Differences Between FHA and VA Loans
If you want to buy a home, saving enough money for the down payment can delay you. However, some mortgages allow you to buy a home with less money down, making approval easier.
Some government-backed mortgage loans accept lower down payments and offer more flexible financial requirements, but which program should you choose?
We look at loans available through programs operated by the VA and the FHA, to help you decide which mortgage program is right for you.
Should You Choose an FHA or VA Home Loan?
If you choose a loan through the VA or the FHA you can benefit in many ways. They could help you to qualify for loans that would otherwise be out of your reach and offer you better terms over conventional mortgages. These government-backed loans allow you to qualify with imperfect credit and lower or no down payment.
However, while the terms available through these programs might be appealing, you still need to meet their requirements. Let’s look at the benefits of these types of loans and how they compare.
VA Loan Program
The Department of Veterans Affairs backs VA loans, and their basic eligibility requirements involve military service. If you are currently or were previously a U.S. service member, you are likely to qualify though there are minimum service requirements. Surviving spouses of veterans can also qualify.
Debt-to-Income Ratio Requirements
Even if you meet the minimum service requirements, to be approved by the lender you will also need to meet their financial requirements. They will review your debt-to-income ratio and credit score as part of their underwriting process.
The VA doesn’t require a certain debt-to-income, however, the lender will have their own rules. When all your debt payments are considered, including your potential mortgage payments, your debt-to-income ratio generally shouldn’t be higher than 41% of gross monthly income.
Though the VA doesn’t set a maximum ratio, if your debt-to-income ratio is higher than 41%, you will be subject to greater financial scrutiny. If you have strong finances, some lenders may allow a DTI ratio above 50% with additional checks and documentation.
Even if your DTI ratio isn’t a problem, the VA requires borrowers to have enough discretionary income left over after paying the mortgage. If you can cover all your debts but have no money left over, how will you afford to buy food or pay your utilities bills?
The VA’s requirement to have discretionary money left over makes life easier for borrowers and is part of the reason why rates of default are lower with this type of mortgage.
Credit Score Requirements
The VA loan program does not impose a minimum credit score. However, individual lenders will set minimum requirements.
Down Payments
If you qualify for a VA loan, you don’t have to save for a down payment at all. However, if you do have some money available for a down payment, it can help reduce your costs. With a larger down payment, you could pay less toward the VA funding fee.
Interest Rates
The interest rates available with a VA loan can be very competitive and often lower than the interest rates offered on other types of loans.
No Mortgage Insurance
If you qualify for a VA loan you won’t have to worry about private mortgage insurance. This would normally be an issue when your down payment is less than 20% of the purchase price, but the VA does not have this requirement.
However, the VA does require that you pay a funding fee unless you are exempt. The percentage you are charged is based on the down payment amount.
- A down payment of less than 5% means a funding fee of 2.15%
- 5% or more means a funding fee of 1.5%
- Down payments of 10% or more require a funding fee of 1.25%
This is for the first use of a VA loan, with subsequent uses increasing the funding fee to 3.3% with down payments of less than 5%.
For example, if you are purchasing a home costing $300,000 without a down payment, you would pay $6,450 as the funding fee for the first use. However, if you had a 10% down payment on the same loan, your funding fee would be $3,375. With a 10% deposit or $30,000, you would only have to pay 1.25% on the $270,000 loan or $3,375.
You can decide to pay this funding fee at closing or have it included in the loan so you pay it gradually with your monthly mortgage payment.
VA Loan Limits
In most counties, the 2024 loan limit is $766,550. In high-cost areas, this rises to $1,149,825 for a single-family home. The VA allows you to purchase a home with up to four units as long as you live in one of them. The VA loan limits increase when buying a multifamily home, though lenders may set their own limits.
VA Loan Minimum Property Standards
An appraiser will check the condition of the property to ensure it is safe, structurally sound, and sanitary. The appraiser isn’t focused on minor issues other than when considering the overall condition of the home. This should ensure the buyer isn’t overpaying or buying a home that isn’t safe to live in.
VA Loan Entitlement
Even though the VA has a set loan limit that can change annually, they only guarantee a quarter of that amount. This means that a limit of $766,550 actually guarantees $191,637.50.
The VA offers a basic entitlement of $36,000, but this is only enough to guarantee homes costing up to $144,000. Second-tier entitlement bridges the gap allowing homes costing more than $144,000 to be purchased.
This currently means that second-tier entitlement is worth $155,637.50. This bonus entitlement can allow veterans to purchase multiple homes without a down payment if they have enough entitlement remaining and only under certain conditions.
The amount of remaining entitlement limits the loan available to purchase a home without needing a down payment. However, if you do not have another VA loan or have defaulted in the past using some of your entitlement, you can borrow as much as the lender is willing to offer without a down payment.
Even if you use up all of your entitlement, where the home is more than four times your remaining entitlement, you can still purchase using a down payment. In this situation, the down payment needs to be 25% of the difference between your maximum loan amount and the purchase price.
