FHA vs. VA Loans: What Are the Differences?

Written by Haley HarrisonUpdated: 12th Mar 2022
Share this article

Disclaimer: This post contains references to products from one or more of our advertisers. We may receive compensation (at no cost to you) when you click on links to those products. Read our Disclaimer Policy for more information.

Looking to buy? In any market, especially the one we live in now, it’s important to have your financing squared away before jumping into the offers game – sellers expect nothing less. For borrowers who may have trouble qualifying for traditional loans, it’s worth your time to read up on FHA and VA loans. These special programs could be the key that makes homeownership a reality for you.

By the end of this article, you’ll have a thorough understanding of:

  • The ins and outs of both VA and FHA loans
  • Qualifying requirements for each
  • Associated closing costs
  • And how to choose the best loan program for you

FHA vs. VA Loans Overview

Understanding FHA Loans

In 1934, the Federal Housing Administration began the FHA loan program to make it easier to buy homes. These loans are backed by the federal government, meaning that if a borrower defaults on payments, the FHA will pay off the remainder of the mortgage. Because of this security, lenders are more inclined to lend to borrowers with lower credits scores and lower down-payments.

>> More: Best FHA Mortgage Lenders

Understanding VA Loans

VA loans, backed by the U.S. Department of Veterans Affairs, offer special benefits for veterans, active-duty military, reservists, National Guard personnel, and surviving spouses.

>> More: Best VA Mortgage Lenders

Differences Between FHA and VA Loans

While both loan programs were designed to assist non-traditional borrowers, they do have a few distinctions.

RequirementsFHA LoanVA Loan
Eligibility:Open to the PublicVeterans, active-duty military, reservists, National Guard personnel, and surviving spouses.
Home Type:Primary ResidencePrimary Residence
Private Mortgage Insurance:Upfront mortgage insurance premium (1.75% of loan amount) and annual premium ( 0.45% – 1.05% of loan amount)No PMI, borrowers pay one time VA funding fee (1.4%-3.6% of loan amount)
Down Payment:Minimum 3.5% of loan amountNo down payment required
DTI Ratio:Maximum 43%No maximum, but borrowers with DTI less than 41% preferred
Credit Score: Minimum credit score of 500No credit score minimum for the VA, but lenders may have their own minimum
Interest Rates:Competitive rates that can be fixed or adjustableFixed interest rates. Tend to be lower than FHA + conventional

Eligibility

Do you know which of these loans you’re eligible for? Both programs offer exceptional benefits to qualified borrowers, but before you jump the gun, make sure you’re one of them!

FHA loans are often thought of as exclusive for first-time homebuyers, but this is not the case. Homebuyers with any experience level can get an FHA loan – so long as their financials are in shape.

On the other hand, VA loans are exclusive to veterans, active-duty military members, reservists, National Guard personnel, and their surviving spouses.

Closing Costs

Typical lender closing costs include application fees, processing fees, underwriting fees, mortgage insurance, lender title insurance, origination fee, prepaid interest, appraisal fee, rate lock fees, and more. Essentially, all the nitty-gritty expenses of pulling a loan together.

With VA and FHA loans, these costs are typically significantly lower. Here’s what you can expect to pay in closing costs.

NOTE: You may be responsible for additional closing fees from your real estate agent and/or the title company or escrow agency handling your closing.

Mortgage Insurance

You may know this insurance as private mortgage insurance (PMI) or a mortgage insurance premium (MIP). For FHA loans, you will be responsible for paying a mortgage insurance premium equivalent to 1.75% of the loan amount. This upfront fee is rolled into the total cost of the loan. In addition to the upfront fee, you will pay an annual mortgage insurance premium between 0.45% and 1.05% of the loan amount.

VA borrowers do not have to worry about MIP but will be responsible for a VA funding fee. This fee is between 1.4% and 3.6% of the loan amount and will depend on several factors, including past VA financing, military service, and down payment.

Down Payment Requirements

Down paymentsare often a significant barrier to entry for many hopeful homeowners. This is why FHA loans are so popular among first-time homebuyers or any borrower looking to save money. The minimum down payment for an FHA loan is 3.5% of the purchase price. So, if your home costs $250,000, you’re looking at an $8,750 down payment. However, it’s important to note that if your credit score is less than 580, you will be required to put down a minimum of 10%.

