VA Loan vs FHA Loan: Which One Should You Choose?

If you are an eligible borrower looking to buy a home, two popular mortgage options are VA loans and FHA loans. Both are government-backed loans that make homeownership more accessible. But there are some key differences between these two loan types that you need to understand before deciding if a VA or FHA loan is the better choice for you.

In this comprehensive guide, we will compare VA loans vs FHA loans to help you determine which one may be the better fit.

What Are VA Loans and FHA Loans?

First let’s start with a quick overview of what exactly VA loans and FHA loans are

VA Loans

• VA loans are backed by the U.S. Department of Veterans Affairs.
• They allow eligible military members, veterans, and surviving spouses to purchase a home with no down payment.
• VA loans do not require private mortgage insurance.
• The funding fee, which helps cover the cost of the program, ranges from 1.4% to 3.6% of the loan amount.

FHA Loans

• FHA loans are insured by the Federal Housing Administration, part of HUD.
• They are available to all qualified homebuyers who meet credit standards.
• FHA loans only require a 3.5% down payment.
• Borrowers have to pay for mortgage insurance premiums.

Now let’s take a deeper look at the key differences between these two popular mortgage loan programs.

VA Loan vs FHA Loan: Eligibility

VA loans have strict eligibility requirements, while FHA loans are open to most borrowers who meet the credit standards.

Who is Eligible for a VA Loan?

You must be one of the following to qualify for a VA-backed mortgage

• A veteran who served at least 90 days of active duty during wartime
• A veteran who served at least 181 days of active duty during peacetime
• Current military member with at least 181 days of service
• Surviving spouse of a veteran who died in service or from a service-related disability

You’ll also need a certificate of eligibility and meet credit and income requirements from the lender.

Who Can Get an FHA Loan?

FHA loans are available to most borrowers who meet these basic requirements:

• A minimum credit score of 580
• Debt-to-income ratio below 43%
• Enough income to afford the monthly payments

The FHA doesn’t have specific military service requirements. These loans are open to anyone who meets the above criteria.

Down Payment and Mortgage Insurance

One of the biggest advantages of a VA loan is that you can get a mortgage with zero down. FHA loans require at least 3.5% down.

VA Loan Down Payment

The VA does not require any down payment from eligible borrowers. This makes it easier for veterans and service members to purchase a home, even if they have limited savings.

You can make a down payment if you choose, but it’s not required. This perk allows military families to buy a home sooner.

FHA Loan Down Payment

To qualify for the lowest interest rate on an FHA loan, you need to make a down payment of at least 3.5% of the purchase price. On a $300,000 home, that equals around $10,500.

Some lenders may allow down payments as low as 3% for borrowers with higher credit scores. But the standard for an FHA loan is 3.5%.

Mortgage Insurance

VA loans don’t require private mortgage insurance. But FHA borrowers have to pay mortgage insurance premiums, adding to the monthly costs.

On an FHA loan, you’ll 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 premium is required when you have less than 20% equity in the home. On a VA loan, mortgage insurance is not required.

Interest Rates and Closing Costs

VA and FHA loans often have lower interest rates than conventional loans. Let’s look at how their rates and fees compare.

VA Loan Rates

The interest rate on a VA mortgage will vary based on your financial profile and market rates. VA mortgages often offer better interest rates than other loan types. This makes them attractive for eligible borrowers.

You’ll also pay the VA funding fee mentioned earlier. For a first-time borrower, this fee is 2.3% of the loan amount.

FHA Loan Rates

FHA loans are very competitive interest rate-wise as well. The rates are similar to what you’ll see from VA loans.

With an FHA loan, your closing costs will include the upfront mortgage insurance premium plus standard fees like appraisal and application costs. Overall fees tend to be slightly higher than a VA loan.

Credit Score Requirements

FHA and VA loans have relatively low credit standards compared to conventional mortgages. But FHA score requirements are a bit lower.

Minimum FHA Credit Score

To qualify for an FHA loan, most lenders require a minimum credit score of 580. Some may go as low as 500 for borrowers who make a 10% down payment.

So FHA loans can be a good option if you have less-than-perfect credit but are working to improve it. They offer a viable path to homeownership for borrowers who may not qualify for a conventional mortgage.

Minimum VA Credit Score

The VA itself does not mandate a minimum credit score. But lenders typically set a minimum VA loan credit score requirement between 580 and 620.

Some lenders may go as low as 530 for applicants who make a down payment to offset their lower score. Talk to lenders to see their specific requirements.

How Much Can You Borrow?

Both VA and FHA loans have limits on the maximum loan amount they will back. VA limits vary by county, while FHA loans have fixed nationwide caps.

VA Loan Limits

For VA loans, the maximum loan amount you can borrow is based on limits set by county. VA loans have higher limits than FHA loans.

• The standard 2022 base conforming VA loan limit is $420,000.
• But limits range from $420,150 to $970,800 depending on location.

VA loans go up to $2,000,000 in Alaska and Hawaii. You can check your county limit on the VA website.

FHA Loan Limits

FHA loan limits are not tied to geographic location. Instead, they have fixed ceilings:

• The base 2022 nationwide limit for FHA loans is $420,680.
• The ceiling goes up to $970,800 for homes in high-cost areas.

So the maximum FHA loan amount you can qualify for is lower than VA in most markets.

Key Benefits of VA Loans vs FHA

To recap, let’s look at some of the top perks borrowers get with a VA loan compared to an FHA mortgage:

VA Loan Benefits

• Zero down payment required
• No monthly mortgage insurance premiums
• Lower interest rates on average
• Higher maximum loan amounts

FHA Loan Benefits

• Only need a credit score of 580
• Low 3.5% down payment requirement
• Available to all qualified homebuyers

So in many cases, a VA loan will allow eligible borrowers to buy a home with less cash up front and lower monthly payments.

But an FHA loan can also be a great option, especially if you have credit challenges or a low down payment amount.

When Is An FHA Loan Better Than A VA Loan?

Here are a few key times when an FHA mortgage may make more sense than a VA loan:

• You don’t meet VA eligibility requirements
• You have a credit score under 620
• You only have a 3-5% down payment available
• You are not planning to stay in the home long-term

Carefully compare both loans to see which one offers the best terms and fits your financial situation.

Tips For Choosing Between FHA and VA

If you qualify for both loan types, keep these tips in mind:

• Get pre-approved to see actual loan estimates.
• Compare interest rates and monthly payments.
• Calculate the cost savings from no VA mortgage insurance.
• Make sure you meet VA service requirements.
• Ask about seller contributions to help with closing costs.
• Know the VA funding fee percentage you’ll pay.
• Understand FHA’s mortgage insurance premium costs.

Doing your homework can ensure you select the right government-backed loan for your needs.

Work With A Trusted Lender

Finding the right VA or FHA mortgage requires a lender you can trust. Look for an experienced lender that offers these tips:

• Low rates and fees
• Smoother approval process
• Strong customer service
• Ability to close loans quickly
• Resources to guide your home search

The lender you choose can significantly impact your loan experience and bottom line. So make