While the federal government insures both FHA loans and VA loans, each is designed for different borrowers. The major difference between the two programs is that FHA loans aim to help low- and moderate-income families, especially first-time home buyers who don’t have a large down payment saved and have less-than-perfect credit. On the other hand, VA loans are exclusively for active-duty service members, veterans, and their spouses.
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Key differences between FHA loans and VA loans
| FHA loan | VA loan | |
|---|---|---|
| Eligibility | Available to anyone who meets the FHA loan requirements | Active-duty service members, veterans, and spouses |
| Down payment | As low as 3.5% for scores of 580 or higher; 10% for scores between 500 and 579 | Zero down payment |
| Minimum credit score | As low as 500 | No requirement, but most lenders prefer a score of 620 or higher |
| Debt-to-income ratio | Not more than 43% but can go as high as 50% | Not more than 41%; otherwise, you’ll undergo more financial scrutiny |
| Property type | Primary residence | Primary residence |
| Loan limits | $524,225 to $1,209,750 | No limits for borrowers with full VA entitlement |
| Mortgage insurance & fees | Upfront and monthly mortgage insurance premiums | VA funding fee |
| Closing costs | 2% to 6% | 1% to 6% |
FHA loans: pros and cons
Pros
- Widely available: You can qualify for an FHA loan provided that you meet the lender’s requirements.
- Low down payment: You need to put down as little as 3.5% if you have a score of at least 580. Otherwise, you'll put down 10% if your score is between 500 and 579.
- Low credit score: Lenders accept scores as low as 500.
- Gift funds: The FHA allows borrowers to use gift funds for down payment and closing costs assistance.
- Flexible DTI ratios: While most lenders prefer a DTI ratio of 43% or less, you can still qualify with a ratio as high as 50%.
- Assumable mortgages: If you decide to sell your home, the buyer can take your FHA loan plus the interest.
Cons
- Mortgage insurance: Requires both upfront and annual mortgage insurance premiums.
- Loan limits: Often vary by county, which may restrict home choices.
- Property restrictions: The property must meet the FHA’s safety and livability standards.
- Occupancy: You can use it to finance your primary residence only.
VA loans: pros and cons
Pros
- Zero down payment: You don’t need to put down anything.
- No mortgage insurance: You only need to pay a one-time funding fee.
- Low interest rate: VA loans often offer lower interest rates than FHA loans.
- Assumable: Like FHA loans, VA loans are also assumable.
Cons
- Funding fee: One-time VA funding fee, unless exempt.
- Eligibility : Only available to eligible veterans, service members, and surviving spouses.
- Appraisal: The VA appraisal process can be more time-consuming than FHA or conventional appraisals.
- Occupancy: You can only use a VA loan to buy a primary residence.
FHA loans vs. VA loans: Which loan is right for you?
If you qualify for a VA loan, it’s usually the best option. The lack of mortgage insurance, zero down payment, and lower interest rates make VA loans way more affordable. These benefits can save you tens of thousands of dollars over the life of the loan.
If you don’t qualify for a VA loan, an FHA loan is still an excellent option for achieving your homeownership dream. The program is especially perfect if you don’t meet conventional loan requirements. You don’t need a large down payment saved or a perfect credit score to qualify.
Before deciding which mortgage loan is right for you, it’s wise to compare rates and terms from multiple lenders. This way, you’ll know your total long-term costs and can make an informed decision. Start with a a proven real estate agent who can connect you with the best lenders in your area. Get your free agent matches from Clever Real Estate today.
Disclaimer: The information provided in this article is for informational purposes only. It is not intended as legal, financial, investment, or tax advice, and should not be relied upon as such. Consult a licensed financial advisor or tax professional regarding your personal financial situation before making any decisions.