FHA vs. VA loan: Which mortgage is right for you? (2024)

Both are government-backed but have different requirements

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FHA and VA loans are two of the most popular government-backed mortgage programs for first-time homebuyers in the United States. Both loans offer advantages over conventional mortgages, but there are some key differences, especially when it comes to eligibility.


Key insights

  • VA loans are exclusive to service members, veterans of the U.S. military and their surviving spouses.
  • VA loans come with no down payment requirement and typically lower interest rates than other types of home loans.
  • FHA loans are open to anyone looking to buy, renovate or refinance a home in the U.S.
  • FHA loans require a minimum 3.5% down payment but have more lenient credit requirements than most other mortgages.

What’s the difference between FHA and VA loans?

FHA and VA loans are both government-backed home loan programs, but they have distinct differences, including eligibility requirements and how they work.

"VA mortgages stand out for their absence of down payment requirements and loan amount restrictions,” said Jim Black, executive director of lender strategy at Calque, a Texas-based home equity firm. “In contrast, FHA mortgages necessitate a minimum 3.5% down payment and are subject to county-specific loan limits.”

VA loans

VA loans are exclusively available to service members, veterans of the U.S. military and their surviving spouses.

These loans are offered by private lenders but are guaranteed by the U.S. Department of Veterans Affairs (VA). This means the department ensures that the lender is reimbursed in case the borrower defaults on the loan. As such, lenders are able to offer lower rates and more flexible terms due to decreased risk.

The most significant advantage of VA loans is that they do not require a down payment. If you qualify for a VA loan, you can use it to purchase a home as your primary residence or to refinance your existing mortgage.

» COMPARE: Best VA loan lenders

FHA loans

FHA loans are backed by the Federal Housing Administration (FHA) and available to a broader range of borrowers than VA loans.

With an FHA loan, you can make a down payment as low as 3.5% toward the purchase of your new home. These loans also have less stringent credit requirements compared to conventional mortgages, making them more accessible to individuals with lower credit scores.

FHA loans can be used for a variety of purposes, including renovating a home, refinancing an existing mortgage or buying a new home.

» COMPARE: Best FHA loan lenders

FHA vs. VA loans: How they compare

Each loan type offers unique benefits and considerations, making it essential to understand their differences.

Down payment

The down payment is money paid upfront toward the purchase of a home. This initial payment reduces the size of the loan you'll need to secure, lowering your monthly mortgage payments.

  • For VA loans: You do not have to make any down payment as long as the sales price isn’t higher than the appraised home value. However, there are advantages to making a down payment on a VA loan.
  • For FHA loans: The minimum down payment set by the FHA is 3.5%. If you have a lower credit score, you may need to put at least 10% down.

Closing costs

Closing costs are the fees you will pay when you purchase a home. These fees cover a variety of expenses, including appraisals, title insurance and lender fees.

Minimum credit score

A credit score is a numerical assessment of your creditworthiness, aiding lenders in evaluating the risk associated with lending you money.

  • For VA loans: The VA does not set a specific minimum credit score requirement. However, it is common for lenders to seek a minimum credit score of 620.
  • For FHA loans: The credit score requirements vary based on the down payment amount. For a down payment of at least 10%, the acceptable credit score range is 500 to 579. For a 3.5% down payment, the credit score requirement rises to 580 or higher.

“Typically, VA mortgages are more advantageous for veterans, direct family members or active-duty military personnel due to lenient credit requirements,” said Black. “On the other hand, FHA mortgages may be preferable for borrowers with lower credit scores or those unable to make a substantial down payment.”

Debt-to-income ratio

Your debt-to-income (DTI) ratio is the percentage of your gross monthly income that you dedicate to debt repayment. Lenders consider it to ensure you have sufficient funds to cover both living expenses and mortgage payments.

  • For VA loans: Unlike conventional loans, VA loans do not have a strict DTI limit. However, lenders will scrutinize your finances more thoroughly if your DTI exceeds 41%.
  • FHA loans: FHA loans have a maximum DTI of around 50%, but some lenders may go as high as 57%, dependent on other factors.

Mortgage insurance

Private mortgage insurance protects the lender in case you default on your loan payments. This helps to offset the lender's financial loss if you are unable to make your mortgage payments.

