FHA vs. VA Loans: What Veterans Should Know
FHA and VA loans are both government-backed loans that can be great options for first-time homebuyers, with each having similarities and differences in terms of requirements. In this guide, we'll break down the specific qualifications needed for each loan so you can determine which one is right for you when buying a house.
An FHA loan is a loan insured by the Federal Housing Administration. It is aimed at helping conventional loans because of their lower requirements.
Like FHA loans, a VA loan is a government-backed loan funded through the U.S. Department of Veterans Affairs for active military and Veterans. It's appealing to first-time buyers because it requires zero money down and no mortgage insurance.
| Loan Requirements | FHA Loan | VA Loan |
|---|---|---|
| Eligibility | Any borrower who meets the credit and down payment requirements and has proof of income | Must be an active military member, veteran or surviving spouse and meet service requirements |
| Down payment | At least 3.5% down within loan limits | No down payment required |
| Minimum credit score | A score of at least 580 to qualify for 3.5% down, or 500 to qualify for 10% down | Minimum based on lender’s requirements—620 is recommended |
| Mortgage insurance and fees | Upfront mortgage insurance and annual mortgage insurance premium | One upfront funding fee and no monthly mortgage insurance premium |
| DTI ratio | At or below 43% | No specific requirements but may have trouble qualifying if above 41% |
| Property type | Primary residence that meets HUD’s minimum property standards | Primary residence that meets VA’s minimum property requirements |
| Closing costs | 2–5% of the total loan amount | 3–5% of the total loan amount |
| Loan limits | $498,257 to $1,149,825 depending where you live | No home loan limit unless the buyer has remaining entitlement |
Though FHA and VA loans are great options for first-time homebuyers, there are some key differences to be aware of. Below we'll break down the main differences between each to get a better understanding of both of their qualifications and requirements.
Eligibility for an FHA loan is dependent on credit, income and debt requirements. While first-time homebuyers make up a large percentage of FHA borrowers, you do not need to be a first-time buyer to qualify. As long as the home you’re buying is your primary residence, meaning it won’t be used as an investment property, then you can qualify.
To qualify for a VA loan, you must be an active member of the military, a Veteran, a national guard or reserves member or an eligible surviving spouse. The length of service and your status determine your eligibility to qualify. If you meet the service requirements specified by the VA, you must obtain a Certificate of Eligibility (COE), which is a document that shows lenders you meet the qualifications to get a VA loan. You must get a COE before closing on the loan.
If you do not meet the minimum service requirements, you may still get a COE depending on your reason for being discharged. For example, if you faced hardship or now have a disability related to your service, you can still qualify.
VA loans are also available for qualifying spouses. If your spouse died while in service and you did not remarry, if your spouse is a prisoner of war, or your spouse is missing in action, you may qualify for a COE.
The down payment requirements for FHA and VA loans are what make these options so appealing to first-time homebuyers.
The minimum down payment required for an FHA loan is 3.5% of the purchase price, though sometimes more depending on your credit score. On average, buyers using an FHA loan put around 5% down. The purchase price of the home must also meet the loan limits under the FHA. Because FHA loans require such a low down payment, mortgage insurance premiums, or MIPs, will be applied.
On the other hand, VA loans do not require a down payment, which is the biggest factor that sets them apart from FHA loans. VA loans don’t have mortgage insurance, but require additional fees at closing.
FHA loans appeal most to those with lower-than-average credit scores as the credit score requirements are lower than other loans. To qualify for a 3.5% down payment, you must have a minimum credit score of 580. If you have a score of 500 to 579, you can still qualify for an FHA loan but will be required to make a 10% down payment.
Mortgage lenders typically set their own credit score requirements when determining eligibility for a VA loan, but a score of 640 is common. Since lenders set their own thresholds for credit scores, borrowers with lower credit scores may still qualify.
FHA loans require borrowers to pay mortgage insurance, which protects lenders should the borrower default on the loan. FHA loans require two forms of mortgage insurance premiums — an upfront fee and an annual fee.
The upfront fee is paid at closing and is usually 1.75% of the total loan amount. If the borrower doesn’t have enough funds to pay the premium upfront, the fee can be rolled into your loan amount, which can slightly increase your monthly mortgage payment.
