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.
If you’re a first-time homebuyer or don’t have perfect credit, VA and FHA loans can help make buying a home more affordable. But how do you know whether a VA or FHA loan is right for you?
I’ve taken out both types of loans personally, so I want to share my experience to help others understand the key differences between these two popular government-backed mortgages.
A Quick Intro to VA and FHA Loans
First, what exactly are VA and FHA loans?
VA loans are backed by the Department of Veterans Affairs. They offer great rates and perks to eligible military members, veterans, and surviving spouses.
FHA loans are insured by the Federal Housing Administration. They help lower income and credit-challenged borrowers become homeowners.
The government backing on these loans reassures lenders and allows them to offer more flexible borrowing options
Now, let’s dive into the details on how VA and FHA loans compare.
VA Loan Benefits
VA loans really hooked me with two huge perks
-
No down payment required – This was a lifesaver when I was buying my first house as a young soldier just starting out. Saving up 3-5% for a down payment can be tough.
-
No monthly mortgage insurance – With an FHA loan, you’ll pay this costly additional fee each month if your down payment is less than 20%. But VA loans skip this charge entirely.
On top of that, VA loans offer:
- Competitive interest rates
- Option to roll closing costs into the loan
- Ability to use gift funds for the down payment
- Flexible credit requirements
- Can be used multiple times to purchase another home
Overall, VA loans provide awesome value, especially if you want to purchase with minimal cash out of pocket.
FHA Loan Benefits
Though they can’t match the VA perks above, FHA loans do have some nice features:
-
Low 3.5% down payment – Much less cash needed compared to conventional loans. This down payment can also come from gifts.
-
Lenient credit requirements – You may qualify with a score as low as 500 with at least a 10% down payment.
Other advantages include:
- Low interest rates
- Small down payments even with poor credit
- Low monthly mortgage insurance compared to conventional loans
- Gift funds can pay for your down payment
- Funds to help cover closing costs
For borrowers who don’t have VA loan eligibility, an FHA loan can make homeownership much more accessible.
VA Loan Requirements
VA home loans have special eligibility requirements. You must be:
- A current military servicemember
- A veteran
- A surviving spouse of a servicemember or veteran
And you need to meet one of these minimum service length requirements:
- 90 total days of active duty during wartime
- 181+ days of continuous active duty during peacetime
- 6 years in the National Guard/Reserves
- Surviving spouses of veterans who died in the line of duty
The VA doesn’t set a minimum credit score, but lenders usually require:
- 580-620+ for full financing
- 500-579 with 10%+ down
FHA Loan Requirements
FHA loans are open to all borrowers who meet credit, income, and debt requirements including:
- Credit score of at least 500 with 10% down
- Credit score of 580+ with 3.5% down
- Debt-to-income ratio below 43%
- 2 years of steady income/employment
First-time homebuyers must also complete a counseling course to qualify for an FHA loan.
Comparing Down Payments
The zero down payment option for VA loans is unmatched. But FHA still allows very low down payments.
VA loans – No down payment required. But you can pay up to 100% of the purchase price.
FHA loans – Mandatory 3.5% down payment. Can go as low as 3.5% even with bad credit.
For a $300,000 home purchase, here’s how the down payments compare:
| Loan Type | Minimum Down Payment | Down Payment Amount |
|---|---|---|
| VA | 0% | $0 |
| FHA | 3.5% | $10,500 |
As you can see, that mandatory 3.5% down payment on an FHA loan can quickly add up. The $0 VA down payment is a huge advantage.
Mortgage Insurance Differences
One major difference between VA and FHA loans is how they handle mortgage insurance:
VA loans – The funding fee can range from 1.4% – 3.6% of the loan amount. This upfront cost works similarly to monthly mortgage insurance. However, the fee can be rolled into the loan or paid upfront.
FHA loans – Required to pay both an upfront mortgage insurance premium (1.75% of loan amount) and an annual premium (0.45% – 1.05% of loan balance). This recurring monthly cost is baked into your payments.