Should I Choose a VA Mortgage Loan?
If you qualify for this type of mortgage, the VA loan program has much to offer. The option of buying a home without having to save a down payment is very attractive, but if you do have a 20% down payment there might be better loans.
With 20% or more of the purchase price, you could avoid the funding fee by choosing a different type of home loan.
FHA loans
If you haven’t served in the U.S. military, you can still qualify for an FHA loan. The Federal Housing Administration also has some requirements, though these are based on your credit score and finances.
Minimum Credit Requirements
The FHA allows borrowers with a credit score as low as 500 to qualify for a loan. However, if your credit is better you will get better terms on the loan.
Down Payments
If your credit score is lower than 580, you need to have a 10% down payment. If your credit score is 580 and above, you can buy your home with as little as a 3.5% down payment.
Interest Rates
If your credit is good, you can also benefit from better interest rates on your loan. With lower credit scores, you can expect to pay higher interest rates, adding to your monthly payments for the length of the mortgage.
Debt-to-Income Ratios
You can qualify for an FHA loan with a debt-to-income ratio of up to 50%, and in some circumstances, it can even be higher than that. While higher debt-to-income ratios can be approved, a maximum DTI ratio of 43% is recommended.
If you don’t have much credit history, a non-occupying co-borrower can help. A non-occupant co-borrower, like a family member, can improve your chances of getting the FHA loan you want.
FHA Loan Limits
There is a maximum loan amount that the FHA will insure. This lending limit varies depending on whether the area is considered low-cost or high-cost. In 2024, the limit in a low-cost area is $498,257, while in a high-cost area, this limit is $1,149,825. These maximums are for single-family homes, with increases for two-unit, three-unit, and four-unit properties.
The FHA’s limits are updated annually and based on the conventional loan limits used by Fannie Mae and Freddie Mac.
Lending Options
FHA loans are designed to allow borrowers to purchase different types of homes. So if you want to buy a duplex, and rent out one unit, the FHA allows this.
The FHA allows borrowers to buy property that contains up to four units. They do require that you live in one of the units, however. You can also use this program to buy a condo, though they may have more restrictions when compared to a typical single-family home.
Property Requirements
Similar to a VA loan, the home you want to buy also has to meet minimum property standards for you to qualify for the loan. Your lender will require an appraisal to determine whether the home meets the FHA minimum property standards. The appraisal will also assess the value, which will be used by the lender when deciding on the amount they will lend.
FHA Mortgage Insurance
While the VA loan has a funding fee, you will have to pay mortgage insurance with the FHA if your down payment is less than 20% of the purchase price. There are two parts to this mortgage insurance; an upfront payment and an annual payment.
The upfront mortgage insurance payment is currently 1.75% of the loan value. The annual MIP varies depending on the loan amount, the loan term, and the down payment.
It starts at 0.15% for loans equal to or less than $726,200 with at least a 10% down payment for a 15-year or less loan term. The highest annual fee is 0.75% for loans above $726,200 with a down payment of less than 5% over a term of more than 15 years. These annual fees are divided by 12 and added to your monthly payments.
If you have a down payment of at least 10% you will have to pay annual mortgage insurance premiums for 11 years, but with lower down payment amounts, the requirement to pay insurance will remain for the life of the loan.
Should I Choose an FHA Loan vs a VA Loan?
An FHA loan could be a great option when you are trying to purchase a home, and your finances aren’t perfect. They are particularly good for first-time buyers and families with low to moderate incomes, however, VA loans offer some advantages.
FHA loans are flexible, allowing lower credit scores and sometimes higher debt-to-income ratios. While this extra flexibility could make owning a home more realistic for some home buyers, there are some downsides to consider. Alternatively, a VA loan does allow you to buy without saving a down payment while offering some similar benefits.
If you are eligible for a VA loan, their terms can be very attractive, and you may find them more suitable over an FHA loan. However, it is important to carefully and fully consider your options before you make your final decision.
Summing up FHA vs VA Loan: Deciding Which Loan Is Right for You
Choosing a government-insured FHA or VA loan can offer many advantages. Thanks to this guarantee, lenders can provide home loans to a wider range of buyers compared to conventional loans.
Though it might be easier to qualify for a government-backed loan, there are still requirements you will need to meet. While the VA loan can offer some advantages over FHA loans, qualification is restricted to veterans, spouses of veterans, and those currently serving.
If a VA loan isn’t an option, there are many reasons to choose an FHA-backed loan. An FHA loan is often more affordable than a conventional mortgage if your credit score is lower, and qualifying should be easier too.
About the author: This article “Difference Between FHA Loans and VA Loans” was written by Luke Skar of MadisonMortgageGuys.com. As the Social Media Strategist, his role is to provide original content for all of their social media profiles and generate new leads from his website.
We provide award-winning customer service to clients who need to purchase a home or refinance an existing mortgage.
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