FHA Vs. VA Loan: What's The Difference And The Best Option?

Home loans from the Federal Housing Administration (FHA) and Veterans Affairs (VA) both come with enhanced benefits that help the people who qualify, including attractive lending terms, lower down payments and competitive interest rates. But the differences between an FHA loan vs. VA loan several differences between these government-backed mortgage programs.

What’s The Difference Between An FHA And VA Loan?

There are many differences between an FHA and VA loan such as down payment and credit score requirements. One of the key differences is that an FHA loan is available for all eligible U.S. citizens, while a VA loan is only available for eligible active-duty service members, veterans and surviving spouses.

Both FHA and VA loans are government backed loan programs designed to help lower-credit individuals and service members who are buying a house – but the requirements and terms of the loan have crucial differences. It’s important to understand how both loan options work before deciding which one is right for you.

FHA Loan Definition

Since FHA loans are backed by the government, they are seen as less risky to lenders, who can therefore relax their qualifying standards (such as credit score), down payment requirements and interest rates. FHA loans are available to all eligible U.S. citizens.

FHA loans are not offered by all lenders, but you still shop for a loan from multiple mortgage lenders who do FHA loans in search of the best deal for you. You can get a FHA loan with a fixed rate or variable interest rate, for example, and you can choose the best repayment plan for your situation.

FHA loans require you to pay a mortgage insurance premium (MIP), which protects investors from a borrower defaulting on their loan. In an FHA loan you pay MIP regardless of the amount of your down payment or home equity. This differs from conventional loans which only require mortgage insurance if the down payment is less than 20%. If you put less than 10% down on an FHA loan, your MIP stays om the loan until you pay it off. If you put down at least 10%, the MIP will be removed after 11 years.

VA Loan Definition

A VA loan is a type of home loan that is only available to eligible active-duty service members, veterans and their surviving spouses. A VA loan is government backed mortgage that is guaranteed by the U.S. Department of Veterans Affairs (VA), yet you shop for it through private banks and mortgage lenders that offer this type of loan. VA loans typically require no down payment and have more relaxed qualifying requirements.

FHA Loan Vs. VA Loan Requirements

Eligibility

• FHA loan: Borrowers can qualify at a 3.5% down payment with a credit score of at least 580; qualify at a 10% down payment with a credit score of between 500 and 579; must be able to pay a private mortgage insurance (PMI) premium; have a debt-to-income ratio under the maximum based on your financial situation; home must be borrower’s primary residence; borrower must have steady income and proof of employment.
• VA loan: Borrowers must provide necessary documentation, like a certificate of eligibility (COE). You must be an active-duty service member with at least 90 days of service; you have at least 6 years of service in the Reserves or National Guard; you are a veteran who served 90 days in wartime or 181 days in peacetime; you are the spouse of a veteran who died in the line of duty or as the result of a service-related disability. Check on the VA’s website or call your lender for a list of all service requirements.

Credit Score

You need to have an adequate credit score to qualify for different types of loans. A credit score is a number that creditors use to determine your credit behavior, including how likely you are to make payments on a loan. Having a high credit score can make it easier to get a loan, rent an apartment or lower your insurance rate. 

• FHA loan: First, know that different lenders have different credit score requirements for an FHA loan, but in general you’ll need at least a score of 500 and a 10% down payment to qualify. If your score is 580 or higher, you can qualify for an FHA loan with as little as 3.5% down.
• VA loan: Each lender has its own credit requirements for a VA loan, but technically the VA does not have a credit score limit to qualify. Most lenders require a score of at least 580.

Down Payment

Most lenders require a down payment before offering you a loan. The down payment is considered as a percentage of the purchase price and cash you bring to the table at closing.

• FHA loan: The down payment requirements for an FHA loan will differ depending on the lender and your credit score. Most will require 10% if your score is between 500 and 579 and 3.5% if it’s above 580.
• VA loan: Currently, there is no down payment requirement for a VA loan. However, the VA does charge a VA funding fee, which is lowered the more money you put down. For instance, if put down anything less than 5%, you’ll pay 2.15% of the loan amount as a funding fee. This fee drops to 1.25% if you put 10% down.

Mortgage Insurance

To qualify for some loans you will need to buy private mortgage insurance (PMI), which is a type of insurance that protects investors who own mortgages.

• FHA loan: Since FHA mortgages allow for down payments as low as 3.5% for borrowers with a credit score as low as 580, mortgage insurance is required for all FHA home loans. This includes an upfront MIP and an annual one.
• VA loan: One of the many benefits of a VA loan is that it does not require mortgage insurance.

Debt-to-Income Ratio

A lender will often consider your debt to income ratio (DTI) when you apply for a loan. Your DTI is derived by dividing your monthly debt payments by your monthly gross income and is expressed as a percentage. Most lenders like to see this number lower than 43% for your best chance at approval.

• FHA loan: The maximum DTI is 43%, but if you have certain financial strengths that offset your risk, a DTI of up to 57% can still qualify.
• VA loan: Most lenders prefer that you have a DTI ratio of 41% or lower for a VA loan. However, some lenders may allow you to qualify with a DTI of up to 50%.

VA Loan Vs. FHA Loan: FAQs

What’s the better loan type for veterans?

Because VA loans do not require a down payment, typically have a lower interest rate than FHA loans and do not require the borrower to pay mortgage insurance, a VA loan may be the best choice for eligible active-service military members, veterans and their surviving spouses. 

Can I use an FHA and a VA loan together?

FHA and VA loans can’t be combined to pay for a single home, but you can use both loans on separate houses. To do this, a homeowner will pay for a home and then turn it into a rental property when they’re ready to finance another house. One of the houses will need to be a rental property because both loans require you to be the primary resident.

Which loan option has better interest rates?

VA loans tend to have lower interest rates than conventional mortgages or FHA loans. Additionally, the closing costs on VA loans tend to be lower than for other types of mortgages, though the borrower pays a one-time VA funding fee up to 3.3% of the loan amount. While VA loans have fixed interest rates, FHA loans can have fixed or adjustable interest rates.

The Bottom Line

Both FHA and VA loans are government backed loan programs designed to help certain borrowers buy a house. Both have lower down payment obligations and better interest rates than qualifiers would get through a conventional loan. Anyone who qualifies for a VA loan, however, will likely get better terms than they can expect from an FHA loan.

Whichever loan type you qualify for, it’s important that you start the mortgage application process now, even before you go house hunting. It will help you focus your search to homes within your budget.