VA loans don’t require borrowers to pay mortgage insurance but do charge a one-time VA funding fee. This fee typically ranges from 1.25 to 3.3% of the loan amount and varies based on your total down payment and whether or not the borrower has previously used a VA loan. If a borrower has used a VA loan before, the funding fee can increase but can go back down by making a down payment.
Similar to the upfront fee for FHA loans, the funding fee can be paid upfront or rolled into your mortgage, which means your monthly mortgage payment and loan amount will increase. Some borrowers may be exempt from paying the funding fee if they receive compensation for a service-related disability, are a surviving spouse, or if the borrower is on active duty and received a Purple Heart.
The amount of debt a borrower has significantly impacts whether or not they can qualify for a loan at a good rate. Your debt-to-income ratio is how much of your gross monthly income you use to pay your monthly debts and expenses, such as credit card payments and student loan payments. This is also known as your back-end debt ratio.
For FHA loans, lenders typically want the borrower to have a DTI ratio at or below 43%. Lenders will also look at your front-end DTI ratio, which is how much of your gross monthly income will be going towards potential housing-related debt, like mortgage payments, HOA fees and property taxes. Lenders prefer your front-end DTI ratio to be around 31%, but may vary based on the borrower’s credit score.
VA loans do not have a specific DTI ratio requirement, but lenders generally want a borrower’s DTI ratio to be at or below 41%. Borrowers with anything above 41% may need to be evaluated more closely. For VA loans, lenders will only look at your back-end DTI ratio instead of both back- and front-end.
Property types eligible to purchase using an FHA and VA loan are similar amongst both loans. Both loans can be used to purchase a primary residence if the home meets standards, but can’t be used to purchase investment properties. If you plan to buy a multi-unit home, you must reside in one of the units to be eligible to use the loan.
Meeting the minimum property standards for these loans ensures that the buyer moves into a safe home and will not have to deal with high-cost repairs after move-in and later down the line. Meeting the requirements not only protects the borrower, but it also protects the mortgage lender. Should a borrower default on the loan and stop making their mortgage payments, the lender will take the home back and try to sell it. Making sure it meets standards will help make the selling process easier for the lender.
FHA and VA loans have specific guidelines set by the Department of Housing and Urban Development and the Department of Veterans Affairs that must be met during the home inspection and appraisal process before the loans can close.
For FHA loans, the HUD has specific guidelines properties must meet, called minimum property standards or MPS. The VA has similar standards with home properties using VA loans, known as minimum property requirements or MPR.
The HUD requires properties being purchased with an FHA loan to meet the following criteria:
If any problems arise with both FHA and VA loans and the property does not meet the HUD and VA requirements, the problems must be fixed before the loans can close. Normal wear and tear and minor maintenance issues that do not affect the home’s safety do not need to be repaired.
Mortgage rates for government-backed loans tend to be lower than conventional loans. Not only do interest rates depend on the state of the economy, but they also fluctuate based on the borrower and the lender. Your credit score, down payment and other financial factors can influence the mortgage rate you qualify for. Some lenders also offer different rates, which makes shopping around for a mortgage important.
Closing costs are another important factor buyers must calculate into their budget when buying a home. Closing costs for an FHA loan typically range from 2 to 5% of the total loan amount. Buyers are responsible for covering the closing costs but are eligible to ask for seller concessions in which the seller can pay for a portion of the costs. For an FHA loan, sellers can put up to 6% of the total loan amount toward your closing costs.
Closing costs for VA loans can be anywhere from 3 to 5% of the total loan amount and buyers can also ask the seller to pay concessions. The seller can put up to 4% of the total loan amount towards the closing costs.
Conforming loan limits refer to the cap on the size of the mortgage that Freddie Mac and Fannie Mae will buy. If your mortgage meets or is lower than the required limit, your loan will be considered a conforming loan and you will be able to qualify for FHA or VA loan options.
Loan limits for FHA loans vary depending on the county and state where you reside. The current range for low-cost areas starts at $498,257 while higher-cost counties can be upwards of $1,149,825. Use a loan limit calculator to find out the FHA loan limit in your area.
There are no loan limits for VA loans, but the lender will decide the loan amount based on your income, credit history and assets. The only time veterans or service members will have a loan limit is if they have remaining entitlement. For example, if they previously took out a VA loan and are still paying it off, they will have loan limits based on the county they live in.
