FHA vs. VA loans
Explore the differences between two popular government-backed home loans
VA loans and FHA loans have federal government backing and are highly popular among first-time U.S. homebuyers. While both loans are helpful, there are some significant differences — especially for eligibility. In this article, we take a side-by-side look at FHA and VA loans.
| VA | FHA | |
|---|---|---|
| Down payment | No down payment required | At least 3.5% down |
| Closing costs | 3% to 5% of the loan | 2% to 6% of the loan |
| Minimum credit score | No minimum credit score | Usually 500 to 580+ |
| Debt-to-income ratio requirement | More scrutiny by the lender if your DTI is more than 41% | Usually 50% or less, depending on other factors |
| Mortgage insurance | No mortgage insurance required | Mortgage insurance premiums |
| Other requirements | Must be a veteran of the U.S military | No restrictions; anyone can apply |
What’s the difference between FHA and VA loans?
FHA and VA loans are both government-backed home loans, but they otherwise have a number of differences, including how they work and minimum eligibility requirements.
VA loans
VA loans are only available for service members and veterans of the U.S. military and their surviving spouses. The loan is available from private lenders but is guaranteed by the U.S Department of Veterans Affairs (VA). The biggest advantage that there is no down payment requirement. If you become eligible for a VA loan, you can purchase a home as a primary residence or refinance your existing mortgage.
How does it work?
VA loans do not originate from the U.S Department of Veteran Affairs, but the department backs each issued loan in case a veteran or their spouse defaults on it. The government’s backing gives lenders the confidence to offer $0 down financing with flexible terms and rates. The process of applying for a VA loan is as follows:
- Get a Certificate of Eligibility.
- Get preapproved.
- Place an offer on a home.
- Close the application after you get an accepted offer.
Learn more: Find the best VA lenders.
FHA loans
FHA loans are available for everyone and require mortgage insurance. This type of loan, backed by the Federal Housing Administration, lets you make a down payment as low as 3.5% toward your new home.
Additionally, an FHA loan comes with less stringent credit requirements than a conventional mortgage. You can apply for an FHA loan to renovate, refinance or buy a new home.
How does it work?
If you believe that applying for an FHA loan is the best option for you, the first step for you is to make sure you have enough for a down payment. The process of applying for an FHA loan involves the following steps:
- Get preapproved by the lender by fulfilling the eligibility criteria.
- Complete your Form 1003.
- Get the property you wish to buy appraised.
- Follow the lender’s underwriting process.
- Complete FHA loan approval.
Learn more: Find the best FHA lenders.
FHA vs. VA loans: How they compare
Let’s get a little deeper into the specific differences between FHA loans and VA loans. This will help you understand how VA loans and FHA loans vary in their requirements and processes.
- Qualification
VA loans and FHA loans each have a distinct set of requirements for applicants.
For VA Loans
In order to qualify for a VA loan, you must meet one of the following criteria:
- Have served for 90 consecutive active service days in the U.S. military during wartime
- Have served 181 days as an active service member in the U.S. military during peacetime
- Have six years of service recorded in National Reserves or National Guard
- Be the spouse of a veteran who died in the line of duty or due to a service-related disability
For FHA Loans
Anyone can apply for an FHA loan, including veterans. However, you have to fulfill the minimum criteria:
- Meet the minimum credit score
- Have a verifiable employment record for the last two years
- Have verifiable income through pay stubs, bank statements and federal tax returns
- Use the loan for a primary residence
- Meet the minimum debt-to-ratio requirement
- Get a property appraised by an FHA-approved appraiser
- Minimum credit score
A credit score is a numerical analysis of your creditworthiness. This helps lenders determine how safe or risky it is to lend you the money to buy, renovate or refinance a home.
For VA Loans: There is no minimum or maximum credit score requirement set by the VA. However, the common lender requirement for a minimum credit score is 620.
For FHA Loans: If you are making at least a 10% down payment, the credit score requirement is 500 to 579. If you are making a 3.5% down payment, the credit score requirement increases to 580 or higher.
- Debt-to-income ratio (DTI)
Your DTI is the percentage of gross monthly income that you pay toward debt. Debt-to-income requirements for VA and FHA loans differ.
For VA Loans: There is no maximum DTI limit on VA loans. However, if your DTI is higher than 41%, the lender will take a closer look at your finances. This ensures that you will have enough money to cover your living expenses and make mortgage payments.
For FHA Loans: The maximum DTI ratio is typically 50%; however, some lenders have a lower threshold.
- Down payment
The down payment is the money you pay upfront toward the cost of your home.
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.
- Mortgage insurance
Mortgage insurance protects the lender in case you default on loan payments.
For VA Loans: You do not need to buy any mortgage insurance or pay any premium. However, you will pay a VA funding fee, which is a one-time charge. This can range from 1.4% to 3.6% of your total loan amount.
This one-time fee varies depending on the down payment amount and if you have previously had a VA-backed loan. You can either pay it upfront or opt to include it in your monthly loan payments.
For FHA Loans: You must pay mortgage insurance. You can either pay it upfront or choose to make monthly mortgage premium payments. The monthly insurance premium will vary based on how much you are borrowing and the length of your FHA loan.
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Bottom line: Is a VA loan better than FHA?
While both loan types are suitable for first-time homebuyers, VA loans have the added benefits of no down payments or mortgage insurance costs. However, VA loans are only made to eligible U.S. service members, veterans and their spouses.
For many others, FHA loans are often a more appropriate option than a conventional mortgage. If you fulfill the criteria, you might consider applying for an FHA loan.
- 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:
- U.S. Department of Veteran Affairs, “Eligibility requirements for VA home loan programs.” Accessed June 22, 2021.
- Consumer Financial Protection Bureau (CFPB), “What is debt-to-income ratio? Why is the 43% debt-to-income ratio important?” Accessed June 22, 2021.
- U.S Department of Housing and Urban Development (HUD), “FHA Mortgage Limits.” Accessed June 22, 2021.
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