With an FHA loan, you’ll pay that monthly mortgage insurance for the life of the loan unless you refinance. But the VA funding fee is only paid once upfront.
Clearly, VA loans save you a ton of money by avoiding monthly mortgage insurance payments.
Interest Rates
Government-backed loans often have lower interest rates than conventional mortgages.
In general, VA loans tend to offer the best rates – usually 0.5 to 1% lower than FHA loan rates. However, other factors like your credit score, down payment, and loan term will impact your specific rate quote.
I’d recommend getting rate quotes for both VA and FHA loans to see which option provides the lowest rate based on your situation.
Loan Limits
VA and FHA loans both come with conforming loan limits that cap the maximum you can borrow. These lending limits factor in your property location.
Here are the current baseline limits:
- VA loan – $564,500 for single-family homes
- FHA loan – $548,250 for single-family homes
So in higher-cost areas, VA loans allow you to borrow slightly more. But in many markets, VA and FHA limits are comparable.
Key Differences At a Glance
To recap, here are the main features that set VA and FHA loans apart:
| Loan Feature | VA Loan | FHA Loan |
|---|---|---|
| Eligibility | Military affiliated only | Open to all borrowers |
| Down Payment | None required | Mandatory 3.5% down |
| Mortgage Insurance | No monthly premium | Required monthly |
| Interest Rates | Usually lower than FHA | Typically higher than VA |
| Loan Limits | $564,500 | $548,250 |
With the huge perks for eligible borrowers, VA loans are hard to beat. But FHA loans are also a great option if you don’t qualify for a VA loan.
Which Loan Is Right For You?
As you can see, VA and FHA loans share similarities but also have key differences. Choosing the right loan type depends on your financial situation and goals.
VA loans are best if you want:
- A $0 down payment
- To avoid monthly mortgage insurance
- The lowest interest rate
FHA loans may be better if you:
- Don’t qualify for a VA loan
- Have a lower credit score
- Need flexible credit requirements
My advice – if you’re eligible for both, get quotes for each loan type. Apply for the one that provides the best pricing and fits your needs.
And don’t forget to ask about down payment assistance programs in your state. These can help you cover some of your closing costs and down payment.
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.
Mortgage Insurance and Fees
FHA loans come with two mortgage insurance charges – an upfront insurance premium and a yearly mortgage insurance premium (MIP) based on the remaining loan balance. The one-time upfront charge on FHA loans is 1.75% of the loan amount and is added to your loan balance. The annual premium decreased from 0.85% to 0.55% of the loan amount in early 2023, saving FHA buyers potentially thousands over the life of the loan. The annual MIP can only be canceled once your mortgage is paid in full unless you had a down payment of at least 10%. In that case, the MIP will be canceled after 11 years.
In the case of the VA, the funding fee varies from 1.25% to 3.3% of the loan amount, depending on the down payment amount and previous VA loan use. This fee can be paid upfront or rolled into the total loan amount. Some VA loan applicants are exempt from paying the funding fee and may waive the fee altogether.
For a FHA loan of $250,000, the total amount financed would be around $254,375 with an additional MIP annual fee. The overall additional cost from the annual premium would be around $30,000-$35,000 by the end of the loan, depending on the amortization schedule.
For a VA loan of $250,000, the total amount financed would be $255,750 with no annual fee. While the VA funding fee can be a greater upfront cost, it is much more cost-effective over the life of the loan.
VA loans may be more cost-effective in the long run. Its important to calculate the total costs over the life of the loan.
VA Loan Vs. FHA Loan: What YOU need to know!
FAQ
What is the difference between FHA and VA loans?
Why is a VA loan better?
Why would a seller not accept an FHA or VA loan?
Why would a seller not accept a VA loan?
What is the difference between a VA and FHA loan?
VA loans, backed by the U.S. Department of Veterans Affairs, are open only to those who have served or are serving in the military and for some surviving spouses. FHA loans, insured by the Federal Housing Administration, are open to anyone who qualifies. Beyond that, specific features and requirements of the two loans differ as well.
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 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.
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.