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FHA vs. VA loans
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.
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 2020, nationwide limits range from $331,760 to $765,600.
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+
None
Down payment
starting at 3.5%
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
If you’re a first time buyer with low to median income, and FHA loan could be for you. It’s lenient eligibility requirements make it a good option for borrowers with high debt-to-income ratio 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.
When should I avoid a FHA loan?
Avoid an FHA loan if you’re buying in an area with a low supply and high demand. FHA have a lower loan ceiling, so FHA loans may not cover the cost of the home you need. Additionally, heavily discounted homes, fixer-uppers and condos might not qualify for a FHA loan.
Compare FHA lenders
When should I choose a VA loan?
Consider applying for a VA loan if you or family member is a part of the military. It doesn’t require a down payment or mortgage insurance, cutting down on overall costs. It also comes with attractive tax perks and relaxed credit requirements.
When should I avoid a VA loan?
Avoid a VA loan if you found a home that needs a lot of work — VA loans can have strict home assessments. And you’ll be on the hook for 5% down if you’re looking at a manufactured home. Additionally the VA doesn’t guarantee the full amount of your loan. You may need to meet additional requirements from the bank.
Compare VA lenders
Bottom line
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 2020, 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 Iervasi is a writer from Sydney, Australia. Her writing — and curiosity — has taken her around the world, and she now calls New York home. With a journalistic eye for detail, 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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