FHA vs. VA Loans: What’s the Difference?

Federal Housing Administration (FHA) and Veterans Affairs (VA) loans are government-backed mortgage loans offering lower down payment and credit requirements than conventional loans. VA loans require no down payment or mortgage insurance, making them the most attractive option if you qualify. But FHA loans can be a good option, even if you are eligible for a VA loan, especially if you have a lower credit score or plan to purchase a large property. Read on to determine whether an FHA or VA loan is the best option for your situation. 

What Is an FHA Loan?

FHA loans are loans backed by the Federal Housing Administration and allow small down payments and lower credit scores. If you default on an FHA loan, the FHA will pay your remaining balance to your mortgage lender, offering the lender a layer of security and broadening approved borrowers. As a borrower, an FHA loan’s more flexible requirements can make it easier to secure a loan without a large downpayment.

FHA loans are designed to help people who cannot afford homeownership to purchase a home. FHA loans typically require a minimum of 3.5% down payment if you have a credit score of 580 or higher. Buyers with credit scores in the 500 to 579 range can secure a mortgage with a 10% down payment.

FHA Loan Eligibility Requirements

An FHA loan can benefit first-time homebuyers. Purchasing a property with a smaller down payment allows you to secure a larger loan or buy a home faster. According to the Federal Housing Administration, FHA loan requirements are:

• A credit score of at least 580 with a 3.5% down payment
• A credit score between 500 and 579 with a 10% down payment
• Pay a mortgage insurance premium (MIP)
• Debt-to-income ratio less than 43%
• The home must be your primary residence
• Proof of employment and steady income

Key Features of FHA Loans

FHA loans open the opportunity for home ownership to more families. Key features of an FHA loan that make it an attractive option include:

• Lower down payment: Conventional loans may require a 20% down payment.
• Flexible credit requirements: Borrowers with a score as low as 500 could be approved for a loan. 
• Higher loan amount limit: With the low down payment, you can be approved for a higher total loan amount. 

What Is a VA Loan?

VA loans are backed by the U.S. Department of Veterans Affairs. VA loans are designed to benefit those who have served our country. VA loans offer competitive interest rates and have no down payment requirement, making them one of the most attractive mortgage options available to buyers. 

In addition to military veterans and surviving spouses, those who served in the Reserves or National Guard or have been discharged because of a service-connected disability may be eligible for a VA loan. 

VA Loan Eligibility Requirements

Eligibility requirements for a VA loan depend on whether you’re on active duty or served previously. Criteria include:

• If you’re an active duty member, you must have served at least 90 continuous days without a break. 
• If you’re a veteran, the minimum active-duty service requirements depend on when you served. Generally, you’ll need either 90 or 181 days of continuous service. You can qualify with less if you were discharged for a service-related disability.
• In addition to active duty service members and veterans, surviving spouses of veterans are eligible for VA loans as long as they meet VA requirements. 
• You might also be eligible if you have completed six years in the Reserves or National Guard. 
• If you were discharged because of a service-connected disability and placed on the retired list, you may qualify. 

You might qualify for a VA loan if you served in certain other organizational roles. These include:

• Merchant seaman during World War II
• Officer of the National Oceanic and Atmospheric Administration
• Public health service officer
• Cadet at the U.S. Military, Air Force or Coast Guard Academy
• Midshipman at the U.S. Naval Academy

Key Features of VA Loan

There are significant advantages to securing a VA loan. The biggest reasons to consider a VA loan include: 

• No down payment required: You can save more or qualify without a down payment.
• No private mortgage insurance: This will allow you to save more on monthly mortgage costs.
• Lower interest rates: This results in lower monthly mortgage payments and potentially saves you thousands over the loan’s lifetime. 

Similarities and Differences Between FHA and VA Loans

While there are some similarities between FHA and VA loans — they're both government-backed and easier to qualify for than conventional loans — there are also some key differences. Here’s what to consider. 

Loan Availability

FHA loans are available to all borrowers, while VA loans are exclusively for eligible military veterans, active-duty service members and surviving spouses. You won’t qualify for a VA loan if you only served briefly in the military or never served. 

Credit Score Requirement

FHA loans have more lenient credit score requirements than VA loans, which may require a higher credit score for approval. Generally, VA loans rely on the lender’s credit score requirements, which are higher than the stated FHA minimums. FHA loans may be a better option for borrowers with low credit scores. 

Debt-to-Income Ratio

FHA loans have more lenient guidelines, allowing for a higher debt-to-income ratio, while the VA loan typically requires a lower debt-to-income ratio. For a VA loan, the acceptable debt-to-income ratio is 41%. For FHA loans, borrowers need a debt-to-income ratio of less than 43%.

Down Payment

FHA loans typically require a lower down payment, usually around 3.5% of the purchase price, while VA loans often require no down payment. If you’re struggling to meet a minimum downpayment, a VA loan may offer a better solution, although the FHA loan’s 3.5% is also achievable for many families. 

Mortgage Insurance

FHA loans require borrowers to pay private mortgage insurance (PMI) if they put down less than 20%, while VA loans do not require PMI. This will save you in the long and short term, as PMI usually costs 0.19% to 2.25% of your mortgage.

Loan Amount Limits

FHA loans have higher loan limits, allowing borrowers to finance more expensive properties, while VA loans have specific loan limits based on the county where the property is located. An FHA loan may be the better solution if you're looking for a larger, higher-value property. 

Loan Terms and Rates

Generally, VA loans have lower interest rates than FHA loans. For example, of loans closed in August, the average 30-year fixed rate for FHA loans was 6.95%, compared with 6.71% for VA loans. In addition, there is a difference in closing costs. Both FHA and VA mortgages offer comparable term options.

Use of the Home

Both FHA and VA loans generally are only available for your primary residence. However, there are exceptions for VA loans in which you can purchase a second home if you meet the VA’s occupancy requirements. You can’t use a VA loan for vacation or investment properties, but you could rent out your primary residence in a few cases. FHA loans are only available for your primary residence.

Closing Costs

For both FHA and VA loans, you can expect to pay standard closing costs of 3% to 6% of your total loan amount. In addition, you’ll want to account for additional VA or FHA closing costs. For an FHA loan, you’ll need to pay PMI upfront. It’s 1.75% of the loan amount. The remaining PMI is rolled into your monthly mortgage payments. 

While you don’t need PMI with a VA loan, you will need to pay a VA funding fee unless you qualify for an exemption. You can pay the funding fee upfront or roll it into the mortgage amount. The first time you get a VA loan, the VA funding fee is 2.15% of the loan amount. For any later VA loans for new homes, the funding fee increases to 3.3%. The funding fee will be reduced if you make a larger down payment. 

Application and Approval Process

The application and approval timeline for an FHA loan is typically shorter than a VA loan because of the additional requirements and processes involved in obtaining a VA loan. 

• For an FHA loan, the typical timeline from application to closing is 30 to 45 days. 
• For a VA loan, you can expect 40 to 50 days from contract signing to closing day with most lenders.

Buying Your New Home

Whether an FHA or VA mortgage is the best option for your family depends on factors such as credit score, total loan required, income and whether you qualify for a VA loan. Both offer strong benefits and lower-cost opportunities to start building equity in a home while saving more.  

Frequently Asked Questions