FHA vs VA Loan: Which Mortgage Is Right for You?

If you’ve been researching home loans, you’ve likely come across the acronyms FHA and VA.

While all the different terms and acronyms you find while looking for a home might seem like bewildering alphabet soup, these are two you especially want to know about.

FHA and VA loans are mortgage programs that are offered by private mortgage lenders but insured by the U.S. government. The government backing allows the lenders to offer loans to a wider range of borrowers — with low down payment requirements and competitive interest rates — than they might with a conventional loan.

It helps to understand the differences between FHA vs VA loans, and the advantages of each, when you’re deciding which type of home loan to choose.

FHA vs VA loan: Which is better?

When comparing FHA and VA loans, it helps to remember that one isn’t necessarily better than the other. Homebuying is a personal process, and the only question that really matters is, which is the right loan program for you?

Having said that, all mortgage loans come with trade-offs, and FHA and VA mortgages are no different. Here’s how the two stack up.

FHA and VA loans explained

FHA loans are backed by the Federal Housing Administration (FHA) and were designed to make homeownership affordable for low- to moderate-income homebuyers. However, there are no upper income restrictions for FHA loans, and they can be great options for high-earning buyers as well.

VA loans are backed by the U.S. Department of Veterans Affairs (VA). They are specifically for active-duty military, veterans, and eligible surviving spouses, to honor their service and help enhance their quality of life.

Anyone can apply for an FHA loan as long as they meet the borrower criteria. But only qualifying veterans, active-duty servicemembers, and some surviving spouses can get VA loans, as long as the veteran received an honorary discharge.

FHA vs VA loan eligibility at a glance

Related reading: VA Home Loan Eligibility Basics: Find Out if You Qualify

Credit score

Both FHA and VA loans are designed to make homeownership accessible to more prospective buyers, so their credit score requirements are lower than those for conventional loans.

FHA guidelines require a credit score of at least 580 to qualify with a 3.5% down payment. If your credit score is between 500-579, you may still qualify, but the down payment requirement rises to 10%.

If you don’t have a traditional credit history and credit score, FHA lenders can still work with you. They’ll require alternative forms of credit history, such as a record of on-time rent and utility payments.

The VA itself doesn’t set hard and fast minimum credit score requirements. It’s recommended minimum is 580, but it encourages lenders to give loans to any creditworthy servicemember, so it allows them to be flexible. A veteran whose credit score is in the low 500s but who has few debts and solid income could still be eligible for a VA loan.

Lenders can set their own requirements on top of government guidelines, and many look for a minimum of 580 or 620. But if you don’t get approved with one lender, don’t give up. Because of the leniency in VA credit qualifications, you may be approved by another company that accepts lower scores.

VA vs FHA loan Down payment

FHA down payments depend on your credit score.

If your score is 580 and above, you will be required to pay 3.5% of the home’s purchase price. If your score is between 500 and 579, you’ll have to put down 10%.

VA loans do not require a down payment if a borrower has full entitlement benefit available. You read that right — eligible VA borrowers can buy a home with 0% down. That’s especially advantageous to first-time homebuyers who can afford a mortgage payment but are struggling to save up a down payment.

To find out if you have full entitlement, you’ll need your certificate of eligibility (COE). But don’t worry, your lender can pull that for you when you apply for a loan.

Learn more: Where to Find your VA Certificate of Eligibility (COE)

If you currently have a partial entitlement, or used your full entitlement in the past and it hasn’t yet been restored, you may need a down payment. But your lender can go over what’s available to you and your VA options.

Here’s more good news on the down payment front from both types of loans. Both allow gift funds.

Gift funds can come from friends, family, an employer, or a down payment assistance program, and the entire down payment can come from gifts (meaning there’s no minimum borrower contribution).

Debt-to-income ratio (DTI)

Lenders look at your debt-to-income ratio (DTI) to determine whether you can afford a monthly mortgage payment. Your DTI is your total monthly debts — including bills such as credit cards, student loans, and car loans — divided by your gross (before tax) monthly income.

A mortgage lender can approve FHA borrowers with DTIs as high as 50%, and in many cases, higher. According to a HUD report, about 25% of all FHA loans in 2020 had DTIs above 50%.

But the lower your DTI, the better your chances of qualifying. A low DTI can increase the loan amount you qualify for, as well, since you’ll have more money available for your mortgage payment. Additionally, a lower DTI can help you get a lower interest rate and save tens of thousands of dollars over the life of the loan.

The VA’s suggested DTI is a maximum of 41%. Here again, though, lenders are encouraged to be flexible. A borrower who has a DTI above 41% but plenty of savings, steady income, and good credit with a history of on-time payments may still qualify.

VA vs FHA loan mortgage insurance

If you opt for a low down payment loan, chances are you’re going to pay mortgage insurance (MI).

Mortgage insurance helps reduce lenders’ risk when they give loans to borrowers who put down less than 20% (which is most borrowers these days). Federally-backed loans also have mortgage insurance requirements, which helps mitigate the government’s risk, since it guarantees these mortgages for lenders.

FHA mortgage insurance

The FHA requires an upfront and annual mortgage insurance premium (MIP). It's important to be aware that these amounts can change annually.

The upfront MIP is 1.75% of the purchase price. In other words, on a $200,000 loan, the upfront MIP is $3,500. In most cases, that cost can be rolled into the mortgage.

