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Ease the financial burden of buying a home with these government-backed loans.
Buying a home is among the biggest and most exciting commitments you’ll ever make. But how do you choose the right financing? Like every mortgage, FHA and VA loans have their advantages and disadvantages.
How do FHA loans differ from VA loans?
Both are government-backed mortgage programs, but they come with different eligibility requirements, terms and loan limits.
FHA loans are insured by the Federal Housing Administration, an agency under the US Department of Housing and Urban Development (HUD). They’re issued by federally approved banks or financial institutions.
With FHA loans, the borrower pays for mortgage insurance to protect the lender against loss if the borrower defaults on the loan. This insurance results in a 1.75% upfront premium at closing, along with monthly mortgage insurance payments for the life of the FHA loan.
You can qualify for an FHA loan with a FICO score of 580 or higher and a down payment of at least 3.5% of your loan. You can apply with a credit score of 500 to 579, but you’ll need to put down 10% as a down payment. Generally, the lower your credit score, the higher your loan’s interest rate.
The Federal Housing Authority sets maximum mortgage limits for FHA loans that vary by state and county. In 2019, nationwide limits range from $314,827 to $726,525.
Thanks to its flexible eligibility requirements, the FHA is the largest mortgage insurer in the world.
Unlike FHA loans, VA loans are open to military members only. Federally guaranteed by the US Department of Veterans Affairs (VA), the VA loan was designed to offer long-term financing to eligible veterans. Widows or widowers are eligible as long as they haven’t remarried.
The VA doesn’t guarantee the full amount of the loan. Instead, it insures a portion of the loan from qualified lenders, like Veterans United, which varies by county. If a borrower defaults on their loan, the lender is protected by the VA.
To be eligible for a VA loan, both lenders and borrowers must meet a list of criteria.
The VA loan has a big selling point: No down payment is required. To qualify, the loan amount must not exceed the loan limit for the county, and the sales price must not exceed the appraised values.
There’s no need for private mortgage insurance either. In most cases, borrowers pay a funding fee — a one-time charge equal to 1.25% to 3.3% of the loan amount.
The VA has no credit requirements, but lenders can impose their own rules. Typically, VA lenders are looking for a credit score of 620 or higher.
FHA loans
VA loans
Eligibility
Anyone who meets the income and credit score requirements
Eligible veterans and surviving spouses who have not remarried
Institutional support
Federal Housing Administration
Veterans Administration
Credit score requirement
500 or higher
None
Down payment
3.5% to 20%
None
Lender options
Any FHA-approved lender
Any VA-approved lender (The VA can lend directly, but it’s rare.)
Interest rates
Subject to market conditions and negotiable between the lender and borrower
Subject to market conditions and negotiable between the lender and borrower
Types of properties
– Single-family homes and 2- to 4-unit properties – Select manufactured and mobile homes – FHA-approved condos and townhomes
– Single-family homes and 2- to 4-unit properties – Select manufactured, mobile and modular homes – VA-approved condos – Select construction sites
What are the benefits of a FHA loan and a VA loan?
Each loan offers fixed rates and is designed to ease the financial pressure of buying a home. The finer details vary by loan type.
Easy to qualify. FHA loans are open to most borrowers.
Low FICO score requirement. Apply with a score of 500 or higher.
Higher DTI allowed. Accepts debt-to-income ratios of 43% to 50%.
Assistance OK. Your family or friends can contribute to your money down. And nonoccupying coborrowers and cosigners are allowed.
Flexibility with closing costs. Sellers can pay up to 6%, with the opportunity to finance your other closing costs.
Refinance with little equity. Refi up to 97.75% of the home’s value — or have at least 2.25% in equity. Or do a cashout refi with 15% equity or more.
No down payment required. You may not need to budget this cost.
Up to 100% financing. Without PMI.
Relaxed credit score requirements. Typically, only your past 12 months of credit history is considered.
Tax benefits. Veterans can typically claim mortgage interest, discount points and origination fees.
High loan limit. For 2019, the limit is $417,000 in most parts of the country.
Save on closing costs. If you have a service-related disability, the lender may waive your funding fee. The seller may also agree to pay some of the closing costs — up to 4% of the home price.
Attractive refinancing. No appraisals, credit checks or out-of-pocket closing costs. And you can refi up to 100% of the appraised value.
What are the drawbacks of FHA loans and VA loans?
