FHA vs. VA 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 and VA loans compare?

Both are government-backed mortgage programs, but they come with different eligibility requirements, terms and loan limits. An FHA loan may appeal to buyers who have a low credit score or can only make a small down payment. But for military members, a VA loan requires no down payment or private mortgage insurance.

Eligibility

Depending on which type of loan you’re interested in, you’ll have to meet certain requirements.

VA eligibility

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:

• Served 90 consecutive days of active service during wartime.
• Served 181 days of active service during peacetime.
• Clocked more than six years of service in the National Guard or Reserves.
• Surviving spouse of a service member who died in the line of duty or as a result of a service-related disability, and you haven’t remarried.

FHA eligibility

In 2020, you must meet six requirements to qualify for an FHA loan:

• At least 18 years old.
• FICO score is 500 to 579 with a 10% down payment or 580 or higher with a 3.5% down payment.
• Debt-to-income ratio is 43% to 50% with student loans factored in.
• Steadily employed and able to prove your income with recent tax returns, W2s and pay stubs.
• Have two years of employment history.
• Plan to occupy the home as a primary residence.

In addition, you must be assessed by an FHA-approved appraiser and be able to purchase mortgage insurance.

Institutional support

FHA loans are administrated by the Federal Housing Administration, which is part of HUD. VA loans are administrated by the veterans administration.

Credit score requirement

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%. Generally, the lower your credit score, the higher your interest rate.

The VA has no credit score requirements, but lenders can impose their own rules. Typically, VA lenders are looking for a credit score of 620 or higher.

Maximum loan amount

The VA’s maximum loan limit is based on the maximum guarantee authorized by the VA. For 2020, that maximum guarantee is 25% of the loan up to $127,600, which makes the maximum loan amount $510,400.

The FHA has imposed the following limits for 2020:

• One-unit homes: $331,760 floor and $765,600 ceiling
• Two-unit homes: $424,800 floor and $980,325 ceiling
• Three-unit homes: $513,450 floor and $1,184,925 ceiling
• Four-unit homes: $638,100 floor and $1,472,550 ceiling

Mortgage insurance

Because the VA guarantees the loan up to a certain point, you don’t have to pay for private mortgage insurance, even if your down payment doesn’t meet the 20% threshold most lenders require. But an FHA loan still requires PMI.

Down payment

The VA doesn’t require a down payment as long as the loan amount doesn’t exceed the loan limit for the county and the sales price doesn’t exceed the appraised value of the home.

The FHA allows a down payment as low as 3.5% for those with FICO scores of 580 or higher. But if your score is between 500 and 579, you’ll be required to put 10% down to get your loan.

Fees

VA and FHA loans both come with the standard fees associated with getting a mortgage as well as additional funding fees. For example, the FHA funding fees include 2.25% of the mortgage paid upfront and an ongoing PMI of 0.85% of the loan amount.

The VA charges a one-time funding fee equal to 1.25% to 3.3% of the loan amount based on the loan you get, your loan history and whether you choose to pay a down payment.

Lender options

Both agencies provide a list of agency-approved lenders to choose from. The VA issues loans itself, but only in very rare cases.

Interest rates

Your interest rate is determined by the lender you use and is subject to market interest rates and your negotiation with the lender.

Restricted uses

Both VA and FHA loans have similar restrictions. For example, they both require you to occupy the property as your primary residence and offer loans on similar property types. The only real difference is that while the FHA doesn’t offer loans on properties under construction, the VA does on a select basis with VA-approved builders.

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Features	Loan types: Conventional, Refinance, Home Equity, HELOC, Jumbo, Reverse, FHA, VA, USDA Minimum credit score: 620 Minimum down payment: 3.5%

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. Compare your home financing options before making a final decision.

Frequently asked questions

• Can I get a second VA loan?

  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.

• What is the acceptable debt-to-income ratio for VA loans?

  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.

• Can I get additional money for renovations?

  Yes, it’s possible with a FHA 203(k) loan. This renovation loan allows you to purchase a property and get up to $35,000 in cash for renovations or repairs.

  Because 203(k)s offer cash beyond the purchase price, they’re risker for lenders. To help compensate for that risk, you’ll need a minimum credit score of 640 to apply.