VA loans do not require borrowers to make not any down payment, and this is one of the most attractive perks of getting a VA loan.

Credit Score Requirements

A credit score of 580 or lower means you’ll be putting down 10% with an FHA loan. And while borrowers with a credit score as low as 500 can still qualify for an FHA loan, they may have trouble finding a lender. Rocket Mortgage, for example, requires a minimum credit score of 580.

VA loans do not have a minimum credit score requirement. However, like with FHA loans, credit scores below the 580 range may raise red flags with VA lenders.

Rates

While both loans typically always have lower rates than traditional loans, VA loan rates will still be the most favorable. Whether you’re going with a conventional loan or a special loan program, you will always be better off with a higher credit score and larger down payment.

FHA vs. VA Loans: Refinancing Options Compared

Whether it be to refinance or buy, the process to secure a loan can be a huge hassle. Luckily, FHA and VA borrowers can enjoy streamlined and cash-out refinance. This process makes it easier for borrowers to go from one government-backed loan to another with less paperwork and no appraisal requirement.

FHA Loan Options:

  • FHA Cash-Out Refinancing: Any cash-out refinance means you’re cashing out on the equity on your home. You take out a loan for more than what you owe, pay off your remaining mortgage, and the difference goes to you in cash. Many homeowners choose to use these funds for home improvement projects or repairs.
  • FHA Reverse Mortgages: For senior citizens, reverse mortgage loans allow you to pull money from the home’s equity to supplement your income.
  • FHA 203(k) Rehab Refinance Loan: Need some assistance with repairs? With FHA rehab refinances, you can roll the costs of repairs and renovations into the new mortgage. This allows you to get the funds for immediate repairs while paying it off through your monthly mortgage payments.

VA Loan Options:

FHA and VA Loan term options

Loan terms refer to the length of the loan (15 years or 30 years) and the type of interest rate (fixed or adjustable/variable). Fixed interest rates will stay the same over the length of the loan even as market rates fluctuate. Adjustable or fixed ratesdo just the opposite and fluctuate with the market.

Adjustable rates can work to your advantage if you secure a loan while rates are low, but you run the risk of your rate increasing significantly as the market goes up. Fixed-rate loans put you in the best position for the long term.

Is an FHA or VA Loan Better?

The clear winner here is VA loan financing for borrowers eligible for both FHA and VA loans. With lower down payment requirements, lower interest rates, and lower closing costs, VA loans remove a lot of barriers for borrowers.

Is a VA Loan Stricter than an FHA Loan?

One of the main reasons many borrowers opt for either VA or FHA loans is to avoid the strict qualifying requirements of traditional loans. Both loan programs are more lenient in nature, but the VA loan process has fewer financial requirements to meet as long as you are eligible.

Is a VA Loan or FHA Loan Harder to Qualify for?

This question depends on who you are. Do you or your spouse have veteran, reservist, or active duty military status? If not, then you do not qualify for a VA loan. On the other hand, FHA loans require a minimum down payment, debt-to-income, credit scores, and PMI, whereas VA loans do not.

Bottom Line: FHA vs. VA Loans

FHA and VA loans are great financing options for borrowers who may have difficulty qualifying for a traditional loan. With lower barriers to entry and basic eligibility requirements, both programs make it easier for borrowers to become homeowners. For veterans, active-duty military members, reservists, and their surviving spouses, VA loans are going to offer more benefits.

Remember, even within these programs, you can position yourself for better loan terms by improving your financial standing. A higher credit score, larger down payment, and lower debt-to-income ratio will get you that lower rate you’re after.

Keep Reading:

Haley Harrison
Haley Harrison

Haley is an experienced writer and has worked for several years on the title side of the real estate world. Through her work, she helps educate homebuyers on the ways they can prepare for homeownership. When she is not writing or getting buyers and sellers to the closing table, Haley enjoys travelling, studying personal finance, and being at home with her dog. She attended the University of Cincinnati majoring in International Relations, and holds a M.A. in Bilingual Education from Universidad de Alcalá. Haley’s areas of expertise spans mortgages, real estate, and loans.