FHA yearly MIP rates range between 0.45%-1.05%, depending on the amount of the loan, your down payment, and the length of the loan. Most FHA buyers pay 0.85% of the loan amount per year, or about $141 per month on a $200,000 loan.

If you pay less than 10% down, you’ll pay yearly MIP for the life of your loan, though most people refinance out of FHA long before the full loan term. If you pay more than 10%, the MIP requirement falls off after 11 years, if you hold the loan that long.

MIP rates for a 30-year FHA loan

Bolded row is the most common scenario for FHA buyers.

MIP rates for a 15-year FHA loan

VA funding fee

VA loans do not require mortgage insurance, per se. Instead, the loans are subject to an upfront funding fee, ranging from 1.40% to 2.30% of the purchase price. The funding fee amount depends on your down payment and whether you’ve used a VA loan in the past.

VA FUNDING FEES FOR FIRST-TIME BORROWERS

VA FUNDING FEES FOR SUBSEQUENT HOME LOANS

You can roll the VA funding fee into the loan or negotiate with the seller to cover it. Some VA borrowers who have service-related disabilities may be exempt from the funding fee.

There is no annual or monthly mortgage insurance fee for VA loans.

Here’s a tip: If you take an FHA loan requiring MIP for the life of the loan, you can refinance to a conventional loan once you have 20% equity in the home. Conventional loans do not have a private mortgage insurance (PMI) requirement when borrowers have at least 20% home equity. Once you reach that threshold, you may qualify for a conventional mortgage refinance with no mortgage insurance.

Eligible property types

Both loans will finance owner-occupied, or primary, residences. Eligible property types for both include:

• Single-family homes
• Multifamily homes up to four units (one of them must be your primary residence; you can rent out the others)
• Condominiums (must be on the federally-approved list)
• Townhouses
• Manufactured homes

FHA vs VA loan minimum property requirements

Both FHA and VA loans have rigorous property requirements. Each loan type requires an appraisal by a government-approved inspector who will verify the property’s safety, livability, and fair market value.

Briefly, the appraiser looks for a number of property factors, including (but not limited to):

• Structural integrity of the home (foundation, construction, roof, etc.)
• Adequate heat, water, and sanitation/sewage systems
• Appropriate and safe living space
• Adequate access to the property
• Safe grounds and property (i.e., free of structural, chemical, and environmental hazards)

That said, some sellers may get cold feet with FHA or VA loan buyers. Why? Well, if the appraiser indicates some areas need repair, the homes will need to be fixed before the loan can be approved.

FHA and VA also prohibit lenders for approving these loans for more than the home is worth. If the appraisal comes back lower than the sale price, the lender can only approve a loan up to the appraisal price. Borrowers can then either back out of the sale penalty free if they can’t, or don’t want to, make up the difference from their savings.

However, most homes will pass meet FHA or VA property requirements.

Loan limits

FHA loans must meet loan limits in a given area. Loan limits are based on 115% of the median home price in your area, usually your county. The FHA’s maximum loan amount (the ceiling) in [loan_year] is [loan_limit agency='fha' units='1' type='high-cost']. The lowest limit (the floor) is [loan_limit agency='fha' units='1' type='standard']. To look up the limits for your county, check out the FHA mortgage limits search tool on HUD.gov.

VA loan limits were eliminated for borrowers with full entitlement in 2020. The maximum amount you can get will be determined by lenders by looking at factors like income and DTI.

VA loan limits do come into play if your COE shows partial entitlement. Loan limits in [loan_year] in that case fall between [loan_limit agency='fhfa' units='1' type='standard'] and [loan_limit agency='fhfa' units='1' type='high-cost'] for a single-family home, the same as the conventional conforming loan limits.

These limits change annually, so it is important to be aware of what the current loan limits are for your area.

Interest rates

VA loan interest rates are typically among the lowest in the market. In fact, early in 2021 they were 0.32% lower than conventional loan rates — which saves borrowers roughly $60 each month on a $350,000 30-year mortgage.

But FHA loan rates tend to be competitive as well. The government backing helps keep rates on both of these loan programs in check.

FHA vs VA loan: How to choose?

VA loans are one of the best deals in homebuying if you have full entitlement. However, if you don’t qualify because you’re not a member of the military community, an FHA loan can be a great alternative, especially if you have a lower credit score.

Now, sellers are sometimes skeptical of both loan types due to the property and appraisal requirements. They may be inclined to go with a conventional loan borrower as the buyer, just because they don’t have to meet those requirements.

However, you can overcome their hesitation by working with lenders and real estate agents who are experienced in these loan types and can address sellers’ worries.

Getting preapproved can also help, as it shows sellers that you’re a qualified borrower with a conditional loan approval from a lender.

FHA vs VA loan FAQs

The right loan for the right borrower

Both FHA and VA loans provide borrowers with flexibility and opportunities to become homeowners with less money upfront. To choose the right one, consider the eligibility requirements and your homeownership goals.

Better yet, apply for preapproval. A mortgage lender can tell you which loan programs are available to you, and which will help you achieve the homeownership dream the fastest.

Fairway is not affiliated with any government agencies. These materials are not from the VA, HUD, FHA, USDA, or RD, and were not approved by a government agency.

*Pre-approval is based on a preliminary review of credit information provided to Fairway Independent Mortgage Corporation, which has not been reviewed by underwriting. If you have submitted verifying documentation, you have done so voluntarily. Final loan approval is subject to a full underwriting review of support documentation including, but not limited to, applicants’ creditworthiness, assets, income information, and a satisfactory appraisal.