FHA vs VA Loan

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Unlocking the door to homeownership often begins with choosing the right mortgage. In this guide, we delve into the key distinctions between these two financing options, helping you navigate the path to your dream home with confidence. While both FHA and VA loans are backed by the federal government, financing is provided through private lenders.

What is an FHA loan?

An FHA loan is guaranteed by the Federal Housing Administration. It is a mortgage option designed to make homeownership more accessible, particularly for first-time buyers or buyers with limited financial resources. FHA loans have more flexible eligibility criteria than conventional loans, making FHA loans an attractive choice for those entering the housing market with modest savings or credit challenges.

Pros and cons of FHA loans

FHA loans offer a lower down payment requirement, usually 3.5%, making homeownership more affordable for those with limited savings. The qualification criteria are more lenient, allowing borrowers with credit scores as low as 580 to secure financing. The FHA will accept lower scores with a down payment of at least 10%. FHA loans tend to have lower interest rates compared to conventional mortgages.

One notable drawback of FHA loans is the required mortgage insurance premiums (MIP), which typically cost 1.75% of the total value of your loan. Additionally, there is a monthly fee determined by the base amount of your loan and loan-to-home value ratio. FHA loans have stricter minimum property requirements compared to conventional loans.

What is a VA loan?

A VA loan is a mortgage option backed by the U.S. Department of Veterans Affairs and available only to eligible military veterans, active-duty service members and qualifying spouses. These loans often offer competitive interest rates and don't require private mortgage insurance, reducing overall borrowing costs. VA loans also offer flexibility in credit requirements, making homeownership more achievable for military families.

Pros and cons of VA loans

With a VA loan, buyers aren’t required to put any money down, making it an accessible option for those with limited cash. Credit requirements are more relaxed compared to conventional loans, though they usually require a minimum credit score of about 620. VA loans typically offer lower interest rates compared to conventional loans, and you won’t have to purchase private mortgage insurance (PMI) or pay MIP.

However, there is a one-time funding fee that can add to the upfront cost of buying a home. Like FHA loans, properties are subject to stricter standards compared to conventional loans.

Loan eligibility requirements

To be eligible for a VA loan, individuals must meet specific criteria set by the U.S. Department of Veterans Affairs. These loans are only available to active-duty service members, National Guard and Reserve members, and certain qualifying spouses. Generally, veterans and National Guard members must have served for a minimum period, with different requirements based on the era of service. Active-duty members qualify after serving for 90 continuous days.

You must also present a Certificate of Eligibility (COE) to confirm your entitlement to the program and obtain a VA loan.

What’s the difference between FHA and VA loans?

VA loans and FHA loans are both government-backed mortgage programs, but there are distinct differences between them in terms of their eligibility requirements and lending criteria.

VA loans are only available to eligible military members and their spouses, and they offer advantages like 0% down. FHA loans, insured by the Federal Housing Administration, cater to a broader audience, providing more flexible qualification criteria and accommodating lower credit scores. Both loans require upfront fees, but FHA loans also mandate mortgage insurance premiums, which can add to long-term costs.

Down payment requirements

With a VA loan, borrowers are not required to put any money down — however, they may still need to cover certain closing costs. FHA loans require a minimum down payment of 3.5% of the home's purchase price, or 10% if the borrower’s credit score is between 500 and 579.

Putting down a larger down payment on either a VA or FHA loan lowers the principal balance and results in a lower monthly payment. It can also help you build equity faster and reduce any funding fees.

Loan limits

There are limits to the amount of money you can borrow with an FHA loan. The FHA’s nationwide limit for a one-unit property ranges from $498,257 to $1,149,825 in 2024, but the limit depends on the cost of housing in the area where you purchase a home.

Mortgage insurance requirements

VA loans generally do not require mortgage insurance premiums (MIPs). FHA loans require mortgage insurance premiums to protect lenders in case of borrower default.

There are both upfront and annual MIP payments. The upfront premium is typically rolled into the loan amount, while the annual premium is paid monthly and is determined by the loan-to-value ratio and loan term. MIP is a distinctive feature of FHA loans, allowing borrowers to qualify with lower down payments but adding extra costs to the overall loan.

Funding fees

While FHA loans do not have funding fees, VA loans require this one-time payment for most borrowers to support the program; although some exemptions exist. The fee is a percentage of the loan amount and varies based on factors like the borrower's military service, down payment amount and whether it's the borrower’s first VA loan. Borrowers can pay the funding fee upfront or include it in the loan.

How to apply for an FHA loan

To apply for an FHA loan, you’ll need access to documents like proof of income, employment history, credit information, and documentation of any assets. You should also know the lending requirements, which include a minimum credit score of 580, among other criteria.

You’ll need to fill out and submit the lender's application and provide authorization for a credit check so the lender can review your financial information and determine your eligibility. If you’re approved, the lender issues a preapproval letter, and you’ll then need to find a property, sign a purchase agreement and inform the lender. The lender will appraise the home to make sure it meets FHA standards.

Once all conditions are met, the loan goes to underwriting for final approval. After receiving approval, you’ll attend the loan closing, sign the necessary documents and assume ownership of the property.

How to apply for a VA loan

The first thing you need to start the VA loan application process is obtain a Certificate of Eligibility (COE) to show the Department of Veterans Affairs that you qualify for the VA loan benefit. Next, you’ll need to find a VA-approved lender and gather the necessary documents, including proof of income, employment history and a valid photo ID. The VA loan program typically does not require a minimum credit score, but lenders may establish their own criteria.

Once pre-approved, you’ll need to find a home that meets the VA’s standards. After finding a home, finalize the loan details, and the lender submits the loan for VA approval.

Summary of Money’s FHA vs VA loans

V​​A loans, exclusively for eligible veterans and service members, offer benefits like no down payment and competitive rates. FHA loans, backed by the Federal Housing Administration, can be ideal for buyers with lower credit scores.

FHA loans and VA loans are both attractive financing options for qualifying home buyers, but keep in mind that the mortgage option you choose should be the one that fits your budget and goals.