibility requirements. In fact, just about anyone can qualify provided they meet these basic standards:

• Have a valid Social Security number
• Have a FICO credit score of at least 500
• Meet debt-to-income and other underwriting requirements

The bottom line: VA loans are exclusively for military families, while FHA loans are open to all.

Down Payment and Mortgage Insurance

Two other big differences between VA and FHA loans involve the down payment and mortgage insurance.

VA loans do not require a down payment at all for most borrowers. This “no down payment” perk makes it easier for eligible buyers to afford a home.

VA loans also don’t charge monthly mortgage insurance. Instead, you pay an upfront VA funding fee that ranges from 1.4% to 3.6% of the loan amount.

FHA loans require a minimum down payment of 3.5%. While not a huge amount, it is a hurdle compared to the zero down payment for a VA loan.

FHA buyers also pay an upfront mortgage insurance premium of 1.75% of the loan amount, plus an annual premium between 0.45% and 1.05% of the loan amount. This monthly mortgage insurance lasts for the life of the FHA loan.

Clearly, VA loans offer significant savings if you want to buy a home with minimal cash upfront and dislike the idea of mortgage insurance premiums.

Credit Score Requirements

VA and FHA loans have differing minimum credit score requirements as well:

• VA loans don’t have an official minimum credit score, but lenders typically require a score of at least 620. Some may approve scores as low as 580 with strong compensating factors.

• FHA loans can be obtained with a minimum credit score as low as 500, provided you make a 10% down payment. For the minimum 3.5% down payment, you’ll need a score of at least 580.

As you can see, FHA loans offer more flexibility if you have less-than-perfect credit but can manage a small down payment. VA loans are a bit tougher to qualify for if you have a poor credit history.

Loan Limits

The maximum loan amount you can borrow also differs between VA and FHA loans:

• VA loans do not have set lending limits for borrowers making their first purchase with a VA loan. However, lenders will still assess your income, assets, debts, and credit to determine the max loan amount you qualify for.

• FHA loans have maximum loan limits that vary by county, similar to conforming loan limits. Currently FHA loan limits range from $420,680 in lower cost areas to $970,800 in the highest cost areas.

So while VA loans give you more wiggle room, FHA loans still allow you to buy a high-value home in expensive real estate markets.

Allowable Debt-to-Income Ratio

Lenders also look at your total monthly debt payments in relation to your gross monthly income – also known as your debt-to-income or DTI ratio. Here are the DTI limits for VA and FHA loans:

• VA loans do not have an official cap, but most lenders hesitate to approve DTIs over 41%. They scrutinize DTIs above this level much more carefully.

• FHA loans allow maximum DTI ratios of 31% for housing costs and 43% for total debt. Your ratio can go up to 47% with strong compensating factors.

FHA guidelines build in a bit more breathing room for borrowers with higher debt loads. But with either loan, maintaining a DTI under 40% will make getting approved much easier.

Types of Properties Allowed

Both VA and FHA loans can be used to finance single family homes, townhomes, condos and some multifamily homes of 1-4 units.

The property must be used as your primary residence – VA and FHA loans can’t be used to purchase vacation homes or investment properties. Other key requirements include:

• Property must meet HUD minimum quality standards and local building codes
• Home must be appraised at equal or higher value than purchase price
• Condos must be FHA or VA approved

Prepayment Penalties

One final advantage of VA and FHA loans is that they cannot charge prepayment penalties. This gives borrowers flexibility to refinance or pay off the loan early with no extra fees.

By contrast, conventional loans may hit you with a fee if you pay off the mortgage within the first 3-5 years after closing.

How To Choose: VA Loan vs FHA Loan

Now that we’ve compared the two loans in detail, how do you decide between a VA loan and FHA loan?

Here are a few key questions to ask yourself:

• Are you eligible for a VA loan based on military service? VA loans come with big perks like no down payment and no monthly mortgage insurance.

• How is your credit score? FHA loans may be a better option if your score is below 620 and you need more underwriting flexibility.

• How much cash do you have saved? The 3.5% FHA down payment could be easier to manage than the savings needed for a conventional loan down payment.

• What’s your monthly debt burden like? If your DTI is over 41%, FHA guidelines may give you more leeway.

While VA loans offer excellent benefits for military buyers, FHA loans can also be attractive depending on your financial situation.

I recommend sitting down with a mortgage professional to discuss both options. They can help you analyze the pros and cons for your unique circumstance.

Owning a home is a big step that impacts your finances for years to come. Make sure you select the right mortgage product by understanding how VA and FHA loans measure up. This will put you in a better position to find your dream home while keeping your payments comfortable long term.