  • For VA loans: VA loans do not require mortgage insurance or any associated premiums. However, you will pay a VA funding fee, a one-time charge that ranges from 1.4% to 3.6% of your total loan amount. The exact fee depends on your down payment and whether you have previously used a VA-backed loan. You can either pay this fee upfront or opt to have it factored into your monthly loan payments.
  • For FHA loans: Mortgage insurance is mandatory for FHA loans. The monthly insurance premium varies based on the loan amount and the term of your FHA loan.

“It's crucial to note that FHA loans mandate mortgage insurance payments throughout the loan's duration, requiring careful consideration in monthly budgeting,” said Black.

Other requirements

VA loans and FHA loans each have specific eligibility requirements for applicants.

  • For VA loans: To qualify for a VA loan, you must meet one of the following service requirements:
    • Served at least 90 consecutive days of active duty during wartime
    • Served at least 181 days of continuous active duty during peacetime
    • Completed six or more years of service in the National Guard or Reserves
    • Are the spouse of a veteran who died in the line of duty or due to a service-related disability
  • For FHA loans: FHA loans are open to anyone, including veterans, who meet the following basic requirements:
    • A minimum credit score of 500 to 580
    • A verifiable income and employment history
    • A down payment of at least 3.5% of the purchase price
    • A property appraisal from an FHA-approved appraiser

In addition to these requirements, lenders may set their own additional criteria for VA and FHA loans.

FHA vs. VA refinance

When it comes to refinancing existing mortgages, FHA and VA loans provide tailored options to meet specific borrower needs. Upfront costs vary, with FHA requiring an upfront mortgage insurance premium and VA refinances incurring a funding fee based on the loan type.

FHA streamline refinance

The FHA streamline refinance is a simplified option for borrowers with existing FHA loans, aiming to reduce paperwork and underwriting requirements.

To be eligible, you must have made a minimum of six payments on the current FHA loan, with no late payments in the past six months. As well, the refinance must result in a net tangible benefit, such as a lower interest rate or a switch from an adjustable to a fixed rate.

FHA streamline refinances offer the choice of credit or noncredit qualifying options. The FHA limits cash-out amounts to $500.

VA refinance options

Veterans can refinance existing VA loans or switch from other mortgage types to a VA loan, subject to specific restrictions. The VA provides three refinancing options for eligible veterans:

  • VA cash-out refinance
  • VA streamline refinance (IRRRL)
  • Conventional-to-VA refinance

VA streamline refinances generally bypass credit checks. For a cash-out refinance, eligible veterans can access up to 90% to 100% of their home equity.

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FAQ

Is a VA loan better than FHA?

VA and FHA loans are both popular home financing options, each catering to different needs. VA loans offer no down payment, competitive interest rates and no private mortgage insurance. However, VA eligibility is restricted to military service personnel. FHA loans typically accept lower credit scores and are accessible to a broader range of borrowers. Ultimately, the choice between the two depends on individual circumstances and eligibility.

What is the VA funding fee?

The VA funding fee is a one-time fee paid to the Department of Veterans Affairs when taking out a VA loan. It helps offset the costs of the VA loan program.

Do FHA loans have higher interest than VA loans?

Yes, FHA loans typically have higher interest rates than VA loans. As of Dec. 14, 2023, the average 30-year FHA mortgage rate is 6.550%, while the average 30-year VA loan rate is 6.131%, according to the St. Louis Fed.

Bottom line

Both VA and FHA loans are great options for homebuyers. However, VA loans offer the distinct advantages of no down payment and no mortgage insurance. These perks are exclusive to eligible U.S. service members, veterans and their spouses. For those who don't qualify for a VA loan, FHA loans often prove to be a more suitable choice than a conventional mortgage.


Article sources
ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
  1. U.S. Department of Veteran Affairs, “Eligibility requirements for VA home loan programs.” Accessed Dec. 15, 2023.
  2. Consumer Financial Protection Bureau, “What is a debt-to-income ratio?” Accessed Dec. 15, 2023.
  3. U.S Department of Housing and Urban Development (HUD), “FHA Mortgage Limits.” Accessed Dec. 15, 2023.
  4. U.S. Department of Housing and Urban Development, “Streamline Your FHA Mortgage.” Accessed Dec. 15, 2023.
  5. Federal Reserve Bank of St. Louis, “30-Year Fixed Rate FHA Mortgage Index.” Accessed Dec. 15, 2023.
  6. Federal Reserve Bank of St. Louis, “30-Year Fixed Rate Veterans Affairs Mortgage Index.” Accessed Dec. 15, 2023.
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