For both loans, seller hesitation can be a factor — especially in a hot market. Consider the other potential disadvantages by mortgage type.
High insurance payments. You’ll pay two mortgage insurance premiums, no matter your down payment.
An upfront premium equal to 1.75% of the loan amount and paid at closing.
An annual premium paid monthly and based on your loan and loan-to-value ratio. Expect to pay from 0.80% to 1.05% of your loan balance.
FHA insurance required. To stop paying premiums, you need to pay off your loan or refinance.
Lower loan ceiling. The maximum you can borrow varies by county. If you’re buying in an area with low supply and high demand, an FHA loan may not cover the costs.
Property limitations. Heavily discounted homes and fixer-uppers may not qualify. Condos can be challenging too.
Long appraisal process. The VA program is known for its strict minimum property requirements (MPRs). Appraisers assess the safety, sanitation and structural integrity of a property, which can take weeks or months.
Increasing funding fee. Each time you use a VA loan, the flat funding fee increases.
Lender overlays. Because the VA guarantees only 25% of the loan, lenders require a list of minimum credit scores, maximum debt-to-income ratios and more.
Down payment for manufactured homes. If you use a VA loan to buy a manufactured home, you’ll put down at least 5%.
Full amount not guaranteed. The VA doesn’t guarantee the full amount of your loan. You may need to meet additional requirements from the bank.
Which option is best for my needs?
It depends on your situation. FHA loans are popular, especially with first-time homebuyers earning a low to median income. Given lenient eligibility requirements, they’re a good option for borrowers with high debt-to-income ratios and low credit scores.
To avoid being blindsided, factor the required mortgage insurance into your budget. You’ll pay an upfront premium at closing and then make monthly payments for the life of the mortgage.
VA loans don’t require a down payment or mortgage insurance, which cuts your overall costs significantly. They also come with attractive tax perks and relaxed credit requirements. But they’re open to military members only.
The big question: Do you qualify for a VA loan? These loans are notorious for strict home assessments. So if you’re eligible, your best bet is to find a home that’s ready to move into to speed up the appraisal process.
While FHA loans are flexible and easier to apply for, borrowers are hit with monthly insurance payments that last the life of the mortgage. But VA loans are exclusive: Requiring no down payment, they’ve opened the homeownership doors to many military members.
You must meet at least one of the following conditions set out by the Department of Veterans Affairs to be eligible for a VA loan:
You’ve served 90 consecutive days of active service during wartime.
You’ve served 181 days of active service during peacetime.
You’ve clocked more than six years of service in the National Guard or Reserves.
You’re the surviving spouse of a servicemember who died in the line of duty or as a result of a service-related disability, and you haven’t remarried.
In 2019, you must meet six requirements to qualify for an FHA loan:
You’re at least 18 years old.
Your FICO score is 500 to 579 with a 10% down payment or 580 or higher with a 3.5% down payment.
Your debt-to-income ratio is 43% to 50% with student loans factored in.
You’re steadily employed and able to prove your income with recent tax returns, W2s and pay stubs.
You have two years of employment history.
You plan to occupy the home as a primary residence.
You must be assessed by an FHA-approved appraiser and be able to purchase mortgage insurance.
Yes, it’s possible to have two or more VA loans at the same time. You’ll need to meet standard income and credit requirements. Your lender can tell you if you’re eligible.
The maximum debt-to-income ratio is 41%. This refers to the percentage of your gross monthly income that goes toward paying off debts.
Say your annual income is $48,000. When you divide that by 12, your monthly income is $4,000. Multiply that by 0.41 — the highest debt-to-income ratio allowed — and you get $1,640.
If your monthly debt obligations add up to $1,640 or less, you may qualify for a VA loan. Higher than $1,640, and you likely won’t.
Yes, it’s possible with a FHA 203(k) loan. This renovation loan allows you to purchase a property and score up to $35,000 in cash for renovations or repairs.
Because 203(k)s offer cash beyond the purchase price, they’re a risker loan for lenders. To compensate for that risk, you’ll need a minimum credit score of 640 to apply.
Katia is a freelance writer from sunny Sydney, Australia. Her writing — and curiosity — has taken her around the world, and she now calls chaotic, creative New York home. She navigates insurance and finance for Finder, so you can splash your cash smartly (and be a pro when the subject pops up at dinner parties).
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